The British Columbia Securities Commission (BCSC) has made it easier for B.C. issuers to access capital outside the province. As of October 31, 2017, three new and/or improved exemptions to the prospectus requirement are available for distributions to purchasers outside B.C.:
- Private placement exemption (improved)
- Public offering exemption (new)
- Testing of the waters exemption (new).
The changes are found in the new BC Instrument 72-503 Distribution of Securities outside British Columbia, which revokes and replaces the previous version of the same instrument.
- Under B.C. securities laws, and in particular under BC Instrument 72-702 Distribution of Securities to Persons Outside British Columbia, a distribution is deemed to take place in B.C. where an issuer with a substantial connection to B.C. distributes securities outside of the province.
- British Columbia issuers distributing securities outside the province must therefore comply with the prospectus requirement in section 61 of the Securities Act unless an exemption is available.
- While the old BC Instrument 72-503 provided for a private placement exemption, it was cumbersome and still left many issuers facing the delays and costs associated with relying on prospectus exemptions or filing a B.C. prospectus even where the distributions were to non-residents.
The Three Exemptions
Private placement exemption
Under the new private placement exemption, a prospectus is not required for any distribution that meets the following criteria:
- The purchaser is not resident in B.C. (no certification required);
- The purchaser purchases as principal;
- The issuer complies with the securities law of the purchaser’s jurisdiction; and
- The issuer is not relying on Multilateral Instrument 45-108 Crowdfunding in any of the jurisdictions that have adopted it (cross-border crowdfunding is dealt with separately in BC Instrument 72-505 Exemption from prospectus requirement for crowdfunding distributions to purchasers outside British Columbia).
Most of the red tape that made the old private placement exemption cumbersome to use has been removed, including the following:
- Certification of purchaser’s non-resident status is no longer required;
- The list of acknowledgments that needed to be inserted into the subscription agreement is no more; and
- There is no specific requirement to be listed on one of the “qualified exchanges” that were enumerated in the old BC Instrument 72-503.
As was the case under the predecessor exemption, the first trade of a security acquired under this exemption is subject to the resale restrictions in section 2.5 of National Instrument 45-102 and a Form 45-106F1 report of exempt distribution must also be filed with the BCSC within 10 days of the distribution, along with a copy of any offering material required to be filed with the securities regulator of the purchaser’s jurisdiction.
Public offerings exemption
Under the new BC Instrument 72-503, a distribution is exempt from the prospectus requirement if:
- The purchaser is not a Canadian resident (this requirement is satisfied if the distribution is made over an exchange or market outside of Canada, as long as the issuer or selling securityholder has no reason to believe that the purchaser is a Canadian resident);
- The issuer has filed a registration statement in accordance with U.S. federal securities laws in connection with the distribution and that statement has become effective (or has done the equivalent in another foreign jurisdiction, as described in the Instrument); and
- If the issuer is a reporting issuer in B.C., it files the U.S. registration statement (or equivalent in another foreign jurisdiction) with the BCSC (including any supplements).
- If the issuer is not a reporting issuer in B.C., it files (within 10 days of the distribution) a Form 45-106F1 report of exempt distribution with the BCSC and deliver a copy of the U.S. registration statement or equivalent document (including any supplements). In this situation, it is not necessary to include Schedule 1 to Form 45-106F1 (“Confidential Purchaser Information”).
Testing of the waters exemption
The chief purpose of this new prospectus exemption is to allow B.C. issuers take advantage of the US JOBS Act which allows emerging issuers to communicate with qualified institutional buyers (and certain other institutional investors) to “test the waters” for a possible U.S. offering.
Under the new BC Instrument 72-503, the testing of the waters exemption applies only where the communications are with non-residents of Canada and are permitted under section 5(d) of the Securities Act of 1933. This exemption is not limited to distributions into the U.S., but an issuer looking at a jurisdiction other than the U.S. would need to determine whether the securities laws of that jurisdiction contain provisions similar to those of the US JOBS Act.
Canadian securities laws are not harmonized on the issue of where a distribution takes place. While it is generally accepted that a distribution takes place in the jurisdiction where the purchaser resides, some provinces, like B.C., also consider the distribution to take place in the jurisdiction of the issuer. While the Ontario Securities Commission has generally taken the former approach, it recently published amendments to its proposed OSC Rule 72-503 Distributions Outside of Canada (as previously discussed here) which provides for certain limited exemptions from the prospectus requirement, including where a distribution is made under a public offering document in a foreign jurisdiction.