On April 23, 2013, Canadian securities regulators provided exemptive relief to an applicant group of Canadian and U.S. dealers and their affiliates that, under certain circumstances, enables foreign issuers (including governments) to make private placement offerings to permitted clients in Canada as part of a global offering without having to add supplemental prescribed Canadian disclosure. The elimination of Canada-specific disclosure is intended to provide sophisticated Canadian investors increased access to foreign offerings.
Prior to the granting of the exemptive relief, foreign issuers wishing to offer in Canada had to prepare supplemental disclosure to comply with Canadian securities laws, as a "Canadian wrapper" to the global offering document. The need for a Canadian wrapper is a disincentive for foreign issuers from offering in the Canadian market.
The relief becomes effective June 22, 2013, and is scheduled to expire in June 2016, by which time it is anticipated that the relief will be continued through rule-making.
It is necessary to prepare a Canadian wrapper for a private placement offering in Canada to satisfy the following disclosure requirements in the securities legislation of one or more provinces: (1) disclosure regarding the status of the issuer or selling security holder as a "connected issuer" or "related issuer" of an underwriter on the front page and in the body of the offering document; (2) a description of statutory rights of action if the offering document contains a misrepresentation; and (3) notification to investors and authorization with respect to the indirect collection of personal information of purchasers in Ontario and British Columbia. It is also necessary, in certain cases, to obtain permission for the inclusion of a statement that a security will be, or an application will or has been made for the security to be, listed on a stock exchange (collectively, the "exemptive relief").
Why the Exemptive Relief is Necessary
Canadian investors only have the opportunity to participate in private placements by foreign issuers if the issuer or underwriters choose to prepare a Canadian wrapper in addition to their home jurisdiction offering documents. Access to sizeable markets and liquid securities and the ability to create diversified portfolios are most important to create a successful portfolio. The exclusion from many foreign offerings results in the loss of investment opportunities and creates barriers for sophisticated Canadian investors to create value.
The Canada-only disclosure requirements have impacted investors across the spectrum, from the equity markets to the fixed income market. While Canadian wrappers were prepared in some cases, they increased offering costs. In many other situations, where issuers or underwriters elected not to access the Canadian market, the requirements had the effect of preventing Canadian institutional investors from efficiently accessing the U.S. market on the same basis as U.S. investors. Canadian investors who could not buy these securities in the initial offering had to buy in the secondary market, often at an increased cost. This cost is especially evident in a fixed income market with the current low yields.
How the Exemption Works
For what types of offerings is the exemptive relief available? The relief is available for two types of foreign offerings: (1) securities issued by a foreign issuer that is not a reporting issuer in Canada or an investment fund and has its head office or principal executive office outside of Canada; and (2) securities issued or guaranteed by the government of a foreign jurisdiction. The offering must be made primarily outside Canada.
Who can sell securities under the exemptive relief? Under the exemption, the following dealers, and their affiliates, may sell securities without preparing supplementary Canadian disclosure documents: Barclays Capital Inc., Citigroup Global Markets Inc., Deutsche Bank Securities Inc., HSBC Securities (USA) Inc., J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets, LLC, Scotia Capital (USA) Inc., and UBS Securities LLC. This list will expand as other dealers apply for and receive exemptive relief.
In order to rely on the relief for an investor, an exempted dealer must have delivered to that investor a brief prescribed notice explaining the exemption and have received back from that investor a signed consent. The dealer must deliver the notice to the investor even if the investor has already received the notice from another dealer.
Who can purchase securities under the exemptive relief? The exemptive relief applies only to investors who are a "permitted client" as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, and who have delivered a consent form to each of the dealers who seeks to rely on the relief for that investor.
What are the special requirements for disclosure of underwriting conflicts of interest? The connected issuer/related issuer portion of the exemption requires that the offering document provided to prospective Canadian investors must comply with U.S. law regarding disclosure of underwriting conflicts of interest as applicable to registered offerings. This will be automatic if the foreign offering document is a U.S. prospectus. However, the offering itself does not need to have been registered under U.S. law. A U.S. or other foreign private placement circular is acceptable as long as its disclosure of underwriting conflicts of interest meets the same standard as for a U.S. registered offering.
For offerings of securities issued or guaranteed by a foreign government, if the issuer is a "related issuer" of a dealer, generally meaning a connection through shareholdings of at least 20%, the exemption is only available if the offering document provided to prospective Canadian investors complies with U.S. law regarding disclosure of underwriting conflicts of interest for registered offerings or Canadian underwriting conflicts disclosure rules. Again, the offering does not need to have been registered under U.S. law.