Historically, many foreign issuers used a “Canadian wrapper” – a document that “wraps” around the foreign offering document to add required Canadian disclosure, instead of altering their existing offering documents to comply with Canadian securities laws. In September 2015, however, Canadian securities regulators adopted several amendments to reduce the disclosure burden on foreign issuers privately placing securities in Canada. The intent of the amendments was to end the need for Canadian wrappers and allow foreign issuers to access the Canadian private placement market more quickly and cost effectively.
Two years on, we decided to consider whether the Canadian wrapper is facing extinction. Unfortunately, we don’t think so. Although Canadian wrappers certainly are less prevalent today than they were before September 2015, they may still be required or remain the most cost-effective solution in certain situations.
First, the Canadian wrapper “exemption” is not an automatic exemption. To conclude that a Canadian wrapper is not required, a substantive analysis of the specific facts needs to bear that out. For example, it will need to be confirmed that all prospective, Canadian-resident investors qualify as “permitted clients” under Canadian securities laws and not just as “accredited investors” (the threshold otherwise typically required in order to issue securities on a Canadian, prospectus-exempt basis). Also, if there is a potential conflict of interest between the issuer and the dealer engaged to effect the distribution (which will often be the case for investment funds that use dealers that are affiliated with the issuer), then it must be confirmed that:
- there will be a concurrent distribution of the securities to U.S. investors (which will not always be the case);
- the foreign offering document to be delivered to Canadian-resident investors contains the same disclosure as provided to investors in the U.S.; and
- if applicable, the disclosure complies with FINRA rule 5121 (which again will not always be the case).
These determinations typically require the advice of both foreign and Canadian counsel.
From the above, you will note that counsel is often needed to determine whether a Canadian wrapper is required in the context of a specific offering. Also, if counsel is not careful they may burn unneeded time and money in trying to conclude that a Canadian wrapper is not required, only to then determine that a Canadian wrapper is in fact required or is the most practical path forward. In that instance, time and money have been spent and the issuer is back to square one – having counsel prepare a Canadian wrapper.
Is Your Firm Paying for Insurance Coverage It’s not Required to Have?
With the adoption of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) in 2009, the securities registration regime across Canada experienced a major overhaul. Before then, regulators in some provinces including Alberta, Manitoba and Saskatchewan required firms seeking to be registered in certain categories to obtain insurance coverage in the form of a surety bond in addition to a Financial Institution Bond. With the adoption of NI 31-103, these province-specific surety bond requirements were eliminated.
Although this regulatory change occurred quite some time ago, it may be valuable for registrants to review their current insurance coverage to determine whether their firm is adequately insured and/or whether it is paying insurance premiums for coverage it no longer requires.