Comments are expected by October 13, 2015 on the CSA's proposed single harmonized form of exempt distribution report to be used in all provinces and territories of Canada. The CSA's proposals to amend National Instrument 45-106 Prospectus Exemptions to introduce this new form of report were published for a 60-day comment period on August 13, 2015. Although the concept of a single harmonized report is welcome, the new report would require issuers, including investment funds, to provide significant additional information that can be expected to be costly and time-intensive for issuers to gather in and report on.
We intend to provide a letter to the CSA that will outline the points we highlight in this Bulletin, given that we understand that the CSA is moving to finalize the new form of report as soon as possible.
Development of the proposed form of exempt distribution report has been a rather laboured process on the part of the CSA, but this important initiative will have material impacts on exempt market industry participants if the proposed form is adopted in its current format.
Presently, issuers who distribute securities pursuant to certain prospectus exemptions are required to file a report of exempt distribution within specified time-frames:
- Form 45-106F1 Report of Exemption Distribution (Form 45-106F1) must be completed and filed in all provinces and territories except British Columbia. Form 45-106F1 is filed in paper format in all jurisdictions except Ontario, where it is filed electronically through the OSC's e-portal.
- In British Columbia, the required form of report is Form 45-106F6 British Columbia Report of Exempt Distribution (Form 45-106F6). Form 45-106F6 is filed electronically through the BCSC's e-services. Investment funds filing an annual exempt trade report may file a Form 45-106F1 in British Columbia rather than the form normally required in that province.
- Issuers must file reports of exempt trades within 10 days of a trade, although investment funds have the option of filing annual reports, with a deadline to file them within 30 days of their fiscal year end.
In March 2014, the regulators in Alberta, New Brunswick, Ontario and Saskatchewan proposed two new forms (one for investment funds and another for all other issuers), which would have required new detailed information to be provided to the regulators. The rest of the CSA members would have retained the existing forms, modified to include certain specified, less extensive, information that was proposed in separate amendments published for comment in February 2014.
To the extent the August proposals consolidate the existing forms — and harmonize the earlier proposals — so that only one exempt distribution report must be completed for all jurisdictions, this is a very positive development. We also welcome the change in filing deadline for investment funds which choose to file annually — within 30 days of calendar year-end, rather than financial year-end, and not quarterly as proposed by the March 2014 proposals. We expect this will allow for ease of compliance and understanding of deadlines. We also note with some relief that the CSA are not proposing to expand the reporting required to cover trades by issuers relying on other prospectus exemptions — the same prospectus exemptions that today require exempt distribution reports, will govern when the new proposed exempt distribution reports must be filed.
Our remaining concerns around the proposed exempt distribution reports relate to the continuing regulatory burden around the non-harmonized filing methods that must be used to file these reports in the various jurisdictions, as well as the significantly enhanced amount of detailed information that will be required to be provided with the reports. We question the regulatory policy need for this information, as well as have concerns about its potential use by the regulators to impose further restrictions or obligations on the exempt markets.
Additional Information in Reports
All issuers would be required to include significant additional information in the exempt distribution report including certain specified identifier numbers, additional disclosure on individuals being compensated, additional details on the prospectus exemption relied on (the section, subsection and paragraph of exemption, such as the category of accredited investor), whether the purchaser is a registrant or insider of the issuer and the name of any individual compensated in connection with each purchaser.
Investment funds would also be required to disclose the National Registration Database (NRD) number of the fund manager, the type of investment fund based on its principal investment strategy, its net asset value, date of formation and financial year-end of the investment fund, its reporting issuer status, its public listing status as well as the net proceeds (net of redemptions) to the investment fund by jurisdiction. Specific information about the offering materials required to be filed in certain jurisdictions would also be required to be included.
Issuers that are not investment funds would also be required to disclose the primary industry based on North American Industry Classification System, the number of employees, for certain issuers, information on directors, executive officers, control persons and promoters, the ownership of securities of the issuer by such parties and the residential address of each such individual; and for issuers with no SEDAR profile, the date of formation, financial year-end, reporting issuer status, public listing status and size of assets.
It is not entirely clear at this time what the CSA proposes to do with the additional information that they are requesting in the new report, although they explain that this information will allow them to better understand the exempt markets and to contribute to CSA policy development as well as international regulatory studies about exempt markets in Canada. For example, it is not clear to us why an investment fund would need to provide its financial year end if the new filing deadline for reports will be based on a calendar year end. We do not believe that the somewhat vaguely explained benefits of this additional information to the CSA warants the significant cost and added administrative burden to the industry, which include international issuers who may factor this into their decision to privately place securities in the Canadian marketplace.
We note that earlier this year the CSA highlighted their concerns with compliance in providing the information currently expected under NI 45-106 in CSA Staff Notice 45-308 Guidance for Preparing and Filing Reports of Exempt Distribution under National Instrument 45-106 Prospectus Exemptions Revised. We expect that the compliance concerns will be exponentially worse with the new proposed form of report, given the sheer amount of information to be provided and the level of detail expected.
In Ontario, issuers will continue to file the new reports through the OSC's e-portal and in British Columbia, issuers will continue to file through BCSC's eServices. In a separate rule proposal published on June 30, 2015 — see Multilateral CSA Notice Require for Comment Proposed Amendments to National Instrument 13-101 and Multilateral Instrument 13-102 — the remaining members of the CSA propose to require exempt market filings to be filed in electronic format on SEDAR. SEDAR is the publicly available electronic portal used by reporting issuers in Canada to file their public documents. Although the proposed rule amendments will permit some of the filings covered in the rule proposals to be made privately (so only the regulators have access), if the issuer is unfamiliar with SEDAR or otherwise erroneously files under the wrong category, non-public information could inadvertently be made public.
These filing requirements will also increase costs to issuers distributing in Canada, which include the very real human costs of understanding the complexities of the SEDAR system that was not built to accommodate filings in respect of private placements. This rule amendment proposal has not been finalized, although the comment period ended on August 31, 2015.
The non-harmonized filing methods that will be required in the various jurisdictions in Canada begs one very important question relating to the most recent amendments. How will all of this information be assembled so as to provide meaningful data on the exempt markets in Canada, which is one of the stated reasons why the CSA needs this information?
The exempt markets in Canada are a real focus for the CSA at present, with the rule proposals listed in this Bulletin coming closely on the heels of significant amendments to NI 45-106 and other instruments, which are still being worked through by industry and the legal community alike.
Borden Ladner Gervais LLP has deep and extensive experience with working with issuers, managers and dealers in the exempt markets in Canada, assisting these participants in understanding regulatory requirements. In 2015, we have published the following Bulletins which explain the various regulatory developments:
- "Significant Changes to Canada's Exempt Market Effective May 5, 2015: Implications for Issuers and Dealers as well as for Retail Investors", Securities and Capital Markets Bulletin, February 2015
- "Private Placements, Canadian Wrappers and Exempt Market Dealer Restrictions", Securities and Capital Markets Bulletin, July 2015
- "Wrapper Amendments Bring Relief — But not for Everyone", Investment Management Bulletin, September 2015