Offerings of securities in other jurisdictions are frequently extended to purchasers in Canada on a private placement basis. However, it is generally necessary to include with the foreign offering document a Canadian wrapper that contains disclosure required under the securities legislation of the various Canadian jurisdictions where the offering is made. Also, it may be necessary to obtain relief from certain Canadian securities regulators in order to permit specified disclosure contained in the foreign offering document, such as a listing representation, that is not permitted under local rules. Since most investors in such offerings are sophisticated institutional investors, the value of this additional disclosure and prohibition is questionable. Furthermore, the time and expense associated with preparing a Canadian wrapper has been cited as a significant deterrent to extending foreign offerings to Canadian purchasers.
The Ontario Securities Commission has (a) granted relief to a group of dealers and (b) proposed amendments to the applicable requirements in Ontario that would allow such offerings to be made available to sophisticated investors without a Canadian wrapper.
PROPOSED ONTARIO AMENDMENTS
The proposed amendments apply to the offering of “designated foreign securities”, which include:
- securities offered primarily in a foreign jurisdiction
securities issued by an issuer that is
- created under the laws of a foreign jurisdiction
- not a reporting issuer in Canada, and
- has its head office or principal executive offices outside of Canada, or
- securities that are issued or guaranteed by the government of a foreign jurisdiction.
The scope of the amendments is limited to offerings to investors that meet the definition of a “permitted client” under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Accordingly, offerings to ordinary “accredited investors” are excluded from the scope of the proposed amendments and will still require the additional Canadian disclosure.
The amendments provide an exemption from the requirement that an offering memorandum include a description of the statutory rights of action available to a purchaser where the offering memorandum contains a misrepresentation. The amendments allow this information to be provided by a variety of other means.
The amendments also provide an exemption from the prohibition against making a representation that a security will be listed on an exchange or quoted on a quotation or trade reporting system for designated foreign securities, provided that the representation is factual.
In addition, the reporting requirements for exempt distributions are amended so that the obligation to confirm that all purchasers were notified that personal information would be collected and provided to the OSC and that such purchasers authorized the indirect collection of personal information by the OSC will apply only where the purchasers are individuals.
On April 23, 2013, the OSC granted relief to several dealers that is similar to the substance of the proposed amendments. However, since the relief has been granted under the passport system it applies in jurisdictions other than Ontario and addresses requirements of other jurisdictions. The scope of the relief granted is also broader than the proposed amendments, and extends to disclosure required under National Instrument 33-105 Underwriting Conflicts. The relief from the prohibited listing representations was addressed in a separate letter.
The effectiveness of the relief has been delayed for 60 days, which will allow other dealers time to obtain the relief on the same basis and maintain a level playing field for all dealers active in the Canadian private placement market.
The proposed amendments and the relief granted by the OSC are positive developments that should minimize the need to create Ontario-specific wrappers for foreign offering documents. As a result it is more likely that foreign offerings will be available to institutional purchasers in Ontario.
The disclosure required for an offering memorandum is one of the areas where there is still considerable variation in the rules of the Canadian jurisdictions and a good example where the differences have little substantive merit. It will be interesting to see whether the regulators in other Canadian jurisdictions will adopt a similar approach to remove barriers for foreign private placements, through rule-making or the use of their blanket-order powers. In particular, like Ontario, Saskatchewan, New Brunswick and Nova Scotia currently have requirements that an offering memorandum must describe the rights of investors in the event of a misrepresentation in the offering memorandum. All Canadian jurisdictions require specific disclosure regarding underwriting conflicts in certain circumstances.
It also remains to be seen whether the OSC will expand its efforts remove other barriers to Canadian participation in transactions, such as restrictive rules on resale of foreign securities outside Canada where Canadians have more than de minimis holdings. Further, while the proposed amendments are limited to large sophisticated purchasers, the case could be made for reducing the regulatory burdens and streamlining the disclosure requirements for private placements more generally.
In addition to providing mandated disclosure, many issuers use Canadian wrappers to provide for certifications, deemed representations and disclaimers, including: certification of the purchaser’s status as a permitted client, acknowledgment of receipt of the required permitted client notice, representations that they are purchasing as principal and not for further distribution, choice of language, acknowledgement of resale restrictions and disclaimers regarding tax and eligibility for investment. However, we expect that these items can be dealt with through a separate notice or in a subscription agreement if there is otherwise no need for a Canadian wrapper.