On February 28, 2013, the Canadian Securities Administrators (CSA) published amendments to National Instruments 41-101 General Prospectus Requirements (NI 41-101), 44-101 Short Form Prospectus Distributions (NI 44-101), 44-102 Shelf Distributions and 81-101 Mutual Fund Prospectus Disclosure (collectively, the Amendments). In addition, amendments to the related companion policies for each of the foregoing National Instruments were published. The Amendments come into effect on May 14, 2013.
The Amendments are intended to clarify certain provisions of the prospectus rules, address gaps in the prospectus rules, modify certain requirements in the prospectus rules to enhance their effectiveness, remove/streamline certain requirements in the prospectus rules that are burdensome for issuers and of limited utility to securityholders and codify prospectus relief that has been granted in the past. The purpose of this bulletin is to highlight the most significant changes to the prospectus rules, in particular as they relate to NI 41-101 (in relation to issuers other than investment funds) and NI 44-101. This bulletin does not discuss changes to the financial statement requirements contained in the prospectus rules (which relate primarily to pro forma financial statement requirements for an acquisition).
Summary of Certain Significant Amendments to NI 41-101 and NI 44-101
Filing of Final Prospectus - Timing (NI 41-101)
Currently, an issuer must obtain exemptive relief in order to file a final prospectus more than 90 days after the date of the receipt for the preliminary prospectus. The Amendments provide in Part 2 of NI 41-101 that an issuer must not file (A) its first amendment to a preliminary prospectus more than 90 days after the date of the receipt for the preliminary prospectus, and (B) its final prospectus more than 90 days after the date of the receipt for the preliminary prospectus or an amendment to the preliminary prospectus which relates to the final prospectus. The Amendments also provide that if an issuer files an amendment to a preliminary prospectus, the final prospectus must be filed within 180 days from the date of the receipt of the preliminary prospectus.
Personal Information Form (PIF) Requirements
The PIF requirements under NI 41-101 and NI 44-101 have been amended to provide that an issuer is not required to deliver to the regulator a PIF for an individual if the issuer or another issuer previously delivered a PIF for the individual and the following are satisfied:
- the certificate and consent included in or attached to the PIF was executed by the individual with three years preceding the date of the filing of the preliminary prospectus;
- the responses given by the individual to questions 6 through 10 of the previously filed PIF are correct as at a date that is within 30 days of the filing of the preliminary prospectus; and
- if the PIF was previously delivered to the regulator by another issuer, the issuer delivers to the regulator, concurrently with the filing of the preliminary prospectus, a copy of the previously delivered PIF or alternative information that is satisfactory to the regulator.
Until May 14, 2016, an issuer is not required to deliver to the regulator a PIF for an individual if the issuer previously delivered a PIF for the individual and the following are satisfied:
- the certificate and consent included in or attached to the PIF was executed by the individual with three years preceding the date of the filing of the preliminary prospectus or pro-forma long form prospectus; and
- the responses given by the individual to questions 4(B) and 4(C) and questions 6 through 9 or, in the case of a TSX Venture Exchange or Toronto Stock Exchange PIF in effect after September 8, 2011, questions 6 through 10, of the predecessor PIF are correct as at a date that is within 30 days of the filing of the preliminary prospectus or pro-forma long form prospectus.
NI 41-101 has been amended to include “personal information form” and “predecessor personal information form” definitions (which defined terms apply to the filing requirements provided for in NI 44-101). “Personal information form” is defined as a completed Schedule 1 of Appendix A to NI 41-101, or a completed TSXV/TSX personal information form submitted by an individual to the TSX or to the TSXV to which is attached a completed certificate and consent form in the form set out in Schedule 1 - Part B of Appendix A to NI 41-101. “Predecessor personal information form” is defined to mean a completed Schedule 1 to Appendix A to NI 41-101 that was in effect from March 17, 2008 to May 14, 2013, or a completed TSX/TSXV personal information form to which is attached a completed certificate and consent in the form that was in effect from March 17, 2008 until May 14, 2013.
The companion policy to NI 41-101 also provides that in order to meet the requirement that the responses to the questions listed above continue to be correct, issuers should obtain appropriate confirmations from the individual concerned. In addition, the companion policy further provides that the CSA’s interpretation of what would potentially be alternative information satisfactory to the regulator is, with respect to previously filed PIFs, the System for Electronic Document Analysis and Retrieval project number and the name of the issuer.
Minimum Offering Amount
Form 41-101F1 and Form 44-101F1 have been amended to include additional disclosure requirements in respect of minimum offering amounts. In particular, item 2.1 and item 1.6 of Form 41-101F1 and Form 44-101F1, respectively, have been amended to provide that where the distribution of securities is to be on a best efforts basis and a minimum offering amount is required for the issuer to achieve one or more of the purposes of the offering, the issuer must disclose totals for both the minimum and maximum offering amount, or if the minimum offering amount is not required for the issuer to achieve any of the purposes of the offering, then the following disclosure must be included: “No minimum amount of funds must be raised under this offering. This means that the issuer could complete this offering after raising only a small proportion of the offering amount set out above”.
