On June 30, 2016, the Ontario Securities Commission (OSC) proposed a new “distributions out” regime that aims to clarify compliance requirements for Ontario issuers selling securities to investors outside Canada.
The proposal is to withdraw Interpretation Note 1 Distributions of Securities Outside Ontario (the Interpretation Note) and replace it with the following:
- OSC Rule 72-503 Distributions Outside of Canada (the Proposed Rule);
- Form 72-503F Report of Distributions Outside of Canada (the Proposed Form); and
- Companion Policy 72-503CP to OSC Rule 72-503 Distributions Outside of Canada (the Proposed Companion Policy).
If the Proposed Rule is adopted, Ontario issuers and selling security holders will have access to a number of new prospectus exemptions for distributions of securities outside of Canada. Three of the new exemptions would require that issuers relying on the exemption file a post-trade report with the OSC and one of exemptions would be subject to resale restrictions. The Proposed Rule also includes a registration exemption, which would help clarify situations in which an Ontario dealer or underwriter would not need to be involved in a foreign distribution.
The extent to which the prospectus requirement applies extra-territorially has been the subject of ongoing uncertainty in some jurisdictions of Canada due to the breadth of the definitions of “trade” and “distribution” in the securities legislation, combined with the inconsistent, and in some cases imprecise, approach to the subject among the regulators. For example, the British Columbia Securities Commission takes the position that an issuer located in British Columbia requires a prospectus, or prospectus exemption, in order to carry out a distribution to investors located anywhere in the world. On the other hand, an Ontario-based issuer, by virtue of the Interpretation Note, may be considered by the OSC not to be carrying out a distribution in Ontario if the investors are outside of Ontario and the issuer has taken adequate steps to ensure that the distributed securities “come to rest” outside of Ontario. In that circumstance, the OSC would not mandate a prospectus or prospectus exemption. It is the Interpretation Note – which does not have the force of law – that has been the main source of the uncertainty in Ontario.
In the consultation draft of provincial and territorial legislation under the proposed Cooperative Capital Markets Regulatory System, it was proposed that the new regulator would adopt the British Columbia approach to distributions outside the jurisdiction and that the Interpretation Note would not be carried forward in the new regime. The public comments received on that proposal played a role in the development of the Proposed Rule.
The Proposed Rule provides an exemption from the prospectus requirement in respect of a distribution of securities to a person or company outside of Canada in the following four circumstances:
- Distribution under a public offering document in a foreign jurisdiction: If the distribution is under a public offering document in the United States (i.e., a registration statement) or a designated foreign jurisdiction;
- Concurrent distribution under a final prospectus in Ontario: If the distribution takes place concurrently with a distribution in Ontario that has been qualified by a final prospectus in Ontario;
- Distribution by a reporting issuer: If the issuer is and has been a reporting issuer in a jurisdiction of Canada for the four months immediately preceding the distribution;
- Other distribution: Any other distribution that does not fit into one of the above three categories, subject to resale restrictions as discussed below.
Each of the four new exemptions is predicated on the distribution being in compliance with the laws of the jurisdiction where the purchaser of the securities is located.
Securities sold outside Canada in reliance on one of the first three exemptions would be free of Canadian resale restrictions. However, the Proposed Companion Policy states that the OSC expects that market participants “will have taken reasonable steps to ensure that the securities come to rest outside of Canada and are not redistributed back into Canada in a manner that constitutes an indirect distribution in Ontario.” As discussed under “Comment” below, this statement detracts from the Proposed Rule’s stated purpose, also set out in the Proposed Companion Policy, of providing “certainty” to cross-border transactions through the establishment of the new exemptions.
The exemption for “other distribution” would be available for outbound distributions that did not fit into the first three categories, but the use of this exemption would carry with it resale restrictions. The first trade after the distribution of the securities would be regarded as a distribution unless it was made to a person or company outside of Canada or (i) the issuer of the securities was a reporting issuer in a jurisdiction of Canada at the time of, and for the four months immediately preceding, the trade; and (ii) at least four months had elapsed from the distribution date.
The Proposed Form
All of the proposed exemptions except a distribution under a public offering document in a foreign jurisdiction would require the issuer, on or before the tenth day after the distribution date, to electronically file the Proposed Form with respect to that exempt distribution. The Proposed Form is more streamlined than Form 45-106F1 Report of Exempt Distribution, which is used for certain other prospectus exemptions, including domestic private placements. The Proposed Form only requires limited information about the offering and does not require the issuer to identify the names of foreign purchasers.
A selling security holder that relies on one of the proposed prospectus exemptions would not be required to file the Proposed Form.
The Proposed Rule also provides a dealer and underwriter registration exemption for a person or company in respect of a distribution of securities to a purchaser outside of Canada if the distribution is qualified by a prospectus filed in a Canadian jurisdiction or is prospectus-exempt under the Proposed Rule, and provided that the following conditions are met:
- The head office or principal place of business of the person or company is in the United States, a designated foreign jurisdiction or Canada;
- In the case of a distribution to a purchaser in the United States, the person or company is registered as a broker-dealer with the Securities and Exchange Commission, is a member in good standing with the Financial Industry Regulatory Authority and complies with all applicable regulatory requirements;
- In the case of a distribution to a purchaser located in a designated foreign jurisdiction, the person or company is registered in a category similar to a dealer in that jurisdiction and complies with all applicable regulatory requirements;
- Subject to a limited exception, the person or company does not carry on business as a dealer or underwriter from an office or place of business in Ontario;
- Other than the issuer or selling security holder involved in a distribution that is prospectus-exempt under the Proposed Rule, the person or company does not trade securities to, with or on behalf of anyone in Ontario, except pursuant to a registration exemption not provided by the Proposed Rule, and
- The person or company is not registered as a dealer in any jurisdiction of Canada.
The Proposed Rule on its face brings a desirable level of clarity to a grey area of the law. The reference in the Proposed Companion Policy to the need for issuers, underwriters and other participants in an offering to take reasonable steps to ensure that the offered securities come to rest outside of Canada could be construed as running counter to the Proposed Rule’s stated purpose of providing certainty. It would be helpful for that reference to be clarified to apply to the circumstance where the issuer may be aware that a purchaser under the offering is acquiring the securities with the intention of redistributing them shortly thereafter into Canada other than by way of normal course trades (i.e., trades that are not pre-arranged between seller and buyer) on a published market.
Similarly, for purposes of the resale restrictions that apply to the proposed “other distribution” exemption, it would be desirable for a normal course trade on a published market outside of Canada to be added as a trade that would not be considered a distribution. Given the underlying rationale of the other proposed exemptions, there is no apparent investor protection objective to prohibiting that type of resale.
The OSC is accepting comments on the Proposed Rule until September 28, 2016.