On April 7, 2016, the Canadian Securities Administrators (the CSA) published final amendments to National Instrument 45-106 Prospectus Exemptions and its Companion Policy. The amendments harmonize the reporting requirements for prospectus exempt financings across Canada, and are scheduled to take effect on June 30, 2016.
The amendments implement most of the changes proposed by the CSA in September of 2015, which we described in a previous alert. They will result in a reporting regime that is, on balance, more onerous than the existing rules. Some key changes between the proposed and final versions, however, reduce or remove required disclosure of sensitive information relating to investors and to certain individuals associated with the issuer.
Currently, issuers and underwriters are required to file a report on Form 45-106F1 following a prospectus exempt distribution of securities in any Canadian jurisdiction other than British Columbia. Since 2011, British Columbia has required reporting of exempt distributions on its own, more comprehensive, Form 45-106F6. As a result of the amendments there will once again be a single, national form of report (the New Form), which will replace the current version of Form 45-106F1, and Form 45-106F6 will be repealed.
Changes to reporting requirements
We set out below the key changes to the reporting requirements between the form of report that was proposed in September of 2015 (the Proposed Form) and the New Form. We also provide a detailed comparison among the requirements of the current Form 45-106F1, British Columbia’s Form 45-106F6 and the New Form, in the table at the end of this alert.
Single report for multiple jurisdictions not mandatory
Under the current reporting rules, if an issuer distributes securities into multiple jurisdictions pursuant to certain prospectus exemptions, it must file a single report in each Canadian jurisdiction where a distribution occurred, listing all the purchasers. This provision, which was also included in the Proposed Form, is being removed by the amendments. The New Form provides that the report filed in a given jurisdiction need only reflect the distributions in that jurisdiction. Alternatively, the issuer or underwriter can include the full list of purchasers with each report filed.1
Determining where a distribution has occurred, however, is not always a simple matter. The positions vary among provinces as to whether an issuance of securities to purchasers outside the home jurisdiction of the issuer or underwriter also constitutes a distribution in the home jurisdiction. As the amended Companion Policy indicates, one should look to applicable “securities legislation and securities directions” to determine when a distribution has occurred in a jurisdiction of Canada.2
Reduced disclosure of information regarding key individuals for non-public issuers
As identified in our previous alert, one of the most contentious aspects of the Proposed Form was a requirement for most non-public issuers to report certain details regarding its directors, executive officers, promoters and control persons. Specifically, under the Proposed Form a report would have to include each such person’s security holdings in the issuer and the amount paid for those securities, as well as the person’s name, jurisdiction of residence and relationship to the issuer. All of this information would have been publicly available.
The CSA has removed the requirement to disclose the security holdings and amount paid for the securities of the applicable persons. The requirement to include the name, jurisdiction and relationship to the issuer for directors, executive officers and promoters will remain, but control person information will only be required in a schedule to the New Form which will not be made publicly available (subject to freedom of information legislation).3
No need to report beneficial owners of certain fully managed accounts
The final key change in respect of the New Form relates to the requirement to disclose beneficial owners of securities issued in an exempt distribution, and requires a bit of background.
The existing rules require the disclosure of beneficial owners of the securities that are distributed. This will continue to be the case under the New Form, other than in two particular circumstances relating to the prospectus exemption for “accredited investors”.
To qualify as an accredited investor, a person must satisfy certain criteria relating to assets, income or financial sophistication. Among other categories of persons, the definition includes certain trust companies and registered advisors who are “acting on behalf of a fully managed account” managed by the trust company or advisor.4 We refer to these as the “fully managed account” categories.
A distribution of securities to an investor who satisfies any of the categories of accredited investor and is purchasing as principal is exempt from the prospectus requirement. In the fully managed account categories, however, the trust company or advisor would in reality purchase securities as agent for their client. To address that fact, the accredited investor exemption provides that the trust company or advisor is “deemed to be purchasing as principal”.5
The existing reporting rules are incongruent with this provision of the accredited investor exemption, however. While the trust company or advisor is deemed to be purchasing as principal, there is no provision as to whether that person or the client should be named in the report as purchaser. The New Form clarifies this issue by requiring that the trust company or advisor, not the beneficial owner, be disclosed in the report when the purchaser satisfies the requirements of one of the fully managed account categories.
The CSA’s amendments to the reporting obligations in respect of exempt financings create rules that are on balance more rigorous than the current regime. Changes between the Proposed Form and the New Form, however, lessen certain reporting obligations, which should ease the disclosure burden in respect of some exempt financings. In that sense, the changes are beneficial for issuers, underwriters and their advisors.
Comparison of disclosure requirements
The following table compares the disclosure requirements of the current Form 45-106F1, Form 45-106F6 and the New Form, to the extent of any significant differences.
Click here to view table.