The Canadian Securities Administrators (the CSA) recently published for comment proposed amendments to the various national instruments governing public offerings of securities and prospectus disclosure, including National Instrument 41-101 General Prospectus Requirements (NI 41-101), National Instrument 44-101 Short Form Prospectus Distributions (NI 44-101) and National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101 and with NI 41-101 and NI 44-101, the Prospectus Rules).
The CSA publication is very comprehensive and the proposed amendments affect many areas of the Prospectus Rules. However, the proposed amendments are generally of a technical nature and are intended to address operational issues that have been identified through use of the Prospectus Rules since major changes were implemented in March 2008.
Key changes in the proposed amendments include:
PERSONAL INFORMATION FORMS (PIFS)
- The regulators will accept a PIF that an individual previously filed for a different issuer. This will be a significant improvement for directors of multiple related issuers, such as families of closed-end funds, who previously were required to file a new PIF for each issuer.
- Issuers will be required to file a PIF with the regulator for an individual at the time of each prospectus filing; however, an exemption from this requirement is available if (i) a PIF was filed by an issuer for that individual within the last three years; (ii) the responses of that individual to key questions in the PIF have not changed; and (iii) a certificate is given by the issuer identifying the previous PIF filing and confirming that the responses to key questions have not changed. Currently, no PIF is required if an individual previously filed one for the issuer at any time. The proposed amendments, which are similar to the requirements originally proposed in 2006, suggest that the CSA intend to consider the continued suitability of existing officers and directors of reporting issuers as part of a prospectus review. The proposed amendments appear to formalize current administrative practice in place for investment funds that are continuously offered.
- Minor amendments have been proposed to the NI 41-101 PIF to remove certain personal questions that are of limited use and to align the questions with those contained in the TSX and TSX Venture PIFs.
We query the proposed emphasis on PIFs for directors and officers of managers of investment funds, given that those managers will have filed detailed personal information forms for these individuals – in the form of a completed Form 33-109F4 – in connection with those managers’ application for registration as investment fund managers. The requirements of National Instrument 33-109 Registration Information are such that these individuals are required to keep this information current and up to date. The proposed PIF requirements appear to be duplicative and we recommend a more streamlined, integrated system that recognizes the complete regulatory scheme that applies to fund managers and funds.
CONTRACTUAL RIGHTS OF RESCISSION
- The CSA have historically been concerned about the distribution of convertible, exchangeable or exercisable securities (such as warrants) under a prospectus where the primary investment decision and payment occurs on the exercise or conversion of the securities distributed. Under the securities legislation of most provinces, a purchaser of those securities under a prospectus does not have a statutory right of rescission in respect of an underlying security. The CSA have proposed amendments to the guidance contained in the companion policy to NI 41-101 to clarify that in certain circumstances, the issuer should provide a purchaser with a contractual right of rescission in respect of the issuance of the underlying security where the conversion, exchange or exercise of the security could occur within 180 days of the purchase of the security under the prospectus.
FINANCIAL STATEMENT REQUIREMENTS FOR SIGNIFICANT ACQUISITIONS THAT ARE ALSO ACQUISITIONS OF A PRIMARY BUSINESS OR A PREDECESSOR ENTITY
- For the purposes of the financial statement requirements a business acquired, or proposed to be acquired, by an issuer may be treated as both the issuer and a significant acquisition, which can create confusion. Proposed amendments to the financial statement requirements of the prospectus forms will clarify the application of these rules in certain circumstances.
- The amendments also provide clarity regarding the inclusion of pro forma financial statements, which are currently only addressed for significant acquisitions.
Amendments have been proposed to NI 41-101 that relate specifically to investment funds using the prospectus form set out in that instrument, including proposed requirements for:
- Expanded disclosure about use of leverage.
- Disclosure of the trading expense ratio, similar to the requirements of the past several years for mutual funds set out in NI 81-101.
- Enhanced disclosure about the directors and officers of the fund manager.
- Disclosure about the principal holders of securities of an investment fund, which are designed to reflect the differences between exchange-traded funds (ETFs) and other mutual funds. These changes are intended to mirror exemptions tha t the CSA routinely provide to ETFs.
Investment fund prospectuses – filed under NI 41-101 or under NI 81-101 – will also be required to contain enhanced disclosure about the principal distributors of the fund. The principal distributors’ certificate to the fund prospectus is being amended to match the forms of certificate mandated for the manager and the fund. Curiously, the CSA propose to remove the concept of a principal distributor signing an “underwriters” form of certificate (that is, to the best of their information, knowledge and belief). There is no explanation by the CSA of this proposed change, and we can only assume this amendment was inadvertent. This proposed change will not be appropriate, particularly where the principal distributor of a fund is not the same entity as the manager of the fund.
NI 81-101 is proposed to be amended to reflect the PIF requirements described above and to make certain other technical changes – the only disclosure amendments relate to the annual information form and those are minor technical amendments.
Other proposed amendments to the Prospectus Rules include the following:
- No Minimum Offering Amount – if an issuer does not propose a minimum offering amount, additional disclosure will be required with respect to use of proceeds. Regulators may still expect an issuer to provide a minimum offering amount in certain circumstances. This also applies to investment funds filing a prospectus under NI 41-101.
- Exemption from Incorporation by Reference of Reports/Opinions Produced in an Information Circular – in some cases it will not be necessary to incorporate by reference the reports or opinions of experts from a special meeting information circular thereby requiring the consent of such experts.
- Prior Sales and Trading Price and Volume Disclosure – disclosure will only be required with respect to the particular series of debt or the particular class or series of securities being distributed.
- Non-Issuer’s Submission to the Jurisdiction and Appointment of Agent for Service – proposed amendments expand the existing requirement beyond persons signing a certificate in the prospectus to all foreign directors of the issuer.
- Primary Business Oil & Gas Exemption to Provide Operating Statements – oil and gas issuers carrying out acquisitions that would be considered acquisitions of a primary business or a predecessor entity will be able to rely on operating statements when providing financial statement disclosure about the acquisition.
- Notice of Intention Exemption – a successor issuer will be exempt from having to wait the 10 business day period to file a prospectus if its predecessor entity previously filed the notice of intention; a similar exemption will be provided for a credit support issuer tha t relies upon the continuous disclosure record of its credit supporter.
- Time to File Final Prospectus – if an issuer files an amendment to its preliminary prospectus, it will have 90 days from date of the amendment to file its final prospectus; irrespective of the number of amendments filed, an issuer will not be allowed to file the final prospectus more than 180 days after the date of the receipt for the preliminary prospectus.
Comments on the proposed amendments to the Prospectus Rules are due by October 14, 2011. Borden Ladner Gervais LLP (BLG) intends to submit a comment letter and we would be pleased to assist you in providing your comments to the CSA.
The proposed amendments to the Prospectus Rules are available here.