The OSC is currently reviewing comments on its latest draft of Proposed OSC Rule 72-503 Distributions Outside Canada (the “Proposed Rule”). The Proposed Rule is intended to clarify when prospectus requirements do not apply to a distribution of securities to investors outside of Canada. If the Ontario rules do not apply (i.e. there is no distribution or registerable activity happening in Ontario because the securities have come to rest outside of Ontario), then there is no need to rely on an exemption from the prospectus or registration requirements. The Statement of Principle in the proposed Companion Policy indicates that in order to ensure securities come to rest outside of Canada, the issuer and other participants in the offering must take reasonable steps including obtaining representations from purchasers outside of Canada that they are purchasing with investment intent and not for the purpose of making an immediate resale. A number of other actions are suggested in the Statement of Principle. If the Statement of Principle is difficult to apply in the circumstances, or the issuer chooses not to do the foregoing analysis, the Proposed Rule provides a number of possible prospectus exemptions for the issuer and registration exemptions for the foreign dealer (provided the distribution is not part of a plan to avoid the prospectus requirement in Canada). One proposed prospectus exemption would be available to a non-reporting issuer for a distribution of its own security to a person outside of Canada, as long as the issuer has materially complied with the securities law requirements of the jurisdiction outside Canada.
Issuers relying on the prospectus exemptions would have to electronically file a streamlined report of exempt distribution on or before the 10th day after the distribution date (or not later than 30 days after the end of the calendar year in which the distribution occurred for investment funds).
With respect to registration requirements, the OSC notes that registration as a dealer is generally required in Ontario if registerable activities are provided to Ontario investors or are otherwise conducted in Ontario regardless of where the investor is located. However, there may still be a question as to whether foreign dealers that participate in the distribution of securities by an Ontario issuer to purchasers outside Canada are subject to these requirements. For that reason, a dealer and underwriter registration exemption would be available to a person in connection with a distribution of securities to an outside person if a number of conditions are met. One such requirement (in the context of a distribution being made to a purchaser in the United States) is that the person must either be (i) registered as a broker-dealer with the SEC, be a member of FINRA and materially comply with all applicable conduct and other regulatory requirements of U.S. federal securities law, state securities law of the United States and FINRA rules in connection with the distribution; or (ii) exempt from registration as a broker-dealer with the SEC and materially comply with all applicable regulatory requirements of U.S. federal securities law in connection with the distribution.
While the Proposed Rule is intended to provide additional clarity to cross-border offerings, some additional questions remain. Please feel free to contact us if you have any questions on the application of the Statement of Principle or the exemptions.