The securities commissions in British Columbia, Alberta and Quebec have each issued separate blanket orders exempting certain issuers from the application of Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets (the Instrument). As discussed in detail in our post dated June 25, the final Instrument was to officially come into force on July 31, 2012 (assuming receipt of ministerial approval, as required) in each of the Canadian jurisdictions, other than Ontario (the Adopting Jurisdictions).
In each of the Adopting Jurisdictions, the Instrument imposes Canadian “reporting issuer” type obligations and other additional burdensome requirements on issuers having a class of securities that have been assigned a ticker symbol by the Financial Industry Regulatory Authority (FINRA) for quotation on an OTC market in the United States, and that do not otherwise have a class of securities listed or quoted for trading on a recognized North American stock exchange prescribed in the Instrument (being the TSX, the TSX-V, the CNSX and Alpha, in Canada and the NYSE, AMEX and NASDAQ, in the United States) where: (i) the issuer’s business is directed or administered from an Adopting Jurisdiction; (ii) the issuer, or a person acting on its behalf, engages in promotional activities in an Adopting Jurisdiction that promote or could be reasonably expected to promote the purchase or sale of the issuer’s securities; or (iii) at any time on or after July 31, 2012, the issuer is assigned a ticker symbol by FINRA for use on OTC markets in the United States, and on or before such date, the issuer distributed securities to a resident in an Adopting Jurisdiction where those securities become the issuer’s OTC-quoted securities.
BC Instrument 55-511, Alberta Blanket Order 51-513 and Decision No. 2012-PDG-0152 in Quebec (collectively, the Blanket Orders) are each intended to remedy the unintended application of the Instrument to certain issuers and transactions. Although meaningful relief is provided in each of the Blanket Orders, the relief granted in Québec is more comprehensive and market friendly than that granted in British Columbia and Alberta, as summarized below.
Relief granted for distribution to “permitted clients” in Québec
Significantly, the Blanket Order issued by the Autorité des marchés financiers (AMF), the securities regulatory authority in Québec, exempts issuers from the application of the Instrument where promotional activities are limited to investors that qualify as a “permitted client” (as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations and, essentially, highly “accredited investors”), where such activities are carried out by a registered investment dealer, exempt market dealer or dealer relying on the international dealer exemption provided in NI 31-103. This investor-based exemption has not been adopted in either British Columbia or Alberta.
Relief for issuers listed on certain exchanges
Each of the Blanket Orders expands on the list of exchanges recognized for the purposes of exempting issuers with a class of securities listed for trading on the same from application of the Instrument. The list of additional exchanges is comprised of the following:
- NASDAQ OMX;
- Borsa Italiana, MTA Tier;
- London Stock Exchange, except AIM;
- Hong Kong Stock Exchange;
- Deutsche Börse, except the First Quotation Board and the Entry Standard tier;
- Xetra, Prime Standard and General Standard tiers;
- SIX Swiss Exchange;
- Bourse de Luxembourg, except Euro MTF;
- Tokyo Stock Exchange, 1st Section and 2nd Section;
- Shanghai Stock Exchange;
- The Stock Exchange of Thailand, except The Market for Alternative Investment (mai);
- National Stock Exchange of India;
- Bombay Stock Exchange;
- Osaka Stock Exchange;
- Korea Stock Exchange; and
- Singapore Exchange.
In the case of British Columbia and Alberta, there is an additional requirement that the issuer have a “primary listing” in effect each time the issuer carries out any promotional activities or distributes securities to a person resident in British Columbia and Alberta. The British Columbia and Alberta Blanket Orders define “primary listing” to mean an issuer’s first listing of a class of its securities on any of the foregoing exchanges. As discussed in our prior summary, by its terms, the Instrument would not apply to any issuer listed on any of the North American stock exchanges prescribed in the Instrument.
Relief for investment funds in Québec
The Blanket Order issued by the AMF also exempts any issuer that is an investment fund from the application of the Instrument in its entirety. An “investment fund” is defined in applicable securities legislation to include both non-redeemable investment funds and mutual funds.
Relief for private placements of debt securities
The Blanket Orders each provide for an exemption from the Instrument for issuers that distribute non-convertible debt securities to investors resident in British Columbia, Alberta and Québec, provided the issuer does not have any class of securities, other than non-convertible debt securities, listed on an exchange or quoted on a quotation and trade reporting system (the non-convertible debt exemption). Since issuers which have securities listed on any of the exchanges identified in the Blanket Orders or on the prescribed North American exchanges are exempt from the application of the Instrument, those issuers that have securities, other than non-convertible debt securities, listed on any other exchange, or quoted on any quotation and trade reporting system are still at risk of being an “OTC reporting issuer” and having to comply with the Instrument. Subject to the regulators providing further interpretational guidance on what is intended by “quoted on any quotation and trade reporting system,” it can only be assumed this includes quotation on OTC markets generally. Effectively, the Blanket Orders can each be read to exempt issuers whose equity securities are subject to restrictions on transfer or otherwise not capable of being OTC-traded, such as wholly-owned finance subsidiaries and other similar private or closely-held issuers. This exemption is available notwithstanding that the issuer may have debt securities that may be OTC traded or have been assigned a FINRA ticker symbol.
In each of British Columbia, Alberta and Québec, the non-convertible debt exemption only refers to the issuer being exempt from the Instrument where it “distributes” non-convertible debt securities. Meanwhile the Instrument also applies to an “OTC issuer” that carries out “promotional activities” in the relevant jurisdiction on or after July 31, 2012. While it is arguable that “promotional activities” form part of a “distribution,” given separate reference to both in the Instrument, it can only be assumed that the debt issuer exemption does not extend to an issuer carrying out promotional activities where a private placement is not effected. However, as discussed above, the AMF has provided additional relief in its Blanket Order in the prescribed circumstances where promotional activities are limited to “permitted clients”.
Other jurisdictions and next steps
While we are aware of British Columbia, Alberta and Québec having to date issued blanket relief as summarized above, it is expected that similar relief will be provided by all other Adopting Jurisdictions (being all other Canadian provinces and territories, other than Ontario, which is not party to the Instrument). Although the Blanket Orders assist in providing relief for a broad range of issuers that, in our view, would inadvertently be caught by this Instrument, there remain a number of interpretational issues and other matters (including the omission of certain stock exchanges from the Orders, such as, among others, the Australian Stock Exchange and the New Zealand Stock Exchange). We continue to work with the relevant regulators to attempt to resolve these issues. We will keep you updated on the progress of these developments as they transpire.