On March 31, 2018, a new “distributions out” regime adopted by the Ontario Securities Commission (the OSC) came into force – changing the rules for Ontario-based issuers and security holders with respect to distributions of securities outside of Canada. The OSC has withdrawn “Interpretation Note 1 Distribution of Securities Outside Ontario” (the Interpretation Note), and has replaced it with OSC Rule 72-503 - Distributions Outside Canada (OSC Rule 72-503). As discussed in our previous Dentons Insight, the new regime provides Ontario issuers and security holders with greater clarity on the application of Ontario securities laws, as well as access to a number of new prospectus exemptions for distributions of securities outside Canada.
Background and context
OSC Rule 72-503 is a much-needed step toward a modernized regulatory environment for certain types of outbound distributions. Historically, the only guidance available to market participants as to whether Ontario securities laws, including prospectus requirements, would apply to a distribution of securities outside of Canada by an Ontario issuer was the Interpretation Note, which was published by the OSC in 1983. In addition to being significantly dated, the Interpretation Note lacked certainty which led to potential complications for Ontario issuer’s offering securities outside of Canada. OSC Rule 72-503 provides a more clearly demarcated and streamlined process for securities compliance in connection with offerings made from Ontario to investors located outside of Canada.
Pursuant to Part 2 of OSC Rule 72-503, issuers and security holders distributing securities outside of Canada are entitled to rely on the following four new exemptions from the prospectus requirement:
- Distribution under public offering document in foreign jurisdictions: A distribution of securities to a person or company located outside of Canada is exempt from the prospectus requirement if, at the time of the distribution, one or both of the following apply: (i) the issuer has filed a registration statement in accordance with the United States Securities Act of 1933, as amended, registering the securities in connection with the distribution, and that registration statement is effective; and/or (ii) the issuer has filed an offering document that qualifies, registers or permits the public offering of those securities in accordance with the securities laws of a specified foreign jurisdiction and, if required, a receipt or similar acknowledgement of approval or clearance has been obtained for the offering document in the “specified foreign jurisdiction”. 1
- Concurrent distribution under final prospectus in Ontario: A distribution of securities to a person or company outside of Canada is exempt from the prospectus requirement if: (i) the issuer of the securities or the security holder has materially complied with the disclosure requirements applicable to the distribution under the securities law of the jurisdiction outside Canada, or the distribution is exempt from such requirements; and (ii) the issuer of those securities has filed with the OSC, and a receipt has been issued for a final prospectus qualifying a concurrent distribution of the same class, series or type of securities to purchasers in Ontario in accordance with Ontario securities law.
- Distributions by reporting issuers: A distribution by an issuer of a security of its own issue to a person or company outside of Canada is exempt from the prospectus requirement if: (i) the issuer has materially complied with the disclosure requirements under the securities laws of the jurisdiction outside of Canada, or the distribution is exempt from such requirements; and (ii) the issuer is a reporting issuer in a jurisdiction of Canada immediately preceding the distribution.
- Distributions by non-reporting issuers: A distribution by an issuer that is not a reporting issuer in a Canadian jurisdiction of a security of its own issue to a person or company outside of Canada is exempt from the prospectus requirement if: (i) the issuer has materially complied with the disclosure requirements applicable to the distribution under the securities law of the jurisdiction outside Canada; or (ii) the distribution is exempt from such requirements.
In order for issuers and security holders located in Ontario to rely on the foregoing exemptions, the OSC requires that the issuer or security holder: (i) will have no knowledge, and no reason to believe, that the purchaser is in Canada; and (ii) will have taken reasonable steps to ensure that a distribution is effected in accordance with the securities laws of the foreign jurisdiction.
In addition, when an issuer or security holder relies on the first three aforementioned exemptions, the resale restrictions and seasoning periods applicable to private placements in Canada do not apply. However, under the fourth exemption, the first trade of the securities remains subject to a restricted period on resale (see Appendix D of National Instrument 45-102 - Resale of Securities).
For issuers (but not security holders) distributing securities outside of Canada, OSC Rule 72-503 also introduces a new reporting obligation in certain circumstances.
Issuers that wish to rely on the new exemptions, but do not complete a foreign public offering or a concurrent offering under an Ontario-receipted prospectus, will be required to file a report of distribution on Form 72-503F – Report of Distributions Outside Canada (Form 72-503F) within 10 days of the distribution setting out a description of the transaction. In addition, if the issuer is an investment fund, modified filing rules will apply, and such issuers should consult the rule or their legal counsel for assistance in connection with the filing.
Summary of exemptions, restrictions and obligations
With the implementation of OSC Rule 72-503, Ontario issuers and security holders will have the following prospectus exemptions available for distributions outside Canada:
|Prospectus exemption||Canadian resale restrictions||Form 72-503F required from issuer|
|Foreign public offering||No||No|
|Concurrent distribution under Ontario prospectus||No||No|
|Distributions by reporting issuers||No||Yes|
|Distributions by non-reporting issuers||Yes||Yes|
Interpretation of the new prospectus exemptions
For purposes of the new prospectus exemptions, section 2.5 of OSC Rule 72-503 provides that a distribution made through the facilities of an exchange or market outside Canada will qualify as a distribution outside Canada if neither the seller, nor any person acting on its behalf, has reason to believe the distribution has been pre-arranged with a buyer in Canada. Where the transaction has been pre-arranged with a buyer inside of Canada, the distribution will continue to be subject to Canadian prospectus requirements unless an alternative exemption is available.
Additionally, while OSC Rule 72-503 provides issuers and security holders with a series of exemptions, it also includes a broad anti-avoidance prohibition restricting the ability of issuers and security holders from structuring proposed transactions in a way that would allow reliance on the new exemptions to circumvent Canadian securities laws.
