On March 23, 2015, the British Columbia Securities Commission (BCSC) adopted BC Instrument 51-512 – Certain Private Placements (BCI 51-512), which provides certain disclosure exemptions in the case of securities offered to sophisticated Canadian investors on a private placement basis. This development is the latest in a series of actions taken by Canadian provincial securities regulators since 2012 to reduce hurdles for international dealers and issuers engaging in cross-border offerings to sophisticated Canadian investors. Through this series of actions, Canada’s provincial securities regulators have, where the exemptions are available, eliminated the time and expense associated with preparing a document to supplement the foreign offering document to satisfy technical Canadian securities law requirements (a Canadian Wrapper). The aim of these exemptions is to broaden the range of investment opportunities available to Canadian investors, without compromising investor protection. These actions have been focused in the following four areas:
- exemptions from the requirement to include “connected and related” issuer relationship disclosure in accordance with Canadian securities laws;
- exemptions from the requirements to include prescribed statutory rights of action disclosure under the securities laws of certain provinces or territories;
- exemptions from the prohibition on making representations in an offering memorandum about applications and intended applications to list securities on stock exchanges; and
- exemptions from the imposition of certain Canadian continuous disclosure obligations.
From the perspective of international dealers and issuers, and Canadian institutional investors, these changes are welcome. However, accommodations have been made by only some but not all of the Canadian securities regulators, while some exemptions only apply to certain specified dealers. Some of the orders and instruments address some but not all of the above areas, and each order and instrument specifies different sets of prerequisite conditions. Furthermore, the majority of the orders are time-limited (with different expiry dates) with the expectation that legislative action will eventually be taken to codify the exemptions. The market is hopeful that such legislation will come soon and will further streamline technical requirements, provide a clearer way forward, and eliminate gaps and conflicts across the existing patchwork of orders and law across Canada. In the meantime, international dealers and issuers must take care in navigating the rules for cross-border offerings to Canadian investors.
BC Instrument 51-512: offering disclosure exemptions
BCI 51-512 replaces BC Instrument 51-511 - Exemptions from Multilateral Instrument 51-105 Issuers Quoted in the US Over-the-Counter Markets, and exempts certain issuers from becoming over-the-counter reporting issuers under Multilateral Instrument 51-105 – Issuers Quoted in the US Over-the-Counter Markets (MI 51-105), as long as selling efforts and actual sales are only made to “permitted clients” on a private placement basis. BCI 51-512 further provides that where the distribution is made: (a) under a Canadian prospectus exemption; and (b) only to “permitted clients” (as defined in National Instrument 33-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations) (permitted clients), an issuer is exempt from the Canadian-specific “connected issuer” and “related issuer” disclosures required under Section 2.1(1) and Section 4 of National Instrument 33-105 –Underwriting Conflicts (NI 33-105), that would otherwise need to be included in a Canadian Wrapper. Unlike the existing Québec Blanket Order (as defined below) and the Canadian Securities Administrators’ (the CSA) exemptive relief orders (discussed below), the exemptions provided by BCI 51-512 are not limited to foreign issuers or securities primarily issued outside of Canada. Furthermore, there is no notification or consent requirement with which issuers and underwriters are required to comply. In addition, BCI 51-512 does not deal with listing representations, which the BCSC previously addressed in BC Notice 47-701 - Blanket Permission Under Section 50(1)(c) of the Securities Act, or statutory rights of action.
Alberta and Québec Blanket Orders: continuous disclosure exemptions
MI 51-105—adopted in 2012 by each of the provinces other than Ontario—provides that a foreign issuer that undertakes promotional activities in Canada and that is not listed or quoted on a designated exchange could be a reporting issuer in Canada, and therefore subject to extensive Canadian continuous disclosure requirements if the issuer’s equity securities trade over-the-counter in the US. As a result, foreign issuers and dealers undertaking private placement offerings of foreign securities in Canada have, at times, limited sales to Ontario, which was not a party to MI 51-105, Québec (which issued a blanket order on August 14, 2012 exempting issuers from the rule so long as promotional activities concern only permitted clients (the Québec Blanket Order)) and Alberta (which issued Blanket Order 45-514 – Certain Private Placements on November 20, 2014 (the Alberta Blanket Order) which is similar to the Québec Blanket Order and will remain in place until November 20, 2017). The Alberta Blanket Order grants wholesale relief in Alberta from the requirement to comply with Canadian disclosure requirements regarding underwriter conflicts of interest and from the prohibition on making listing representations in an offering document, as long as: (a) the securities are distributed on a Canadian prospectus-exempt basis; and (b) every person who purchases securities is a permitted client.
CSA exemptive relief orders: “Canadian wrapper exemptions”
Prior to the adoption of BCI 51-512 and the issuance of the Alberta Blanket Order, the CSA issued two initial exemptive relief orders, dated April 21, 2013 and June 21, 2013, as well as a number of subsequent exemptive relief orders (collectively, the Canadian Wrapper Exemption Orders) that permitted specified Canadian and US dealers and their affiliates to make private placement offerings to permitted clients in Canada as part of a global offering without having to add supplemental prescribed Canadian disclosure in a Canadian Wrapper. The Canadian Wrapper Exemption Orders address the disclosure requirements imposed on foreign issuers and dealers including the “connected issuer” and “related issuer” disclosures imposed by NI 33-105 and the requirement to include a description of the statutory rights of action available to purchasers for a misrepresentation in a Canadian Wrapper. In parallel to these Canadian Wrapper Exemption Orders, the CSA also provided a side letter to the relevant dealers confirming that they were exempt from the prohibition on making representations in an offering memorandum about applications and intended applications to list securities on stock exchanges.
