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 prospectus requirements and exemptions. You can view other sections of the guide here.
The Uniform Act
Part 5 of the draft uniform act (Prospectus Requirements) sets out the core prospectus requirements. Only the overarching requirements are included in the draft uniform act, with the detailed requirements set out in the regulations, which is consistent with the approach of most provincial and territorial securities acts.
National Instruments and National Policies
In order to maintain continuity and minimize disruption for market participants, the proposed initial regulations are derived principally from the existing "4-series" national instruments and national policies(1) in their current forms as of March 2, 2015. Generally, the changes that have been proposed are those necessary:
- to fit the "4-series" as regulations under the draft uniform act;
- to eliminate differences in requirements across the participating provinces and territories; and
- to reflect the integration of the regulatory authorities in the participating provinces and territories into the system.
The proposed revisions are not intended to affect the application of the existing "4-series" in the non-participating jurisdictions.
If you are interested in understanding the types of technical drafting changes being made generally to the "4-series" and seeing some examples, see note (2) below.
Prospectus Exemptions
The proposed initial regulations do not include any national instruments related to prospectus exemptions (i.e., National Instruments 45-102 and 45-106) or their related forms and companion policies. Proposals for prospectus exemptions in the participating provinces and territories will be made public at a later date, but are expected to constitute a comprehensive set of capital raising exemptions. This will include, along with exemptions that are already harmonized, newly harmonized exemptions such as:
- an exemption to allow capital raising from existing security holders;
- a family, friends and business associates exemption;
- two exemptions permitting equity crowdfunding, based generally on (i) exemptions adopted in British Columbia and other jurisdictions as of May 2015, and (ii) proposed Multilateral Instrument 45-108 Crowdfunding published for comment by Ontario and other jurisdictions in March 2014; and
- an offering memorandum exemption (with no offering size limit, but with investment limits).
The proposals for prospectus exemptions in the participating provinces and territories are expected to carry forward a number of harmonized exemptions that are based on local exemptions available today in one or more participating provinces or territories. These include, for example, exemptions relating to (i) capital accumulation plans, (ii) bonus or finder's fees, (iii) mortgages, (iv) cooperatives and credit unions, (v) real estate securities, and (vi) provincial economic development programs.
New Developments
(a) Prospectus Filings
An area that will see a regulatory change in Ontario (to bring it in line with British Columbia) relates to prospectus filings. It is proposed that if an issuer files a prospectus in any participating province or territory, it will be considered to be filed in all participating provinces and territories.
(b) Special Warrants/Prescribed Converting Securities
An area that will see a regulatory change in both British Columbia and Ontario relates to special warrants. Section 2.4 of National Instrument 41-101 General Prospectus Requirements prohibits an issuer from filing a prospectus to qualify the distribution of securities acquired upon the exercise of special warrants or other securities unless the holders of the special warrants or other securities have been provided with a contractual right of rescission. A carve-out has been added in section 2.4 of National Instrument 41-101 for the participating provinces and territories, as section 118 of the draft uniform act provides a statutory right of rescission in similar circumstances for prescribed "converting securities" (which are similar to special warrants for purposes of National Instrument 41-101 but also catch other convertible securities, such as subscription receipts).
It is also proposed that a new statement regarding recission will be required to be inserted in a prospectus if, in a participating province or territory, the securities being distributed under the prospectus are being distributed for the purposes of fulfilling a conversion of special warrants.
(c) Trading Securities Using the Internet and Other Electronic Means
An area that will see a regulatory change in Ontario (to bring it in line with British Columbia) relates to the use of the Internet for trading in securities outside the participating provinces and territories. It is proposed that a distribution of securities made from a participating province or territory to a person entirely outside of those jurisdictions through the Internet will be deemed a distribution in the participating provinces and territories and therefore subject to applicable registration and prospectus requirements in the draft uniform act. For more information, see our segment on Distributions Outside the System.
(d) Derivatives-related Changes to National Instrument 41-101
Where necessary, changes have been proposed to National Instrument 41-101 to reflect, and be consistent with, the proposed approach to the regulation of derivatives trading in the participating provinces and territories. For example, it is proposed that all over-the-counter (OTC) derivatives will, on an interim basis, be subject to the prospectus requirement in the draft uniform act, except where an exemption or discretionary relief is available. As a result, guidance has been added to the Companion Policy to National Instrument 41-101 to clarify that, in the participating provinces and territories, National Instrument 41-101 applies to OTC derivatives. For more information, see our segment on Derivatives.
(e) CMRA Regulation 41-501 Prospectus Requirements and Exemptions
The participating provinces and territories have proposed one new regulation relating to prospectus requirements and exemptions that would apply only to these jurisdictions. Proposed CMRA Regulation 41-501 Prospectus Requirements and Exemptions, together with its companion policy, is derived from existing local rules of the participating provinces and territories, as well as provisions in their current securities acts that have not been included in the draft uniform act but which are proposed to be retained. The intent of this proposed regulation is to replace these local rules and provisions, as well as to provide guidance and impose requirements that address other requirements contemplated by the draft uniform act that cannot be easily added to the existing national instruments.
