Amendments to facilitate offerings
On September 8, 2015, certain amendments to the current Canadian securities regulatory regime came into effect to facilitate certain cross-border private placement offerings to sophisticated investors resident in Canada (the “Amendments”). As noted in a previous Insight, this is an area of securities regulation that has been in need of harmonization among Canadian jurisdictions. The Amendments are a welcome step toward both harmonization and simplification of the rules applicable to Canadian participation in private placements by foreign issuers.
Background to the Amendments
Foreign issuers and dealers that wish to allow sophisticated Canadian investors to participate in private placements have historically encountered several regulatory restrictions, which have been applied differently across the provinces and territories of Canada. These restrictions, noted in our previous Insight and below, were addressed by the inclusion of a separate disclosure document known as a "Canadian wrapper” with the offering document for delivery to Canadian investors, or through exemptive relief orders obtained by individual international dealers to eliminate the need for the "Canadian wrapper." Preparation of a "Canadian wrapper" increased the time and cost to foreign issuers and dealers in carrying out cross-border offerings. Even in the case of reliance on “Canadian wrapper exemption” relief orders, there was a time and cost demand on foreign issuers and dealers to apply for and obtain such orders, and then, once obtained, to ensure that the conditions for reliance on the orders are satisfied for each trade (including the requirement to provide and receive a prescribed form of counter-signed notice (which includes certain specified disclosure) from the Canadian investor(s)). In some cases, international dealers included “Canadian wrappers” with their offering documents notwithstanding that they had the benefit of an exemptive relief order since it was easier to include the “Canadian wrapper” than to conduct the analysis and complete the steps for reliance on a “Canadian wrapper exemption” relief order for a particular trade.
As a result of the Amendments, provided that certain criteria (noted below) are met, a “Canadian wrapper” should no longer be required for foreign issuers offering securities to sophisticated Canadian investors. Furthermore, the process for such offerings has been streamlined. The Amendments remove the obligations of the "Canadian wrapper exemption" relief orders to provide and receive a counter-signed notice from each prospective Canadian investor and to make monthly exempt distribution filings with the applicable Canadian securities regulator(s). Under the Amendments, certain disclosure and notices must still be made to Canadian investors; however, it is permissible for these disclosures and notices to be included in any of: (i) the offering document; (ii) a document delivered at the same time as the offering document; or (iii) a notice delivered in advance of the offering. Consequently, it is expected that a market practice will develop to include such disclosures in a “Notice to Canadian Investors” section included in offering memoranda that may be used with potential sophisticated Canadian investors.
Securities offerings eligible for the exemptions
The Amendments provide the exemptions in the case of distributions of two types of securities ("eligible foreign securities"): (i) securities issued by issuers organized under the laws of a foreign jurisdiction, that are not reporting issuers in Canada and that have their head office and the majority of their executive officers and directors located outside of Canada; and (ii) securities issued or guaranteed by a foreign jurisdiction's government.
Sophisticated Canadian investors eligible for the exemptions
In order to rely on the exemptions, pursuant to the Amendments, each Canadian investor must be a “permitted client," meaning that the Canadian investor must fall into one of eighteen prescribed categories of "permitted client" set out in National Instrument 31-103 - Registration Requirements, Exemptions and Ongoing Registrant Obligations. The categories, which include institutional investors, financial institutions, insurance companies, pension funds, registrants and high net worth individuals, are intended to provide bright-line thresholds for financial sophistication.
Scope of the Amendments
1. Exemptions from the requirements to include “connected and related” issuer relationship disclosure in accordance with Canadian securities laws
For distributions of eligible foreign securities, other than securities issued or guaranteed by a foreign jurisdiction's government, the Amendments provide an exemption from National Instrument 33-105 -Underwriting Conflicts which requires certain warning disclosure if the issuer and an offering dealer are considered to be “connected” or “related,” provided that:
- a concurrent offering is made in the US in compliance with US securities laws and, if applicable, FINRA rule 5121, as amended from time to time;
- the offering document delivered to Canadian investors contains the same information as that provided to US investors; and
- the offering document or another document delivered to Canadian investors refers to reliance on the exemption provided by the Amendments.
In respect of distributions of eligible foreign securities issued or guaranteed by a foreign jurisdiction's government, there is no requirement for a concurrent offering in the US but investors must still be given notice of reliance on the exemption.
2. Exemption from requirements to include prescribed statutory rights of action disclosure under the securities laws of certain provinces
Securities legislation in certain Canadian provinces requires offering documents to include lengthy disclosure of certain statutory rights of action available to investors in the event of a misrepresentation in an offering document. The Amendments provide an exemption from this requirement in an offering of eligible foreign securities to permitted clients if certain (comparatively brief) alternative disclosure is provided in one of: (i) the offering document; (ii) a document delivered at the same time as the offering document; or (iii) a notice delivered in advance of the offering.