Aside from the effect of Canadian Wrapper Exemption Orders being limited to the named dealers listed therein as applicants, the Canadian Wrapper Exemption Orders include certain requirements for those relying thereon, including but not limited to requirements that:
- the offering is “primarily” made in a foreign jurisdiction;
- the offering is made only to a permitted client;
- the issuer is a foreign issuer that is not a reporting issuer in Canada, has its head office outside of Canada, and has a majority of its executive officers and directors resident outside of Canada; or the securities are issued or guaranteed by the government of a foreign jurisdiction;
- the issuer or dealer makes regular filings with the appropriate reporting Canadian securities regulator providing details of exempt distributions made in reliance on the Canadian Wrapper Exemption Orders;
- in the case of certain Canadian Wrapper Exemption Orders, the issuer is not an “investment fund”, as defined under Canadian securities legislation (this restriction was not included in the June 21, 2013 Canadian Wrapper Exemption Order and has not appeared in certain subsequent Canadian Wrapper Exemption Orders);
- a prescribed form of notice (which includes certain specified disclosures) must be provided to, and acknowledged and counter-signed by, each prospective Canadian purchaser; and
- the issuer must comply with US laws on underwriter conflict disclosure applicable to US registered offerings, even for unregistered US offerings where these laws do not apply.
Thus, the Canadian Wrapper Exemption Orders provide some measure of relief to foreign issuers and dealers offering securities to Canadians. However, the requirement to exchange the signed notice and acknowledgement with the investor potentially hinders the sales process. In addition, the issuer and dealer must analyze and make legal judgement calls about whether the other criteria are satisfied, including whether the offering was “primarily” made outside Canada and whether conflicts disclosure in a non-registered offering is sufficient to satisfy the disclosure requirements of the Canadian Wrapper Exemption Orders. Finally, when making offerings to investors in British Columbia, Québec and Alberta, international issuers and their dealers must still consider the overlapping application of MI 51-105, the Alberta Blanket Order and the Québec Blanket Order, alongside the Canadian Wrapper Exemption Orders.
As the CSA granted this series of discretionary Canadian Wrapper Exemption Orders for various groups of Canadian and US dealers and their affiliates, the CSA also proposed corresponding revisions to Canadian securities legislation. The Canadian Wrapper Exemption Orders were, in fact, designed to expire upon legislative changes coming into effect. These legislative revisions would substantially codify the prior Canadian Wrapper Exemption Orders. Implementation would be through amendments to NI 33-105 and, in all jurisdictions other than Ontario and British Columbia, new Multilateral Instrument 45-107 -Listing Representation and Statutory Rights of Action Disclosure Exemptions. Exemptions similar to those in the new multilateral instrument were proposed for Ontario in April 2013, contemporaneously with the first Canadian Wrapper Exemption Order. The BCSC did not participate in the CSA proposals because it previously granted broader exemptive relief. Importantly, these proposed amendments would make changes to simplify the client notice process, as required in the Canadian Wrapper Exemption Orders. The offering document could be sent to clients simultaneously with the notice. In addition, a client-signed acknowledgment would no longer be required. Because these changes have been proposed by the CSA and by way of a National Instrument and Multilateral Instrument, it is expected that, upon implementation, these instruments will move the Canadian market towards a more coherent and predictable nation-wide regime for international issuers and dealers making offerings to sophisticated Canadian investors. Both proposals were published for a 90-day comment period, ending February 26, 2014, but their implementation has not yet occurred. Both the April 23, 2013 and June 21, 2013 Canadian Wrapper Exemption Orders are expressed to expire on the earlier of the effective date of legislation or June 22, 2016; the subsequent Canadian Wrapper Exemption Orders are expressed to expire on the earlier of the effective date of legislation or the date that is three years from the effective date of such orders; and the Alberta Blanket Order is due to expire on November 20, 2017. The market is hopeful that new legislation across Canada is imminent.
Navigate with care
Canada is unique within the G-20, in that it does not have a single national securities regulator. Notwithstanding the balkanization of securities regulation in Canada, at times the CSA works together to implement national policies which are Canada-wide and provide a more fulsome and consolidated regime. Unfortunately, in the case of foreign issuers and dealers offering securities to Canadians, such a uniform approach has not yet been adopted. The concurrent existence of BCI 51-512, the Canadian Wrapper Exemption Orders, MI 51-105, the Alberta Blanket Order and the Québec Blanket Order, has created a patchwork of exemptions and rules pertaining to offerings by foreign issuers to investors located in Canada. The hope is that legislation implemented by the CSA through National Instruments and/or Multilateral Instruments will address some of these existing gaps and inconsistencies to create a more clear and coherent position across Canada going forward. In the meantime, the requirements applicable to foreign issuers or dealers selling securities on a foreign issuer’s behalf still need to be considered by foreign issuers and/or dealers on a case-by-case basis, in some cases with the advice of Canadian legal counsel.