The Canadian securities regulators have finalized rule changes that would enable foreign issuers (including governments) to make private placement offerings to permitted clients in Canada as part of a global offering without a Canadian wrapper, subject to certain conditions. The rules will come into effect on September 8, 2015.
The exemptions address underwriter conflicts disclosure, the description of statutory rights of action, and requirements to obtain regulatory permission to make a statement in the offering document about a proposed listing of the offered securities.
The rule changes will be implemented through:
- Amendment to National Instrument 33-105 Underwriting Conflicts
- Amendment to Ontario Securities Commission Rule 45-501 Ontario Prospectus and Registration Exemption and Form 45-106F1 Report of Exempt Distribution
- In provinces other than Ontario and British Columbia, new Multilateral Instrument 45-107 Listing Representation and Statutory Rights of Action Disclosure Exemptions
WHY IS EXEMPTIVE RELIEF NEEDED?
Sophisticated Canadian investors can lose investment opportunities when foreign issuers and underwriters decide not to extend United States or global offerings into Canada as a result of the time and expense associated with preparing a Canadian wrapper to satisfy some technical Canadian disclosure requirements or, in some cases, seeking regulatory permission to expressly make any representation concerning the offered securities’ proposed listing.
AVAILABLE EXEMPTIVE RELIEF
Relief is available for two types of offerings made primarily outside Canada:
- Securities issued by a foreign issuer that is not a reporting issuer in Canada, has its head office outside of Canada, and has a majority of its executive officers and directors resident outside of Canada
- Securities issued or guaranteed by a foreign jurisdiction’s government, which can be a national government or the government of a political subdivision
HOW DO THE EXEMPTIONS DIFFER FROM THE EXISTING DEALER ORDERS?
The rules deal with dealers and institutional investors’ significant concerns about the discretionary exemption orders and with the exemptions as proposed for comment in April and November 2013. There are no longer requirements relating to compliance with U.S. requirements on underwriter conflicts disclosure for offerings registered with the U.S. Securities and Exchange Commission in the case of offerings not so registered. While the exemptions have a new notice requirement, the notice is greatly simplified and is not required to be sent in advance of an offering, and there is no requirement to obtain a signed acknowledgement.
For non-government issuers, the conditions include:
- A concurrent distribution of the security to investors in the United States
- Receipt by Canadian investors of a document containing the same disclosure as provided to U.S. investors
- Compliance with applicable U.S. federal securities law and, if applicable, the disclosure requirements of FINRA Rule 5121
In the case of securities issued or guaranteed by a foreign government, there are no conditions relating to U.S. offerings or specifically relating to the disclosure of underwriter conflicts.
TO WHOM CAN THE SECURITIES BE SOLD?
A purchaser of securities subject to the exemption must be a “permitted client” as defined in National Instrument 31-103 - Registration Requirements, Exemptions and Ongoing Registrant Obligations.
Dealers would be required to provide a notice concerning their reliance on the exemptions, which could be done in three ways:
- A dealer provides the notice to its clients in advance of any offering that relies on the exemptions
- The offering document includes a notice to Canadian investors
- A dealer provides the notice to its clients separately from the offering document
The notice must refer to reliance on the exemption from the underwriter conflicts disclosure requirements and include a prescribed paragraph regarding statutory rights of action. If given as a one-time notice before any offering under the exemption, the notice must state that the dealer intends to rely on the exemption for any distribution in the future of an eligible foreign security to the permitted client.
It remains to be seen whether a practice of including a “Notice to Canadian Investors” in global offering documents, as commonly is the practice for other jurisdictions, will develop. In addition to including the prescribed information, the Notice to Canadian Investors could include an optional paragraph on Canadian selling and resale restrictions.
IMPACT ON POST-TRADE AND MONTHLY REPORTING
The exemptions do not affect the requirement to file post-trade reports with the Canadian regulators. The regulators have indicated that they intend to publish revisions to the form of post-trade report for comment this summer.
The requirement that dealers provide a monthly summary of offerings relying on the exemptive relief would no longer apply.