Foreign companies offering securities to sophisticated investors in Canada through dealers may no longer need to provide specified Canadian disclosure to those investors.
Currently, when foreign securities are offered to sophisticated investors in Canada on a private placement basis, specifically mandated Canadian disclosure is required to be included directly in any offering memorandum or in a related “wrapper” document that forms a part of the offering memorandum.
In response to criticism that Canadian investors are being shut out of international offerings as foreign issuers seek to avoid the time and expense involved in preparing a wrapper, the Canadian Securities Administrators (CSA) recently took action to make it easier for foreign issuers to offer securities to sophisticated Canadian investors in private placement transactions.
Ad Hoc Relief
On April 23, 2013 the CSA granted exemptive relief to certain dealers with respect to certain disclosure requirements in the context of a private placement of foreign securities to sophisticated investors (the “Ad Hoc Relief”). If other dealers want similar relief they will have to make an application to the CSA.
The Ad Hoc Relief provides an alternative means by which the applicant dealers and their affiliates (the “Applicants”) can satisfy both:
- the requirement to disclose in an offering memorandum a summary description of the statutory rights of action available to purchasers in Ontario, Saskatchewan, Nova Scotia and New Brunswick (the only CSA jurisdictions with such requirement) in the event that such offering memorandum contains a misrepresentation (“Rights of Action Disclosure”); and
- the connected and related issuer conflicts of interest disclosure requirement of subsection 2.1(1) of National Instrument 33-105 Underwriting Conflicts (“Conflicts Disclosure”).
In order to benefit from the Ad Hoc Relief:
- the Applicants must deliver prescribed one-time disclosure to a prospective investor and provide certain reports to the regulators from time to time; and
- the investor must provide written acknowledgement and consent documentation to the Applicant.
In addition, the offering memorandum must comply with the disclosure requirements applicable to a registered U.S. offering in respect of any applicable underwriter conflicts of interest.
Types of Distributions
The Ad Hoc Relief only applies with respect to distributions:
- to “permitted clients” (as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations);
- pursuant to the accredited investor prospectus exemption (section 2.3 of National Instrument 45-106 Prospectus and Registration Exemptions); and
- of securities offered primarily in a “foreign jurisdiction” (as defined in National Instrument 14-101 Definitions).
Issuer of the Securities
The issuer of the securities (other than securities issued or guaranteed by the government of a foreign jurisdiction) must meet the following requirements:
- be incorporated, formed or created under the laws of a foreign jurisdiction;
- not be a reporting issuer in any jurisdiction of Canada;
- have its head office or principal executive office outside of Canada; and
- not be an “investment fund” (as defined in securities legislation).
The Ad Hoc Relief is not effective until June 22, 2013 and will terminate in three years, or earlier if legislative amendments providing substantially the same relief become effective before then.
Proposed Rule Changes in Ontario
On April 25, 2013 the OSC published for comment proposed amendments (the “Amendments”) to OSC Rule 45-501 Ontario Prospectus and Registration Exemptions. The purpose is to amend specific disclosure requirements with respect to offering memoranda in the context of foreign private placements offered to sophisticated investors in Ontario. The Amendments, if approved, would put all market participants in a similar position.
The Amendments address Rights of Action Disclosure but not Conflicts Disclosure. The OSC states that it is working with other members of the CSA to consider amendments to National Instrument 33-105 to provide relief from Conflicts Disclosure “where offerings by foreign issuers provide comparable alternative disclosure to investors”.
Amendments Compared to the Ad Hoc Relief
The Amendments differ from the Ad Hoc Relief in that they would permit Rights of Action Disclosure to be provided in several alternative ways and not simply by way of a notice from a dealer with written acknowledgment from the purchaser. For example, an issuer may provide Rights of Action Disclosure directly in a separate document which accompanies, but is not part of, the offering memorandum. It is not entirely clear, however, what is intended by some of the alternative manners of disclosure. For example, one alternative is to provide disclosure “in a representation letter, subscription agreement or other form of written notice delivered to the permitted client in connection with a distribution for which no offering memorandum is being used”. Since the Rights of Action Disclosure requirement only is triggered by the use of an offering memorandum, it is not clear what this alternative achieves. Another proposed alternative is “any combination” of the alternative manners of disclosure. It is not clear what combination of disclosure this might permit or how the OSC might interpret the provision.
Another important difference between the Amendments and the Ad Hoc Relief is that the Amendments also apply to distributions of securities of investment funds whereas the Ad Hoc Relief does not.
The Amendments also provide an exemption from the restrictions with respect to making a representation that a security or derivative will be listed on an exchange or quoted on a quotation and trade reporting system (or that an application for same has been or will be made). The exemption would apply only to distributions of foreign securities to permitted clients, provided that the representation is not a misrepresentation.
The Amendments will clarify that the requirement to obtain authorization for the collection of personal information in the context of filing an exempt distribution report will only apply to distributions to individuals.
Finally, it should be noted that the Ad Hoc Relief and the Amendments do not change the fact that an offering memorandum that is voluntarily provided to permitted clients in Ontario attracts liability to the foreign issuer in the event that the offering memorandum contains a misrepresentation.
The comment period with respect to the Amendments ends on July 24, 2013.