On July 15, 2011, the Canadian Securities Administrators (CSA) published a Notice and Request for Comment in respect of proposed amendments to National Instrument (NI) 41-101 General Prospectus Requirements, NI 44-101 Short Form Prospectus Distributions, NI 44-102 Shelf Distributions, together with the companion policies in respect of the foregoing instruments, and NI 81-101 Mutual Fund Prospectus Disclosure (Prospectus Rules). There is a 90-day period in which comments are being sought by the CSA.

This would be the first amendment to the Prospectus Rules since their implementation on March 17, 2008.  The proposed changes are not intended to be an overhaul of the current Prospectus Rules, but are instead intended to clarify certain provisions, address significant gaps, enhance effectiveness, and codify prospectus relief that has been granted in the past.

A complete text of the proposed changes is available on the Ontario Securities Commission website.

Following are key proposed amendments applicable to all issuers.

  • No Minimum Offering Amount:  a requirement for additional disclosure where an issuer does not propose to provide a minimum offering amount.  The CSA nevertheless reserves the right in certain circumstances to impose a minimum offering amount on an issuer.
  • Personal Information Forms (PIFs):  acceptance of TSXV/TSX PIFs in the place of the CSA form of PIF introduced in 2008, provided that a certificate and consent is appended to such PIFs and the information contained therein continues to be correct.  However, except in certain circumstances, PIFs would be required at the time of each prospectus filing.
  • Contractual Rights of Rescission: a requirement that issuers provide contractual rights of rescission in respect of underlying securities where the conversion, exchange or exercise of the security could occur within a short period of time (generally within 180 days) of the purchase of the security under the prospectus. The CSA is in particular referring to subscription receipts and similar types of securities, and is taking the view that investors should be afforded the same remedies in respect of the underlying security, considering that they are making an investment decision in respect of the underlying security.
  • Significant Acquisitions that are also acquisitions of a primary business or predecessor entity: clarification that a non-reporting issuer or a shell reporting issuer that has carried out a significant acquisition that constitutes the acquisition of a primary business or a predecessor entity of the issuer is required to disclose financial statements under Item 32 of NI 41-101F1 as opposed to Item 35 of NI 41-101F1.
  • Exemption of Incorporation by Reference of Reports/Opinions Produced in Information Circular:  codification of relief granted to issuers allowing them to exclude from their prospectuses reports or opinions of experts (in particular, fairness opinions or tax opinions) that are incorporated by reference into the prospectus indirectly through the incorporation by reference of a special meeting information circular.
  • Prior Sales and Trading Volume:  streamlining of disclosure regarding prior sales and trading price and volume in NI 41-101F1 such that it applies only to the class or series of securities that is being distributed under the prospectus, and clarify that if an issuer is distributing a series of debt, it must provide prior sales and trading price and volume disclosure in respect of that series of debt.
  • Non-Issuer's Submission to the Jurisdiction and Appointment of Agent for Service: expansion of the existing requirement to all foreign directors of the issuer, as they are liable for misrepresentations contained in the prospectus.  Perhaps more controversial is the CSA's intention to extend the requirement to file a non-issuer's submission to the jurisdiction and appointment of an agent for service to all foreign experts including qualified persons and auditors.  The CSA is particularly keen to receive feedback in respect of this proposal.
  • Successor Issuer:  clarification of the definition of "successor issuer" such that in circumstances where the successor acquired a business from a predecessor that represented less than all of the predecessor's business, substantially all of the business must have been divested by the predecessor to the successor in order for the issuer to be considered a successor issuer.  This is intended to ensure that an issuer will be considered a successor issuer only if the historical financial statements of its predecessor are an accurate proxy for the successor issuer's financial statements.
  • Primary Business Oil & Gas Exemption to Provide Operating Statements:  extension of an exemption to allow oil & gas issuers carrying out acquisitions to rely on operating statements instead of financial statements when providing financial disclosure about the acquisition.  In addition, the CSA proposes to exempt oil & gas issuers from having to provide audited operating statements the third year back if a recent independent reserves evaluation has been prepared.  This proposal would result in consequential amendments under NI 51-102 Continuous Disclosure Obligations, and NI 52-107 Acceptable Accounting Principles and Auditing Standards.
  • Notice of Intention Exemption:  relief to a successor issuer new to the short form prospectus regime from having to wait 10 business days to file its preliminary prospectus if its predecessor previously filed the notice of intention.  The successor issuer would still have to file a notice of intention concurrently or prior to filing the preliminary prospectus.
  • Time to File the Final Prospectus:  clarification that if a prospectus is amended, the 90-day period will recommence from the date of the receipt of the amended prospectus, but the final prospectus may be filed not later than 180 days after the date of the receipt of the preliminary prospectus.

Following are key proposed amendments applicable to investment funds:

  • Non-Canadian Investment Funds:  an extension of the application of existing requirements for foreign investment funds to managers of foreign investment funds and other non-Canadian entities.
  • Leverage Disclosure for Investment Funds:  an enhancement of the disclosure requirement relating to the use of leverage as an investment strategy in the prospectus summary and body of a prospectus.
  • Investment Fund Trading Expense Ratio:  a requirement that the disclosure of an investment fund's trading expense ratio for the past 5 years.
  • Organization and Management Details of the Investment Fund:  a requirement for additional disclosure on current or past bankruptcies of and cease trade orders against any issuer, and on ownership interests in the investment funds and its fund manager for directors and executive officers of the investment fund.  The CSA also proposes new disclosure relating to principal distributors of investments funds and a requirement to sign a prospectus certificate.
  • Principal Security Holder:  an amendment to the disclosure of principal securityholders of investment funds to limit the disclosure to circumstances where this information is or should be known by the investment fund or its manager.  This amendment is intended to affect exchange traded funds in continuous distributions.
  • Mutual Fund PIF Reform:  a reform of the PIF delivery requirements in NI 81-101 to correspond to the proposed NI 41-101 reforms relating to PIFs as discussed above.
  • Documents Incorporated by Reference in a Mutual Fund Prospectus:  a requirement for the incorporation by reference of the audited balance sheet filed with the mutual fund's simplified prospectus where a mutual fund has not yet filed interim or annual financial statements.  In addition, the CSA proposes to require the incorporation by reference of a mutual fund's interim financial statements and interim management report of fund performance where the mutual fund has not yet filed its annual comparative financial statements and annual management report of fund performance.
  • Principal Distributor Certificate for Mutual Funds:  an amendment to the principal distributor certificate required by Form 81-101F2 Contents of Annual Information Form to require a principal distributor of a mutual fund to provide the same certificate as the mutual fund and the manager of the mutual fund.

As noted above, the comment period expires on October 14, 2011.