After granting a series of discretionary exemptions, the Canadian securities regulators have proposed corresponding revisions to Canadian securities legislation that would enable foreign issuers (including governments) 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", subject to certain conditions. These revisions would substantially codify the prior exemptive relief granted to various applicant groups of Canadian and U.S. dealers and their affiliates since April 2013, which would terminate once all the revisions, including revisions previously proposed by the Ontario Securities Commission, come into effect substantially in the proposed form.
Implementation would be through amendments to National Instrument 33-105 Underwriting Conflicts 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, contemporaneously with granting the exemptive relief to the first group of applicants. The British Columbia Securities Commission did not participate because, to the extent applicable, it has previously granted broader exemptive relief.
Both proposals have been published for a 90-day comment period, ending February 26, 2014.
WHY IS EXEMPTIVE RELIEF NEEDED?
Sophisticated Canadian investors can lose investment opportunities when foreign issuers and underwriters decide not to extend U.S. or global offerings into Canada as a result of the time and expense associated with preparing a Canadian wrapper to satisfy some technical Canadian disclosure requirements or, in some cases, seeking regulatory permission to expressly make any representation concerning the proposed listing of the offered securities.
HOW THE PROPOSED EXEMPTIONS WORK
For what types of offeringsis the exemptive relief available?
Relief is available for two types of foreign offerings: (1) securities issued by 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; and (2) securities issued or guaranteed by the government of a foreign jurisdiction.
Who can purchase the securities?
A purchaser of securities subject to the exemption must be a "permitted client" as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.
What is the nature of the relief from Canadian underwriter conflicts disclosure requirements?
The relief from Canadian disclosure requirements in relation to underwriter conflicts is on the basis that the offering document will comply with section 229.508 of SEC Regulation S-K under the U.S. Securities Act of 1933 and FINRA Rule 5121, whether or not applicable by U.S. law to the offering. These disclosure requirements would apply in any event for an offering registered in the U.S. For other unregistered offerings, the document would need to be reviewed for compliance.
The previous exemptive relief provided to the applicant dealers only required compliance with the U.S. requirements regarding disclosure of underwriting conflicts applicable to registered offerings. Much of the required disclosure in the two referenced U.S. provisions deals with matters other than underwriter conflicts, so it appears to be a broader requirement. Since the regulators' notice of the proposed amendments refers only to U.S. "disclosure requirements on conflicts of interest," the deviation from the previously granted exemptive relief in this respect appears unintentional.
For offerings of securities issued or guaranteed by a foreign government, the Canadian front page disclosure of conflicts would not apply, but if the issuer is a "related issuer" of a dealer, generally a connection through shareholdings of at least 20%, the exemption is only available for the disclosure requirements in the body of the document if it complies with the U.S. provisions stated above or Canadian underwriting conflicts disclosure rules. The offering does not need to have been registered under U.S. law.
What other exemptive relief is provided?
The proposals would provide an exemption from the requirement in the securities legislation of certain provinces to include a description of statutory rights of action if the offering document contains a misrepresentation. They would also provide the requisite permission for representations concerning the proposed listing of the offered securities.
What procedural requirements would apply?
Dealers would be required to provide a notice concerning their reliance on the exemptions, which could be done in three ways:
- A dealer provides notice to its client prior to or contemporaneously with its first distribution to the client that relies on the exemptions.
- The offering document includes a section, such as a "Notice to Canadian Investors", that informs potential investors about the reliance on the exemptions.
- A notice informing potential investors about the reliance on the exemptions accompanies the offering document.
The exemptions do not impact the requirement to file post-trade reports with the Canadian regulators. The filing of a post-trade report in electronic form for Ontario would no longer be a condition to reliance on any of the exemptive relief, but, effective February 19, 2014, all post-trade reports filed in Ontario are required to be in electronic form.
The requirement that dealers provide a monthly summary of offerings relying on the exemptive relief would no longer apply. This requirement had been imposed as part of the policy review on the effect of the exemptions that had been granted to the applicant dealers.
DO THE PROPOSED EXEMPTIONS ADDRESS THE BARRIERS ENCOUNTERED BY THE APPLICANT DEALERS?
The main barriers encountered by the applicant dealers in relying on the current exemptive relief have been (1) having to comply with U.S. laws on underwriter conflict disclosure even for unregistered U.S. offerings where these laws do not apply; and (2) having to send a notice and obtain a signed acknowledgment from a client before sending an unwrapped offering document to the client.
The proposed exemptions would leave the first of these barriers still in place, but changes to the client notice process would simplify that compliance process. First, the offering document could be sent to clients simultaneously with the notice. Second, a client-signed acknowledgment would no longer be required. Third, the notice could be provided on behalf of all dealers participating in a particular offering by including it within the offering document, similar to other notices to investors in many other jurisdictions.