In addition, Form 41-101F1 and Form 44-101F1 have been amended to require an issuer to disclose how the proceeds of the offering will be used by the issuer (with reference to various potential thresholds of proceeds raised), in the event that the following matters apply to the issuer and the issuer raises less than the maximum offering amount: (a) the closing of the distribution is not subject to a minimum offering amount, (b) the distribution is on a best efforts basis and (c) the issuer has significant short-term non-discretionary expenditures including those for general corporate purposes, or significant short-term capital or contractual commitments, and may not have other readily accessible resources to satisfy those expenditures or commitments. In addition, if the issuer is required to make the disclosure above, the issuer must discuss, in respect of each threshold, the impact, if any, of raising each threshold amount on its liquidity, operations, capital resources and solvency. If an issuer is required to include this disclosure in its prospectus, Form 41-101F1 and Form 44-101F1 provide that an example threshold that reflects the receipt of 15% of the offering or less is to be included in the prospectus.
The amendments to the companion policies to NI 41-101 and NI 44-101 provide that where a distribution is being done on a best efforts basis, an issuer will need to determine if a minimum offering is required to achieve one or more of the stated purposes of the offering. In this circumstance, the issuer will need to provide a minimum and maximum offering amount, or otherwise provide the cautionary statement discussed above.
In addition, the amendments to the companion policies provide that where an issuer may determine that a minimum offering amount is not necessary, a regulator may infer that a minimum offering amount is appropriate in the circumstances. For example, such inference may be made where the regulator has concerns that a minimum amount of proceeds must be raised in order for the issuer to achieve its stated objectives or where the regulator has concerns about the issuer continuing as a going concern. The amended companion policies indicate that the benefit of imposing a minimum offering amount is that if the issuer fails to raise the minimum amount, investors benefit from an investor protection mechanism that facilitates the return of their subscription funds to them.
Rights of Withdrawal and Rescission Disclosure for Convertible Securities
In the case of an offering of convertible, exchangeable or exercisable securities in which additional amounts are payable or may become payable upon conversion, exchange or exercise, an issuer is required to include the prescribed disclosure to the effect that the statutory right of action for damages for a misrepresentation in a prospectus is limited, in certain jurisdictions, to the price at which the convertible, exchangeable or exercisable security is offered. This means that if a purchaser pays additional amounts upon conversion, exchange or exercise of the security, those amounts may not be recoverable.
The amendments to the companion policy to NI 41-101 provides that public interest concerns arise if the subsequent distribution of the underlying security is not part of the initial distribution and is not qualified by the prospectus. The CSA states that these concerns arise because when the security is converted, exchanged or exercised prior to the end of the statutory period for a right of action for rescission under securities legislation, the purchaser of a convertible, exchangeable or exercisable security does not retain the same rights to rescission because the convertible, exchangeable or exercisable security that was issued under the prospectus has been replaced by the underlying security. Therefore, the companion policy now provides that in these circumstances, the original purchaser should retain the benefit of any remaining statutory right of rescission that would otherwise apply in respect of the convertible, exchangeable or exercisable security. The companion policy further indicates that an issuer should then provide the original purchaser of the convertible, exchangeable or exercisable security with a contractual right of rescission in respect of such conversion, exchange or exercise transaction.
The companion policy also confirms that the guidance above would not apply to a warrant where such warrants may reasonably be regarded as incidental to the offering as a whole (i.e., a unit offering where the warrant is included in the offering as a “sweetener”).
Qualification to File a Short Form Prospectus
Part 2 of NI 44-101 has been amended to include additional exemptions for reporting issuers that previously filed a prospectus. For example, section 2.7(1.1) provides that section 2.2(d)(ii), 2.3(1)(d)(ii) and 2.6(1)(b)(ii) of NI 44-101 do not apply to an issuer if the issuer has filed annual financial statements as required under the applicable continuous disclosure rules and, unless the issuer is seeking qualification under section 2.6 of NI 44-101, the issuer has filed and obtained a receipt for a final prospectus that included the issuer’s or each predecessor entity’s comparative financial statements for its most recently completed financial year or the financial year immediately preceding its most recently completed financial year. In addition, section 2.7(3) provides that sections 2.2(d), 2.3(1)(d) and 2.6(1)(b) of NI 44-101 do not apply to an issuer if the issuer is not exempt from the requirement to file annual financial statements, but the issuer has not yet, since the completion of a qualifying transaction or RTO been required to file annual financial statements, and the capital pool company filing statement or other filing statement used to complete the qualifying transaction or RTO was filed by the issuer and was compliant with the rules of the TSXV.
Documents Incorporated By Reference in a Short Form Prospectus
Form 44-101F1 has been amended to clarify that an issuer may exclude from its short form prospectus a report, valuation, statement or opinion of a person or company contained in an information circular prepared in connection with a special meeting of securityholders, if the report is not an auditor’s report in respect of financial statements of a person or company and the report, valuation, statement or opinion was prepared in respect of a specific transaction contemplated in the circular, and unrelated to the distribution under the short form prospectus (i.e. a fairness opinion), and such transaction has been abandoned or completed.
The Amendments provide, among other things, clarification and additional disclosure requirements in an effort to address gaps in the prospectus rules, enhance effectiveness and codify relief granted to issuers in the past.