The Canadian Securities Administrators in each province and territory of Canada other than Ontario (the adopting jurisdictions) recently adopted Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets. As we’ve previously discussed, MI 51-105 is scheduled to come into force on July 31, 2012 and, assuming ministerial approval, will have significant implications for issuers that have, or will have in the future, a class of securities that are quoted on over-the counter markets in the United States and who do not also have securities that trade on the North American stock exchanges specified in the Instrument.

By operation of the Instrument, an issuer will become subject to Canadian public company reporting obligations where the issuer, among other things, engages in promotional activities in furtherance of the purchase or sale of their securities, either directly or through a third party representative, in or from an adopting jurisdiction on or after July 31, 2012, or where the issuer otherwise previously distributed securities to persons resident in an adopting jurisdiction if the issuer is subsequently assigned a ticker symbol by the Financial Industry Regulatory Authority in the United States (FINRA) for use on OTC markets in the United States at any time after July 31, 2012. 

The stated purpose of the Instrument is to discourage the manufacture and sale in the adopting jurisdictions of OTC quoted shell companies that can be used to facilitate abusive market practices. However, the Instrument will have the unintended but significant effect of subjecting major well-established issuers who have securities listed on exchanges outside of North America and that only trade OTC in the United States to Canadian public company reporting obligations. Significantly, these issuers may unknowingly become subject to Canadian public company reporting obligations, as it is common market practice for U.S. broker-dealers to apply to have a FINRA ticker symbol assigned to an issuer’s securities without the knowledge or involvement of the issuer. 

The Instrument defines an “OTC issuer” as an issuer that has a class of securities that have been assigned a ticker symbol by FINRA for use on any of the OTC markets in the United States (such as the OTC Bulletin Board, the Pink Sheets or the “grey market”) but does not include an issuer that has any class of securities that are listed or quoted on one or more prescribed Canadian or U.S. exchanges. However, an issuer will also be considered an “OTC issuer” if a FINRA ticker symbol is assigned to the issuer after July 31, 2012 and, on or before the date the symbol was assigned, the issuer distributed a security to a person resident in an adopting jurisdiction and that class of securities becomes the issuer’s OTC-quoted securities. As such, where a ticker symbol is assigned to a class of OTC securities trading in the United States, there is a risk that an issuer that has distributed securities to persons resident in an adopting jurisdiction could, regardless of when such securities were distributed, inadvertently become subject to Canadian public company reporting requirements and to the jurisdiction of securities regulators in the adopting jurisdictions.

Pursuant to MI 51-105, an OTC issuer will be considered an “OTC reporting issuer” and become subject to Canadian securities law requirements that apply generally to “reporting issuers” in the adopting jurisdictions if, after July 31, 2012, an OTC issuer’s business is “directed or administered,” or “promotional activities” are carried on, in or from an adopting jurisdiction.  For these purposes, “promotional activities” means activities or communications by or on behalf of an issuer that promote or could reasonably be expected to promote the purchase or sale of the securities of the issuer. The regulators in the adopting jurisdictions consider “promotional activities” to include communications through an investment newsletter or similar types of promotional publications, as well as the provision of information to potential investors who request information or to potential private placement investors.  Further, an issuer will be considered to carry out promotional activities in an adopting jurisdiction if it communicates from anywhere with persons in that jurisdiction, or communicates from an adopting jurisdiction with persons anywhere, in a way that promotes or reasonably could be expected to promote the purchase or sale of the issuer’s securities.

An OTC issuer that becomes an “OTC reporting issuer” will become subject to Canadian securities law requirements, including those requirements relating to continuous and timely disclosure that generally apply to Canadian public companies, as well as governance requirements relating to the mandate and composition of audit committees, CEO/CFO certifications and corporate governance disclosure.  An OTC Reporting Issuer will have to file a prescribed form of notice in respect of any persons that carry out promotional activities on its behalf, and its directors, officers, promoters and control persons will have to deliver “personal information forms” to the applicable regulators.

The Instrument also imposes specific restrictions on the use of prospectus exemptions and the ability to resell securities, and will require securities issued by OTC reporting issuers to carry specific legend notations in certain circumstances.  Most notably, if securities of an OTC reporting issuer are acquired on or after July 31, 2012, but prior to the date that the issuer is assigned a ticker symbol by FINRA, those securities may only be resold in reliance upon prescribed prospectus exemptions, or through an investment dealer registered in a Canadian jurisdiction if a trade is executed through an OTC market in the United States. The Instrument has not been adopted in Ontario and may not directly impact issuers whose capital markets activities are restricted strictly to Ontario and do not otherwise have any connection to an adopting jurisdiction. The Instrument is scheduled to come into force in every other province and territory of Canada on July 31, 2012, subject to the receipt of applicable ministerial approvals.