This exemption has been enacted in the provinces which require the disclosure of statutory rights through the implementation of two instruments. In Ontario, it has been added to Ontario Securities Commission Rule 45-501 - Ontario Prospectus and Registration Exemptions (the “Ontario Rule”). In New Brunswick, Nova Scotia and Saskatchewan, the exemption exists in the new Multilateral Instrument 45-107 - Listing Representations and Statutory Rights of Action Disclosure Exemptions(the “Multilateral Instrument”).
3. Exemption from the prohibition on making representations in an offering document about applications and intended applications to list securities on stock exchanges
Generally, Canadian securities legislation prohibits representations regarding the future listing of a security on an exchange (a “Listing Representation”). As referenced in our previous Insight, BC Notice 47-701 - Blanket Permission Under Section 50(1)(c) of the Securities Act ("BCN 47-701") provides an exemption to this prohibition in British Columbia and, upon implementation of the Amendments, the Ontario Rule and the Multilateral Instrument will provide a narrower exemption in all of the other provinces and territories. Prior to the implementation of the Ontario Rule and the Multilateral Instrument, international dealers that had obtained “Canadian wrapper exemption” relief orders also held exemptions from the prohibition against making the Listing Representation in connection with the exemptive relief orders.
With the coming into effect of the Ontario Rule and the Multilateral Instrument, the new exemption applies to distributions of eligible foreign securities to permitted clients in each of the provinces of Canada other than British Columbia, if the Listing Representation does not contain a misrepresentation and is made in compliance with the rules and by-laws of the applicable exchange. The more general BCN 47-701 blanket order exemption continues to apply for trades to Canadian investors resident in British Columbia. Consequently, international dealers and issuers are no
4. Potential imposition of certain Canadian continuous disclosure obligations
In our previous Insight, we identified that a foreign issuer whose equity securities trade over-the-counter in the US risks becoming a “reporting issuer” and subject to Canadian continuous disclosure obligations in certain provinces if, among other things, it undertakes promotional activities in such provinces.
Unfortunately, this issue is not addressed by the Amendments, and its application remains balkanized. Multilateral Instrument 51-105 – Issuers Quoted in the US Over-the-Counter Markets ("MI 51-105") has been adopted by all provinces other than Ontario. However, the securities regulators in Alberta, British Columbia and Québec have issued orders exempting issuers in the case of certain offerings made only to permitted clients.
As such, foreign issuers and dealers conducting cross-border offerings in Canada should continue to bear in mind MI 51-105 and the applicable exemptions. Accordingly, a foreign issuer whose securities trade over-the-counter in the US and not on a designated exchange may wish to restrict the Canadian jurisdictions included in its offerings to Alberta, British Columbia, Ontario and Québec.
Practical consequences for international dealers and issuers
The Amendments provide welcome changes that should facilitate certain cross-border offerings to sophisticated Canadian investors. As noted above, foreign issuers and dealers may encounter certain Canadian regulatory issues that will need to be addressed as they arise but, with the ability to avoid preparation of a “Canadian wrapper” in many circumstances, they will likely find the new landscape somewhat more navigable.
Now that the Amendments have been implemented, if foreign issuers and dealers are offering securities to sophisticated Canadian investors and the offering document contains the appropriate disclosure required under US law and by the Amendments, the foreign issuer or dealer will no longer be required to prepare and distribute a "Canadian wrapper" or to rely on an exemptive relief order. Furthermore, as noted in Part III above, the counter-signed notice requirement and the monthly reporting requirement of the exemption orders have been removed. In the absence of a “Canadian wrapper” and in light of the required notices still mandated under the Amendments, it is expected that a market practice will develop to include such disclosures in a “Notice to Canadian Investors” section included in offering memoranda that may be used with potential sophisticated Canadian investors.
Notwithstanding the Amendments, international dealers and issuers need to be aware that:
- issuers or their underwriters will still be required to prepare and file a Report of Exempt Distribution as mandated by National Instrument 45-106 – Prospectus Exemptions in each of the provinces in which the foreign issuer or dealer distributed securities within ten (10) days of the distribution date;
- a notice to Canadian investors will need to be included in offering documents distributed to sophisticated Canadian investors which specifically includes: (i) notice of reliance on the exemption from the disclosure obligations imposed by National Instrument 33-105 - Underwriting Conflicts; and (ii) the prescribed alternative disclosure in respect of statutory rights of action available to investors in the event of a misrepresentation in an offering document, a document delivered concurrently, or in a notice delivered in advance of the offering; and
- a foreign issuer whose securities trade over-the-counter in the US and not on a designated exchange still risks becoming a “reporting issuer” and subject to Canadian continuous disclosure obligations in certain provinces if, among other things, it undertakes promotional activities in such provinces (and, accordingly, it may need to seek Canadian securities laws advice and may wish to restrict the Canadian jurisdictions included in its offerings to Alberta, British Columbia, Ontario and Québec).
In the event offerings do not fall within the scope of the exemptions described above, international dealers and issuers should proceed with caution and seek the advice of legal counsel in order to determine the appropriate disclosure obligations and other regulatory requirements in connection with such distributions.