There are five main parts to this proposed regulation: (i) Prospectus Requirements; (ii) Publication of Research Reports During Distributions; (iii) Trust Indentures; (iv) Restricted Shares; and (v) Prospectus and Registration Exemptions and Related Reporting Requirements. Below, we summarize some of the key aspects of these parts.
(i) Prospectus Requirements
Refusal to Issue a Receipt for Prospectus
The proposed regulation consolidates and carries forward the harmonized grounds on which the new chief regulator may refuse to issue a receipt for a prospectus currently found in provincial securities acts. However, the participating provinces and territories have also proposed to add a receipt refusal ground that currently exists only in British Columbia, namely that the new chief regulator will also be required to refuse a receipt if the directors and officers of the issuer or investment fund manager lack the knowledge and expertise necessary to conduct the business of the issuer in the best interests of the issuer or the issuer's shareholders. This will represent a regulatory change in Ontario.
If you are interested in understanding the rationale for this regulatory change, see note (3) below.
Permitted Activities during the Waiting Period
The proposed regulation substantively preserves the activities currently set out under provincial securities acts that a person may engage in during the "waiting period" between the issuance of a receipt for a preliminary prospectus and the issuance of a receipt for a prospectus. However, an area that will see a regulatory change in British Columbia (to bring it line with the provision in the Ontario Securities Act) relates to who may engage in the permitted activities. Unlike in British Columbia today, where the permitted communications are restricted to those made by a dealer or the issuer, it is proposed that any person may engage in the permitted activities.
The participating provinces and territories have however adopted the British Columbia approach to the methods by which a person may communicate during the "waiting period". Unlike in Ontario today, this approach simply permits communications during the waiting period in the enumerated circumstances without providing examples of the means by which a person might communicate (i.e., distribute a notice, circular, advertisement or letter).
Material Given on Distribution
The proposed regulation sets out the material that a person distributing a security may give out from the date the new chief regulator issues a receipt for a prospectus relating to a security. It is generally consistent with similar requirements imposed in provincial securities acts. While National Instrument 41-101 contains detailed rules on marketing materials provided by investment dealers after a receipt is issued for a final prospectus, the provision in the proposed regulation applies to any person.
Obligation to Send a Prospectus
The proposed regulation imposes specific requirements on the person who receives the purchase order or subscription to send the prospectus to the purchaser. These are generally the same as the existing harmonized requirements contained in provincial legislation.
(ii) Publication of Research Reports During Distributions
An area that will see a regulatory change in British Columbia (arising from a local rule in Ontario) relates to the publication of research reports during distributions. It is proposed that during a distribution of an issuer's securities, a dealer may, despite the prospectus requirement, publish or disseminate certain communications relating to the issuer subject to certain conditions. This prospectus exemption currently exists in Ontario but will be new in British Columbia. For more information, see our segment on Publication of Research Reports During Distributions.
(iii) Trust Indentures
An area that will see regulatory changes in both British Columbia and Ontario relates to the regulation of trust indentures. It is proposed that trust indentures will be regulated under securities laws and, as a result, the participating provinces and territories have proposed to move the relevant trust indenture provisions for public offerings of debt securities to be issued under a trust indenture from corporate statutes and into the proposed regulation.
The trust indenture provisions of the proposed regulation are a close analogue of Part 3 Division 8 of the British Columbia Business Corporations Act (or "BCBCA") and Part V of the Ontario Business Corporations Act (or "OBCA"), except for the differences noted below.
Regulatory Changes in both British Columbia and Ontario
Application to corporate and non-corporate issuers: Neither the BCBCA nor the OBCA capture trust indentures that are issued or guaranteed by a non-corporate issuer. In contrast, the trust indenture provisions of the proposed regulation apply to both corporate and non-corporate issuers. This is consistent with the recommendation of a working group of the 2010 Uniform Law Conference of Canada (ULCC), which noted that bonds issued by non-corporate issuers present exactly the same types of risk to the investing public, and if there is a need to regulate corporate bond trustees, then there is a need to regulate all bond trustees.
Eligibility of trustee: Neither the BCBCA nor the OBCA specifically require a trustee to be a company. In contrast, the trust indenture provisions of the proposed regulation require a trustee to be a company incorporated under the laws of Canada or a participating province or territory and authorized to carry on the business of a trust company.
Regulatory Change in Ontario
Trustee acting as receiver: Under the OBCA, trustees are prohibited from acting as a receiver, receiver-manager or liquidator. The BCBCA does not contain an equivalent prohibition. The participating provinces and territories have adopted the BCBCA approach. This is consistent with the position of the ULCC working group, which has noted that in the unlikely event problems are encountered with having a trustee also serve as a receiver, those problems are best dealt with on a case-by-case basis, rather than by way of an all-encompassing rule.
Regulatory Changes in British Columbia
List of debentureholders: Under the OBCA, any person has the right to require a trustee to provide a list of holders of outstanding debt obligations under the trust indenture. By contrast, under the BCBCA, only a debenture holder has that right. The trust indenture provisions of the proposed regulation adopt the OBCA approach.
