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 on civil liability, including for secondary market disclosure. To view other sections of the guide, click here.
The Uniform Act
Part 12 of the draft uniform act (Civil Liability) sets out the civil liability regime for misrepresentations contained in prospectuses and other prescribed offering documents, take-over and issuer bid circulars and other prescribed disclosure documents (such as offering memoranda), including provisions relating to actions for damages and rights of rescission.
Part 13 of the draft uniform act (Civil Liability for Secondary Market Disclosure) sets out the civil liability regime for misrepresentations contained in secondary market disclosures (including continuous disclosure documents and public oral statements).
CMRA Regulation 11-501
The participating provinces and territories have proposed a new regulation relating to, among other things, civil liability (including for secondary market disclosure), that would apply only in these jurisdictions. Parts 5 and 6 of CMRA Regulation 11-501 Definitions, Procedure, Civil Liability and Related Matters contain requirements that are intended to supplement the provisions that are set out in Parts 12 and 13 of the draft uniform act. These requirements are based on existing provisions in the securities acts and regulations of the participating provinces and territories and certain of them are summarized below.
(a) Civil Liability
(i) Prescribed disclosure documents
The draft uniform act provides a right of action for damages or rescission for a misrepresentation in a “prescribed disclosure document.” This reflects a broader, more flexible approach in order to cover all types of actions for misrepresentation for similar documents under provincial securities acts.
The definition of “prescribed disclosure document” in CMRA Regulation 11-501 for purposes of these provisions in the draft uniform act is set out below and is based on the broad definition of “offering memorandum” that exists today in the Ontario Securities Act:
“a document that provides information, including information about the business or affairs of an issuer, and that has been prepared primarily for sending to and review by a prospective purchaser to assist the prospective purchaser in making an investment decision about securities being sold in a distribution for which a prospectus would be required but for the availability of an exemption from that requirement under capital markets law”
This definition extends liability to all documents provided to a purchaser in the context of a prospectus exempt distribution (whether the document is required to be sent to purchasers or not).
The draft uniform act also provides a right of action for damages or rescission to a purchaser of a security to whom a “prescribed disclosure document” was not sent as required by the regulations and a right of rescission to a purchaser of a security to whom a “prescribed disclosure document” is required to be sent. Under both provisions, liability attaches as a result of the failure to send a prescribed disclosure document when the sending of the document is mandatory rather than voluntary. The definition of “prescribed disclosure document” in CMRA Regulation 11-501 for purposes of these provisions in the draft uniform act refers to the offering memorandum required to be delivered under section 2.9 of National Instrument 45-106Prospectus Exemptions.
(ii) Rescission of purchase of prescribed converting security
In the initial consultation draft of the uniform act, a statutory right of action for rescission was provided in respect of the “exercise of special warrants”. Comment letters from market participants expressed concern with this, as it suggested that statutory rights of action for rescission were limited to the return of the special warrant and not the consideration paid to acquire the special warrant. This was in contrast to section 2.4 of National Instrument 41-101General Prospectus Requirements, which requires a contractual right of rescission for special warrants pursuant to which the holder is entitled to rescission of both the holder’s exercise of the special warrant and the transaction under which the special warrant was initially acquired. The expectation from commentators was that the purchase of the special warrants, and not their subsequent exercise, would be the rescinded transaction, since a return of special warrants in the absence of the consideration paid, would be of little or no value to the purchaser.
In order to provide purchasers of special warrants in the participating provinces and territories with statutory rights of action for rescission for special warrants that are comparable to the contractual rights mandated by section 2.4 of National Instrument 41-101, the participating provinces and territories have revised the draft uniform act to provide a right of rescission in connection with prescribed “converting securities” offered under a prospectus or prescribed offering document. In response to the comments, the rescission right includes the right to rescind the initial purchase of the prescribed converting security.
CMRA Regulation 11-501 defines the “converting securities”. The definition is similar to the existing definition of “special warrant” in National Instrument 41-101, except that it also catches other convertible securities, such as subscription receipts. The participating provinces and territories have added corresponding carve-outs to National Instrument 41-101 and included clarifications in the companion policy to National Instrument 41-101.
(b) Civil Liability for Secondary Market Disclosure
British Columbia and Ontario have existing regulations that accompany their provincial equivalents to Part 13 of the draft uniform act. These existing regulations fall into two categories (i) definitions, and (ii) provisions that apply liability for secondary market disclosure to transactions that would have otherwise been exempt from such liability.
British Columbia and Ontario have substantively similar definitions of “market capitalization”, “principal market” and “trading price”, which apply only with respect to their provincial equivalents to Part 13 of the draft uniform act. The participating provinces and territories have proposed to carry forward each of these definitions in CMRA Regulation 11-501.
(ii) Application to otherwise exempt transactions
Part 13 of the draft uniform act does not apply to distributions that are exempted from the prospectus requirement, nor does it apply to take-over bids or issuer bids, except as may otherwise be prescribed in either case. The prescribed transactions in CMRA Regulation 11-501 for purposes of Part 13 of the draft uniform act are, respectively, transactions exempted from the requirement to file a prospectus under the “trade by a control person” exemption in section 2.8 of National Instrument 45-102 Resale of Securities and transactions that occur under the “normal course issuer bid/purchase”, “foreign take-over bid/issuer bid” and “de minimus” exemptions under Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids(which is proposed to be carried forward across all participating provinces and territories, including Ontario).