A group of securities dealers has successfully obtained relief from most of the requirements that typically drive the need for a Canadian private placement supplement, or wrapper, for selling securities of non-Canadian issuers into Canada.
The exemption order issued by the Canadian securities regulators was the culmination of nearly two years of effort by the applicants, including extensive negotiation of the terms and conditions of the exemption. It will come into effect on June 22, 2013.
When Will the Exemption Be Available?
The exemption will apply to sales of securities in Canada that are made by one of the dealers named in the exemption order or one of its affiliates.
The offering must be made primarily outside Canada, and the securities must be issued by an issuer that is incorporated, formed or created outside Canada, is not a reporting issuer in Canada and does not have its head office or principal executive office in Canada.
Sales in Canada must be limited to “accredited investors” under the prospectus exemption available for sales to those investors and must also be limited to purchasers who are “permitted clients” as defined for the purposes of applicable Canadian dealer registration requirements and exemptions. Further, if any of the investors are individuals in Ontario, it will be necessary to either resort to the use of a conventional wrapper or find another mechanism to deliver prescribed disclosure to those individual investors regarding Ontario freedom of information and protection of privacy legislation.
The exemption is not available for securities of an issuer that would be considered an “investment fund” within the meaning of Canadian securities laws, including exchange traded funds (ETFs).
What Does the Exemption Allow?
If the conditions of the exemption are satisfied, it will allow the following:
- sales of securities in Canada without the “connected and related” issuer relationship disclosure that may otherwise be required on the cover page of a Canadian offering memorandum;
- the use of an offering document that does not contain prescribed statutory rights of action disclosure under the securities laws of any province or territory; and
- making representations about applications and intended applications to list securities on non-Canadian stock exchanges without obtaining case-by-case approvals in any province or territory.
In Ontario, it is necessary to provide any purchasers who are individuals with certain prescribed notifications under freedom of information and protection of privacy legislation. Unfortunately, the exemption order does not provide any relief from this requirement. As a result, if an offering is made to any investors in Ontario who are natural persons, it will be necessary to either continue to use a conventional wrapper or find some other way to ensure that the prescribed disclosure is provided to those individuals in Ontario.
What Are the Conditions of the Exemption?
Before any of the dealers covered by the exemption order may rely on the exemption order for sales to a particular Canadian purchaser for the first time, that purchaser must be given a notice containing prescribed information, including a warning that it will no longer be receiving the statutory rights of action disclosure and certain other information traditionally contained in wrappers. The Canadian purchaser must sign and return a consent form agreeing to the use of the wrapper exemption for sales made to it.
The exemption order will only be available if the non-Canadian prospectus or offering memorandum already complies with the disclosure requirements with respect to underwriter conflicts that would be applicable to a U.S. registered offering, whether or not the offering is actually registered in the United States. Accordingly, Rule 144A offerings in the United States will only be eligible to rely on the exemption order if the Rule 144A offering memorandum voluntarily contains all of the relationship disclosure that would have been required by the Securities and Exchange Commission (SEC) and the Financial Institution Regulatory Authority (FINRA) rules if the offering had been registered under the U.S. Securities Act of 1933, as amended. A broader exemption is available for offerings of securities issued or guaranteed by a foreign government, in which case no underwriter conflicts relationship disclosure may be required at all, except if there are certain ownership relationships between the foreign government and the dealers, in which case compliance with the SEC and FINRA disclosure requirements would still be required.
Until further notice, in addition to the regular exempt trade reports required to be filed with the Canadian securities regulators for sales made in Canada (which are not affected by the exemption order), the dealers relying on the exemption order must also deliver a special monthly report detailing all sales made in reliance on the exemption order.
Other Canadian Requirements That Still Apply
The exemption from the requirement to have a Canadian wrapper does not eliminate the need to comply with other Canadian securities law requirements that could apply to distributions of foreign securities into Canada. In some cases a wrapper may still be required. In many cases, even if a wrapper is not required, other issues will still have to be considered or steps may have to be taken to ensure compliance with all applicable Canadian securities law requirements. These are some examples:
- an offering in which one of the dealers selling the securities into Canada is not covered by the exemption order (in which case that dealer would still require a conventional wrapper);
- offerings in which issuer is an investment fund;
- offerings that may be made to individuals in Ontario, unless the required notifications under freedom of information and protection of privacy legislation are delivered to them in some other manner;
- distributions of securities of an issuer that is, or may become, traded on a U.S. over-the-counter market, so as to ensure that the issuer does not become subject to public company reporting obligations in certain provinces under Canadian Multilateral Instrument 51-105;
- sales of securities that may be subject to regulation under industry-specific requirements, such as insurance legislation or the Bank Act (Canada);
- offerings in which the issuer or any selling securityholder is located in Canada, or the issuer is a reporting issuer in Canada; and
- securities that may have novel tax implications for Canadian investors warranting customized tax disclosure.
At present, it remains unclear to what extent wrappers will still be part of the Canadian private placement landscape. Some involvement of Canadian counsel will still be required. Even when a wrapper is not actually required, Canadian counsel will need to take other steps such as filing any required private placement trade reports with the Canadian securities regulators.
The requirement for dealers to obtain a signed consent from the purchaser before the first time they rely on the exemption order for a sale to that purchaser may also create a significant disincentive to utilize the exemption order and drive some dealers to continue with the traditional wrapper process. Further, although the minimum contents of the consent form are prescribed by the exemption order, there is no reason that its contents cannot be supplemented. Dealers will want to consider building additional provisions into the consent forms that they circulate in order to address other matters not specifically required by the exemption order but that had typically been contained in wrappers.
The implementation date of the exemption order has been delayed until June 22, 2013 so that any dealer who was not part of the original exemption application process may have an opportunity to apply for and obtain similar relief before the exemption becomes available to the original applicants, and thereby avoid being placed at any competitive disadvantage to them.
Dealers who are currently qualified as international dealers in Canada but not currently covered by the exemption order should seriously consider engaging Canadian counsel to make an application for the same relief on their behalf so that they will be entitled to the same benefits as the original applicants.