In an effort to provide greater certainty on the application of prospectus and registration requirements to cross-border transactions, the OSC is proposing to withdraw Interpretation Note 1 Distributions of Securities Outside Ontario and has published for comment OSC Rule 72-503 Distributions Outside of Canada, together with a related companion policy and form, all of which would apply in Ontario.
Gowling WLG Focus
If the proposed new Rule is adopted, clear prospectus and registration exemptions will be available for certain distributions to purchasers outside of Canada; however, associated reporting requirements will apply for some of those exemptions. The OSC has indicated that the provision of the exemptions in the proposed new Rule is not, by itself, determinative of whether Ontario securities law would apply to a distribution outside of Canada or to activities related to the distribution. As a result, issuers seeking to raise capital outside of Ontario would still be free to consider applicable case law in assessing whether or not a prospectus (or an exemption) would be required in the first place, although the guidance in the Interpretation Note would no longer apply.
Exemptions from the Prospectus Requirement
Under the proposed new Rule, the following exemptions from the prospectus requirement are available in connection with a distribution of securities to a person outside of Canada:
- Distribution under Public Offering Document in Foreign Jurisdiction. The prospectus requirement will not apply if prior to the issuance or resale of the securities: (a) the issuer has filed a registration statement in accordance with applicable U.S. securities laws registering the securities for distribution, or (b) the issuer has filed a document similar to a final prospectus in accordance with the securities laws of a designated foreign jurisdiction1 registering or qualifying the securities for distribution.
- Concurrent Distribution under Final Prospectus in Ontario. The prospectus requirement will not apply if: (a) the issuer or the selling securityholder has complied with the securities law requirements of the jurisdiction outside of Canada, and (b) prior to the issuance or resale of the securities, the issuer has filed a final prospectus qualifying the concurrent distribution of the securities in Ontario.
- Distributions by Reporting Issuers. The prospectus requirement will not apply if: (a) the issuer or the selling securityholder has complied with the securities law requirements of the jurisdiction outside of Canada, and (b) the issuer has been a reporting issuer in Canada for the four months immediately preceding such distribution.
- Other Distributions. The prospectus requirement will not apply if the issuer or the selling securityholder has complied with the securities law requirements of the jurisdiction outside of Canada. However, the first trade of securities distributed under this exemption will be deemed a distribution subject to the prospectus requirement unless the trade is to a person outside of Canada or a number of other conditions are satisfied.2
An issuer that relies on the exemption in 2, 3 or 4 above must electronically file a report with the OSC within 10 days of the exempt distribution in accordance with the form included with the proposed new Rule.
Exemptions from the Dealer and Underwriter Registration Requirements
Under the proposed new Rule, the dealer and underwriter registration requirements in the Ontario Securities Act will not apply to a distribution outside of Canada that is qualified by a prospectus filed in Canada or that is exempt under one of the four prospectus exemptions above, if the dealer or underwriter (in either case, the “exempt firm”) satisfies all of the following requirements:
- the head office or principal place of business of the exempt firm is in the United States, a designated foreign jurisdiction or Canada;
- if the distribution is to a purchaser in the United States, the exempt firm is appropriately registered with the SEC, is a member in good standing of FINRA and complies with all applicable regulatory requirements;
- if the distribution is to a purchaser in a designated foreign jurisdiction, the exempt firm is registered in a category in that jurisdiction similar to a dealer in Ontario and complies with all applicable regulatory requirements;
- the exempt firm does not carry on business as a dealer or underwriter in Ontario, except under limited circumstances;
- the exempt firm does not generally trade securities with persons in Ontario, other than an issuer or selling securityholder involved in a prospectus-exempt distribution under the proposed new Rule; and
- the exempt firm is not registered as a dealer in any jurisdiction of Canada.
Rationale behind the Proposed New Rule
The existing Interpretation Note provides that if there is a distribution of securities to a person outside of Ontario by an Ontario or non-Ontario issuer, and reasonable precautions are taken by the issuer, the underwriters and other participants in the distribution to ensure that such securities come to rest outside Ontario, then there is no distribution in Ontario requiring a prospectus, nor is an exemption from the prospectus requirement necessary.
Unlike the proposed new Rule, the existing Interpretation Note is not securities legislation and does not grant exemptions. Rather, it is intended to provide guidance to market participants on the application of Ontario prospectus requirements to a distribution outside the jurisdiction. Its main shortcoming however, according to the OSC, has been its difficulty to administer because of its uncertainty. It does not establish a bright line test in determining whether sufficient steps have been taken to reasonably conclude that securities have come to rest outside Ontario and, as a result, when a distribution outside of Ontario also constitutes a distribution in Ontario. In order to provide greater regulatory certainty to market participants, the OSC is proposing to withdraw the Interpretation Note.
According to the OSC, the proposed new Rule appropriately reflects the OSC’s current approach, which has evolved over time, to the application of the prospectus requirement to cross-border transactions in Ontario. The OSC expects that the principal benefit of the proposed new Rule will be increased regulatory certainty, which will reduce overall costs for Ontario issuers seeking to raise capital outside of Ontario. The proposed new Rule should also avoid the duplicative application of Ontario requirements where an offering is subject to foreign securities laws.
In developing the proposed new Rule, the OSC took into account feedback received from its Securities Advisory Committee and input from Ontario market participants, as well as public feedback on the draft initial regulations published on August 25, 2015 by governments participating in the Cooperative Capital Markets Regulatory System on a unified approach to distributions outside of that system. For background on that proposal, see our August 2015 MarketCaps.
Comments and Questions
The comment period will end on September 28, 2016.