Dealer and underwriter registration exemptions
In addition to creating new prospectus exemptions, OSC Rule 72-503 also provides exemptions to the dealer and underwriter registration requirements imposed under Canadian securities law. The exemptions provided by OSC Rule 72-503 remain substantively unchanged from those included in the proposed rule that was announced on June 30, 2016. Under OSC Rule 72-503, dealers and underwriters are exempt from the dealer and underwriter registration requirements under Canadian securities laws in connection with a distribution of securities to a purchaser outside of Canada, provided that they satisfy all of the following requirements:
- The distribution is qualified by a prospectus filed in a jurisdiction of Canada, or there is an exemption from the prospectus requirement under OSC Rule 72-503 or by another exemption from the prospectus requirement under Ontario securities law;
- The head office or principal place of business of the person or company is in the United States, a specified foreign jurisdiction or Canada;
- If the distribution is made to a purchaser in the United States: (i) the person or company is registered as a broker-dealer with the Securities and Exchange Commission, is a member in good standing with the Financial Industry Regulatory Authority and materially complies with all applicable regulatory requirements, including state securities law; or (ii) the person or company is exempt from registration as a broker-dealer with the Securities and Exchange Commission and materially complies with all applicable regulatory requirements of US federal securities law in connection with the distribution;
- In the case of a distribution to a purchaser located in a specified foreign jurisdiction: (i) the person or company is registered in a category similar to a dealer in that jurisdiction and such registration would allow it to carry on activities in Ontario, and the purchaser materially complies with all applicable regulatory requirements in connection with the distribution; or (ii) the person or company is exempt from registration in the specified foreign jurisdiction and materially complies with all applicable securities regulatory requirements of the specified foreign jurisdiction in connection with the distribution;
- Subject to a limited exception, the person or company does not carry on business as a dealer or underwriter from an office or place of business in Ontario; and
- The person or company is not registered as a dealer in any jurisdiction of Canada.
Pursuant to section 3.2 of OSC Rule 72-503, the dealer registration requirement does not apply to an issuer in connection with a distribution of securities outside Canada that: (i) is qualified by a prospectus filed in any jurisdiction of Canada; or (ii) is exempt from the prospectus requirement under Part 2 of OSC Rule 72-503 or another exemption from the prospectus requirement under Ontario securities law if one or both of the following apply: (A) the trade is made through or to a person or company that is relying on the exemption in section 3.1 or another exemption from registration under Ontario securities law; and/or (B) the trade is made in accordance with the dealer and underwriter registration requirements of the investor's jurisdiction and the issuer is not otherwise registered in any jurisdiction in Canada in the category of dealer.
OSC’s policy rationale
The OSC has taken the view that a foreign investor ordinarily expects to rely on the protections of the securities laws of the foreign jurisdiction in which the investor is located. Accordingly, compliance with Ontario securities laws may be “unnecessarily duplicative of these protections and will generally not be necessary to fulfill the purposes of the Securities Act (Ontario)”. Therefore, the OSC does not interpret the Ontario prospectus requirement as applying to a distribution of securities outside Canada, provided that such distribution is made in compliance with the securities laws of the foreign jurisdiction in which the investor is located.
Nonetheless, the OSC expects and requires an issuer, a security holder and other market participants involved in the distribution, to take “sufficient measures in the circumstances” to ensure that it is reasonable to conclude that the offered securities will come to rest outside of Canada (i.e. it is unlikely they will be redistributed back into Canada). Companion Policy 72-503 - Distributions Outside of Canada provides the following examples of measures and factual scenarios that may support this conclusion:
- Restrictions in the agreement with an agent, underwriter, banking group or selling group prohibiting the sale of securities into Canada (except pursuant to a Canadian prospectus or prospectus exemption);
- Clear statements in the offering document that: (i) the securities have not been qualified for distribution by prospectus in Canada, and (ii) the securities may not be offered or sold in Canada (except pursuant to a Canadian prospectus or prospectus exemption);
- Investor access to an existing trading market outside of Canada that is not materially less advantageous for investors outside Canada than making resales on any exchange or market in Canada;
- The distribution is conducted as a broad-based public offering outside Canada and, if there is no existing trading market outside of Canada, it is reasonable to expect that a trading market will develop outside Canada; and
- Representations and warranties from foreign investors in the offering document that they are purchasing the securities with investment intent and not with a view to distribution, and such representations and warranties are reasonable in the circumstances. The foregoing list of examples is not exhaustive and market participants are advised to consult their legal advisors to determine whether it is reasonable to conclude that securities distributed in foreign jurisdictions will come to rest outside Canada.
In light of the increased interconnectedness of the global economy and the continued appetite of investors located outside of Canada to participate in the Ontario securities markets, OSC Rule 72-503 is a strategic step toward ensuring the Ontario capital markets are accessible to foreign capital, which allows Ontario-based companies to reap the rewards of foreign investment. Nevertheless, due to the fragmentation of the Canadian securities regulatory landscape, issuers and security holders need to continue to be cautious in their approach to foreign investment, as OSC Rule 72-503 is not a Canada-wide exemption and, accordingly, is not applicable to distributions from other Canadian provinces. Issuers and security holders seeking to conduct distributions in foreign jurisdiction are encouraged to consult with legal counsel to ensure they act in accordance with OSC Rule 72-503 in order to benefit from the new exemptions. In particular, it is important to confirm compliance with the local regulatory framework in a specified foreign jurisdiction before completing a distribution therein. As the world’s largest law firm, Dentons is strategically positioned to assist Ontario issuers and security holders in ensuring compliance with applicable securities laws in the specified foreign jurisdictions.