New rules relating to reports filed with Canadian securities regulators in connection with private placements came into force on June 30, 2016 (see our April 2016 MarketCaps). Now that market participants have had some experience operating under those new rules, and in light of concerns which have been raised, Canadian securities regulators have published revised guidance on the preparation and filing of reports of exempt distribution.
Gowling WLG Focus
Reports for most private placements are now filed under an amended Form 45-106F1 in all jurisdictions. Although the new report form eliminated the fragmented reporting requirements that previously existed, foreign dealers conducting offerings into Canada, as well as Canadian institutional investors, have raised concerns about the more extensive information required and the risk of personal liability for those signing the form. To address some of these concerns, Canadian securities regulators have provided relief from the requirement to disclose whether a purchaser is a registrant or an insider of the issuer in certain circumstances in order to facilitate access by institutional investors to foreign investment opportunities. In an effort to further alleviate concerns, Canadian securities regulators have published the revised guidance.
Summary of Revised Guidance
The revised guidance aims to clarify the following points:
- Certification: The report form must generally be signed by a director or officer of the issuer or underwriter, certifying the contents of the report on behalf of the issuer or underwriter. Although this potentially exposes the director or officer to liability for any misrepresentation made in the report, the guidance points out that the director or officer may be able to rely on a reasonable diligence defence under securities legislation.
- Issuer Information Verification: An underwriter filing the report is expected to take reasonable steps to obtain and confirm the information regarding the issuer required by Form 45-106F1. The guidance sets out examples of those reasonable steps, which may include reviewing the issuer’s public continuous disclosure record (where available), reviewing the issuer’s offering document, reviewing information provided by legal counsel, and making inquiries of the issuer. In addition, an underwriter may need to use online search tools (set out in the guidance) to determine the North American Industry Classification Standard (NAICS) code that most closely corresponds to the issuer’s primary business activity.
- Purchaser Status Verification: A seller must generally take reasonable steps to confirm that a purchaser meets the criteria for a particular prospectus exemption. For certain purchasers, such as Canadian financial institutions, Schedule III banks and pension funds, the guidance states that the seller may not need to reconfirm the purchaser’s status for each distribution to that purchaser.
- Accredited Investor Exemption: In some cases, a purchaser (for example, a trust company, trust corporation, registered adviser or registered dealer) may be an accredited investor, but it may not be clear to the filer whether the purchaser is purchasing securities for its own account or is purchasing securities on behalf of a fully managed account, and therefore which paragraph of the “accredited investor” definition applies. Rather than having to select one paragraph, the filer can now indicate that both are potentially applicable (for example, paragraphs “(d) and/or (q)”).