The Canadian Securities Administrators (CSA) announced they will amend National Instrument 45-102 – Resale Restrictions (NI 45-102) and Companion Policy to NI 45-102 (45-102CP) (Amendments) to provide for a new prospectus exemption for the resale of securities (and underlying securities) by a “foreign issuer”, thus making it easier for Canadian investors to participate in prospectus-exempt offerings by foreign issuers.
The Amendments are expected to be adopted nationwide and, if all necessary regulatory and ministerial approvals are obtained, will come into force on June 12, 2018. In Alberta and Ontario, the Amendments will be reflected in Alberta Securities Commission Blanket Order 45-419 – Prospectus Exemptions for Resale Outside of Canada and Ontario Securities Commission Rule 75-503 – Distributions Outside Canada.
The Amendments aim to address feedback received by the CSA that the maximum 10 per cent ownership thresholds contained in section 2.14 of NI 45-102 are an impediment to participation by Canadian investors in prospectus-exempt offerings by foreign issuers. The Amendments create a new section 2.15 prospectus exemption for the resale of securities on a foreign market or to a foreign person, of an issuer that has a minimal connection to Canada as a result of not being organized in Canada, not having its head office in Canada and not having a majority of ordinarily resident Canadian directors or executive officers.
Section 2.15 of NI 45-102 provides that a security holder is exempted from the prospectus requirement for the resale of securities acquired under a prospectus exemption if the resale is on a market outside of Canada or to a person or company outside of Canada and if the issuer of the securities is a “foreign issuer”. An issuer is a “foreign issuer” if it is not incorporated or organized under the laws of Canada, or a jurisdiction of Canada, unless the issuer has its head office in Canada or a majority of the executive officers or directors of the issuer ordinarily reside in Canada.
BACKGROUND AND TIMING
Increasingly, Canadian investors, particularly institutional investors, are participating in global securities markets and investing in diversified global securities portfolios, resulting in more frequent acquisitions of the securities of foreign issuers through private placements or through the facilities of foreign exchanges.
The existing resale exemption in section 2.14 of NI 45-102 provides a prospectus exemption for the resale of securities (and underlying securities) where the issuer is not a reporting issuer in any Canadian jurisdiction, provided that:
- The resale is on a market outside of Canada or to a person or company outside of Canada; and
- Canadian residents own not more than 10 per cent of the outstanding securities of the issuer and represent not more than 10 per cent of the total number of security holders (Ownership Thresholds).
While section 2.14 of NI 45-102 is available for the resale of shares of non-Canadian issuers, some issuers exceed the Ownership Thresholds. This leaves potential Canadian investors in these issuers with the choice of holding securities with an indefinite hold period and limited liquidity options, or avoiding the investment opportunity. This disincentive to Canadian investors consequently deters certain foreign issuers from considering a securities offering in Canada.
As a proposed solution to this impediment, and in an effort to decrease the regulatory burden upon foreign issuers seeking to offer securities in Canada, the CSA proposed amendments that expanded the scope of the factors connecting an issuer to Canada beyond the Ownership Thresholds.
The Amendments introduce section 2.15 to NI 45-102, which exempts a security holder from the prospectus requirement applicable to the resale of securities acquired under a prospectus exemption if:
- The resale is made on a market outside of Canada or to a person or company outside of Canada; and
- The issuer of the securities is a “foreign issuer”, being an issuer that:
- Is not incorporated or organized under the laws of Canada, or a jurisdiction of Canada;
- Does not have its head office in Canada; and
- Does not have a majority of resident Canadian executive officers or directors.
In addition to the creation of section 2.15 of NI 45-102, the Amendments add related guidance to 45-102CP and implement related and consequential amendments to section 8.16 of NI 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations and to Section 1.4 of NP 11-206 – Process for Cease to be a Reporting Issuer Applications (NP 11-206) to include reference to both section 2.14 and new section 2.15 and to remove from section 14 of NP 11-206, the obligation to ascertain the number of Canadian security holders.
Provided that all necessary regulatory and ministerial approvals are obtained, the Amendments will come into force on June 12, 2018.
The Amendments appear to further the CSA’s objective to enhance the ability of Canadian investors to participate in global capital markets and, consequently, increase participation by foreign issuers in Canadian capital markets.
However, investors, issuers and other capital market participants should stay tuned as there may be further proposed amendments to NI 45-102. The CSA have stated that the Amendments are one aspect of their review of the entire resale regime and they are continuing to assess whether this regime continues to be relevant, or whether alternative regulatory approaches are desirable.