On August 25, 2015, the participating provinces and territory in the Cooperative Capital Markets Regulatory System achieved an important milestone towards implementation of the system by publishing a revised consultation draft of the uniform provincial and territorial capital markets act (now known as the Capital Markets Act), along with the drafts of the initial regulations proposed for adoption by the participating provinces and territory under the draft uniform act. These materials have been published for a 120-day public comment period.
This article is part of Gowlings' Guide to the Proposed Initial Regulations and related materials. In this segment of our guide, we discuss the proposed initial regulations relating to issuers quoted in the U.S. over-the-counter market. To view other sections of the guide, click here.
The participating provinces and territories are proposing to carry forward Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets in all of the participating provinces and territories. Multilateral Instrument 51-105 is currently effective in all Canadian jurisdictions except Ontario so the adoption of this multilateral instrument will represent a regulatory change in Ontario.
This instrument deems issuers that trade in U.S. over-the-counter (OTC) markets who have a significant connection to a Canadian jurisdiction to be reporting issuers in that jurisdiction. To date, this instrument has not been adopted in Ontario as there has not been sufficient evidence of abusive activity being conducted in Ontario by U.S. OTC companies that would merit pursuing amendments to the Ontario Securities Act. Unlike the other participating provinces and territories, Ontario does not currently have rule-making authority to designate a class of issuers as reporting issuers. However, this will not be an issue under the draft uniform act.
Currently, under Multilateral Instrument 51-105, an issuer becomes an “OTC reporting issuer” fully subject to Canadian public company reporting and other obligations if the issuer is an OTC issuer that has a significant connection to a jurisdiction in Canada (other than Ontario).
Who is an OTC issuer?
An issuer that has a trading symbol from the U.S. Financial Industry Regulatory Authority for an OTC market in the U.S. (a “FINRA ticker symbol”), including the OTC Bulletin Board, the pink sheets or grey market, is an “OTC issuer” if that issuer is not listed or quoted on certain larger Canadian and U.S. stock exchanges (including, for example, the TSX, the TSXV and NYSE).
What connections are significant?
A significant connection exists if (i) the issuer’s business is directed or administered in or from Canada other than Ontario, (ii) the issuer, or someone acting on its behalf, carries on any “promotional activities” in or from Canada, other than Ontario, including any communications that promote, or could reasonably be expected to promote, the purchase or sale of the issuer's securities, or (iii) the issuer distributes securities to a resident in Canada, other than Ontario, before the same class of securities is assigned a FINRA ticker symbol.
What are the consequences of becoming an OTC reporting issuer?
(a) Disclosure and Related Requirements
In addition to all other provisions of securities legislation that apply to a reporting issuer and its insiders, OTC reporting issuers must comply with the same Canadian public company disclosure, certification, audit committee and corporate governance obligations as venture issuers (but are also required to file an annual information form). However, if an OTC reporting issuer is already filing with the U.S. Securities and Exchange Commission (“SEC”) then it can comply with Multilateral Instrument 51-105 by using documents filed with the SEC.
In addition to the OTC reporting issuer becoming subject to Canadian public company reporting and other obligations, insiders of OTC reporting issuers must file insider reports on SEDI if they do not otherwise file insider reports with the SEC.
(b) Resale Restrictions
The resale restrictions that apply to securities of an OTC reporting issuer are more onerous than the resale restrictions that are otherwise applicable for privately placed securities.
Securities of an OTC reporting issuer acquired before a FINRA ticker symbol is first assigned can only be resold (i) in connection with a take-over bid or issuer bid in a Canadian jurisdiction, or an amalgamation, merger, reorganization or arrangement or a dissolution or winding-up of the issuer that is under a statutory procedure or court order, or (ii) if the securities carry a prescribed legend and are traded by a Canadian-registered investment dealer through a U.S. OTC market.
Securities of an OTC reporting issuer acquired under an exemption from the prospectus requirement after a FINRA ticker symbol is first assigned can only be resold in specific circumstances. By way of example, these include (i) the expiry of a 4-month or 6-month hold period, as applicable, (ii) a limit on the number of securities of the same class that may be sold in any 12-month period, (iii) compliance with a prescribed legending requirement, and (iv) a requirement that the securities are traded by a Canadian-registered investment dealer through a U.S. OTC market.
Rationale behind MI 51-105
Multilateral Instrument 51-105 is intended to discourage the manufacture and sale of shell companies traded in U.S. OTC markets that can be used for abusive purposes. The participating provinces and territories are proposing that Multilateral Instrument 51-105 be carried forward into Ontario in order to curtail the potential for such abusive activity in that jurisdiction as well.
How is MI 51-105 changing?
The participating provinces and territories propose to adopt Multilateral Instrument 51-105, largely, in its current form as of March 2, 2015. The only noteworthy changes that have been proposed include:
(a) Clarification of the effective date of application
Today, under Multilateral Instrument 51-105, an OTC issuer will be an OTC reporting issuer if on or after July 31, 2012 it has a significant connection to an applicable jurisdiction. In order to guard against an OTC issuer in Ontario becoming an OTC reporting issuer retroactively as of July 31, 2012 on the date that the new system is launched, the participating provinces and territories have clarified that in their jurisdictions, “July 31, 2012” is to be read as the new system’s “launch date”.
(b) Proposed exemption from application
By causing OTC issuers to become subject to Canadian public company reporting and other obligations, Multilateral Instrument 51-105 has the unintended consequence of imposing constraints on certain private placements. In response to this concern, the British Columbia Securities Commission issued a blanket order, BC Instrument 51-512, which provides an exemption in section 8 from Multilateral Instrument 51-105 for OTC issuers who have securities listed on a designated exchange, whose only listed or quoted securities are non-convertible debt securities, or who distribute securities to permitted clients and direct promotional activities solely at permitted clients.
The participating provinces and territories have proposed to integrate the contents of section 8 of BC Instrument 51-512 into Multilateral Instrument 51-105 in order to permit these issuers to carry on promotional activities from a participating province or territory or distribute a security to a person in a participating province or territory without being subject to Multilateral Instrument 51-105.
What are the implications?
(a) For the participating provinces and territories (other than Ontario)
Because of the definition of “reporting issuer” in the draft uniform act, an OTC issuer that is an OTC reporting issuer in one participating province and territory under Multilateral Instrument 51-105 will automatically become an OTC reporting issuer in every other participating province and territory. Consequently, any issuer that was an OTC reporting issuer in British Columbia, Saskatchewan, New Brunswick, Prince Edward Island or Yukon prior to the new system’s “launch date” will automatically become an OTC reporting issuer in all other participating provinces and territories.
(b) For Ontario
If an issuer is an OTC issuer that offers securities to prospective investors in Ontario, or carries on other promotional activities in or from Ontario, as of the new system’s “launch date”, Multilateral Instrument 51-105 may be applicable. Consequently, OTC issuers with a significant connection to Ontario will need to determine if Multilateral Instrument 51-105 will apply to them as of the launch date of the new system.