Foreign issuers seeking to offer securities by way of private placement in Canada have long faced many disclosure rules which necessitate the preparation of a "Canadian wrapper" to supplement their offering documentation. Many issuers and dealers have argued that the time and expense associated with the preparation of a wrapper is onerous and ultimately a disincentive to offering securities in the Canadian market. On April 23, 2013, the Ontario Securities Commission (OSC), on behalf of other Canadian securities regulators, issued an order (the Order)1 granting exemptive relief to a group of applicant U.S. and Canadian broker-dealers from having to prepare supplemental Canadian disclosure in the context of a global offering. Two days later, the OSC published proposed amendments2 to certain Ontario rules and requirements that have the effect of codifying much of the relief granted in the Order. The trend towards liberalizing the Canadian disclosure requirements and eliminating the need for a Canadian wrapper will be welcomed by foreign issuers and sophisticated Canadian investors who may otherwise have been excluded from investment opportunities because of the cost disincentive and regulatory burden posed with respect to foreign offerings. What follows is a summary of the Order and the amendments subsequently proposed by the OSC.
the relief order
The Order granted relief to the applicants and their affiliates (variously registered as investment dealers, exempt market dealers or restricted dealers or relying on the "international dealer exemption" in Canadian jurisdictions), subject to certain conditions, from the disclosure requirements that would otherwise necessitate the preparation of a Canadian wrapper. This includes relief from the requirement to describe the applicable statutory rights of action prescribed by provincial securities legislation with respect to any misrepresentation in the offering document. In addition, the Order provided relief from providing disclosure on the front page and in the body of the offering document regarding the status of the issuer as a "related or connected issuer" of an underwriter, as prescribed by National Instrument 33-105 – Underwriting Conflicts (NI 33-105). The relief from the "related or connected issuer" disclosure requirements was granted on the condition that the offering document comply with U.S. law regarding underwriting conflicts of interest disclosure. It would therefore appear that this relief only applies with respect to offerings of U.S. securities or foreign securities that are also being offered in the U.S.
The Director of the OSC also provided the applicants with a permission pursuant to subsection 38(3) of the Securities Act (Ontario) (the Act) to allow representations in offering documents that an application has or will have been made for a security to be listed on a stock exchange. A separate letter was also provided to the applicants by the Director of the OSC acknowledging that the notification and authorization prescribed in Form 45-106F1 – Report of Exempt Distribution (Form 45-106F1) regarding the indirect collection of investors' personal information by the OSC only applies to investors that are individuals (i.e., not corporations or other institutions).
The relief granted in the Order is subject to the following additional conditions:
- Canadian purchasers must be "permitted clients" as defined in National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations.
- The securities must be offered primarily in a foreign jurisdiction.
- The securities must be (1) issued by a foreign issuer that is incorporated, formed or created under the laws of a foreign jurisdiction, has its head office or principal executive office outside of Canada and is not a reporting issuer in Canada, or (2) issued or guaranteed by a foreign government.
- An exempted dealer must deliver a form of notice (prescribed in the Order) to prospective purchasers and receive a signed acknowledgement and consent from the purchaser regarding the dealer's reliance on the exemption. This must be done prior to the dealer's first reliance on the Order (i.e., on a one-time basis only).
- An exempted dealer must deliver to its principal regulator on a monthly basis information with respect to the exempt distributions made in reliance on the Order.
- Each Form 45-106F1 delivered to the principal regulator in connection with an exempt distribution made in reliance on the Order must be filed electronically.
The Order will become effective on June 22, 2013. This sixty-day delay is intended to allow for a level playing field by providing time for other dealers to make similar applications. The relief will expire on the earlier of three years after the effective date (e.g., June 2016) or the date on which legislative amendments come into effect providing similar relief.
the proposed Ontario amendments
On April 25, 2013, the OSC published for comment proposed amendments to OSC Rule 45-501 – Ontario Prospectus and Registration Exemptions (Rule 45-501) and Form 45-106F1. Following the conditions of the Order, the proposed amendments would apply to offerings of "designated foreign securities" to "permitted clients" only. The definition of "designated foreign securities" would codify the conditions of the Order by mandating that the securities be offered primarily in a foreign jurisdiction and must be (1) issued by a foreign issuer that is incorporated, formed or created under the laws of a foreign jurisdiction, has its head office or principal executive office outside of Canada and is not a reporting issuer in Canada, or (2) issued or guaranteed by a foreign government.
Where these conditions apply, the Ontario statutory rights of action for damages or rescission, while still applicable, would not need to be described in the foreign offering document or Canadian wrapper. The disclosure to purchasers of their statutory rights would be permitted to be made by alternative means, including delivery to the permitted client by a registered dealer or international dealer of a notice and acknowledgement that proposes to make future distributions of securities to the permitted client and contains a statement to the effect that the disclosure will apply to all future distributions. Such a notice and acknowledgment must be signed by the permitted client.
The proposals also include an amendment to Rule 45-501 stating that subsection 38(3) of the Act, which prohibits representations in an offering document regarding the listing of a security on a stock exchange, would not apply with respect to the offering of a "designated foreign security" to a "permitted client" if such representation is not a misrepresentation.
Another proposed amendment would clarify in Form 45-106F1 that the requirement to provide notice and obtain authorization from purchasers regarding the indirect collection of personal information by the OSC only applies to individuals and would not be required where the purchaser is an institution or not otherwise an individual.
The proposed amendments do not include relief from the prescribed disclosure regarding underwriting conflicts of interest. However, the OSC notes that it, along with other members of the Canadian Securities Administrators, is in the process of considering amendments to NI 33-105 to provide such relief where offerings by foreign issuers provide investors with comparable alternative disclosure.
The OSC also reminds foreign investment funds that other Canadian regulatory requirements specific to investment funds, such as investment fund manager registration, may still apply. Permitted clients that are investment funds are also subject to regulatory requirements such as fund-on-fund restrictions that may restrict their ability to purchase securities of a foreign issuer that is an investment fund.
Despite the Order and the proposed Ontario amendments, we note that certain types of securities may still necessitate the inclusion of Canadian-specific disclosure in the offering documentation or the preparation of a Canadian wrapper. For example, with respect to issuances of foreign bank notes, disclosure mandated by the Office of the Superintendent of Financial Institutions Canada may still need to be provided. Issuers should also consider whether they might want to provide risk factor disclosure that securities are issued in currency other than Canadian dollars.
The deadline for submitting comments on the proposed amendments is July 24, 2013. It is possible that regulators in other provinces that mandate the disclosure of statutory rights (Nova Scotia, New Brunswick and Saskatchewan) will propose similar amendments in the wake of these developments.