Additional evidence of compliance: Both the BCBCA and the OBCA require issuers to provide trustees on demand with a certificate evidencing that the issuer has complied with applicable trust indenture requirements. However, under the OBCA, issuers are also obligated to deliver this certificate at least once in each 12-month period. The trust indenture provisions of the proposed regulation adopt the OBCA approach.
Notice of default: Both the BCBCA and the OBCA require trustees to provide notice of default to persons holding debentures under the trust indenture. However, under the OBCA, trustees are also required to provide notice of a default having been cured. The trust indenture provisions of the proposed regulation adopt the OBCA approach.
(iv) Restricted Shares
An area that will see a regulatory change in British Columbia (arising from a local rule in Ontario) relates to the distribution of restricted shares. It is proposed that prospectus exemptions will not be available for a distribution of restricted shares unless shareholder approval, on a majority of the minority basis, was obtained for the distribution or the reorganization related to the restricted shares that are the subject of the distribution. For more information, see our segment on Restricted Shares.
(v) Prospectus and Registration Exemptions and Related Reporting Requirements
This part of the proposed regulation, which relates to prospectus and registration exemptions in the participating provinces and territories and related reporting requirements, was not included as part of the publication package for the proposed initial regulations. For more information, see "Prospectus Exemptions", above.
Interface Mechanism
The participating provinces and territories have not included in the publication package for the proposed initial regulations National Policy 11-202 Process for Prospectus Reviews in Multiple Jurisdictions, which outlines the review procedures for any type of prospectus filed with more than one of the securities regulatory authorities in Canada. The participating provinces and territories expect to consider National Policy 11-202 and similar rules when determining the interface to be established with the non-participating jurisdictions. Proposals relating to how interface will work are expected to be made public at a later date.
Questions
If you would like to discuss these regulations and how they will apply to your business, or if you wish to be added to our email distribution list for related publications, please contact Tal Cyngiser* or any of the following lawyers:
*Tal Cyngiser, an Associate in our Toronto office, was seconded to the Canadian Securities Transition Office (CSTO) for over a year, working extensively with the participating provinces and their securities commissions on the drafts of the initial regulations.
To view our full guide, click here.
(1) The "4-series" includes six national instruments and their related forms and companion policies and three national policies:
NI 41-101 General Prospectus Requirements
NI 43-101 Standards of Disclosure for Mineral Projects
NI 44-101 Short Form Prospectus Distributions
NI 44-102 Shelf Distributions
NI 44-103 Post-Receipt Pricing
NI 45-101 Rights Offerings
NP 41-201 Income Trusts and Other Indirect Offerings
NP 46-201 Escrow for Initial Public Offerings
NP 47-201 Trading Securities Using the Internet and Other Electronic Means
(2) The types of technical drafting changes being made generally to the "4-series" are summarized below.
- New "false" carve-outs for the participating provinces and territories have been created where a term defined in an instrument has the same, or substantively the same, definition as in the draft uniform act and the participating provinces and territories want the draft uniform act definition to apply in their jurisdictions.
For example, a carve-out has been added to the definition of "derivative" in section 1.1 of National Instrument 41-101 such that the definition of this term in section 2 of the draft uniform act would apply in the participating provinces and territories.
- New carve-outs for the participating provinces and territories have been created where a requirement imposed in an instrument is different from the draft uniform act, and the participating provinces and territories want the draft uniform act requirement to apply in their jurisdictions.
For example, a carve-out has been added to the definition of "special warrant" in section 1.1 of National Instrument 41-101 such that in the participating provinces and territories, special warrant will mean a security prescribed to be a converting security under Part 12 of the draft uniform act (Civil Liability).
As another example, a carve-out has been introduced in subsection 17.2(7) of National Instrument 41-101 in order to reflect that the new regulatory authority and not the new chief regulator has the power under the draft uniform act to grant an extension of a prospectus lapse date. For non-participating jurisdictions, it is the provincial securities regulator that has the power to grant such extension.
- Existing carve-outs have been deleted if the participating provinces and territories want to rely on a definition or requirement in the instrument.
For example, the existing Ontario carve-out in section 5.8 of National Instrument 41-101 from the requirement for a prospectus to contain a certificate signed by certain officers and directors of a reverse take-over acquirer has been deleted. Section 5.8 currently applies in all other participating provinces and territories to provide protection for potential investors of an issuer that is subject to a reverse take-over.
As another example, currently British Columbia and Ontario set out the types of communications a person may make relating to a final prospectus in their securities acts. However, as the draft uniform act does not include such language, the references to the participating provinces and territories in paragraph (a) of the definition of "final prospectus notice" in section 1.1 of National Instrument 41-101 have been deleted in order that paragraph (b) of the definition, which sets out the permitted communications, would apply in these jurisdictions.
- Existing carve-outs have been extended to all participating provinces and territories if the draft uniform act includes an identical or overlapping requirement.
For example, subsection 5.15(1) of National Instrument 41-101 provides the regulator in each jurisdiction except Ontario with the discretion to require additional certificates. The carve-out for Ontario exists because under Ontario securities laws, the provincial securities regulator has the authority to require such certificates. This carve-out has been extended to all participating provinces and territories because the chief regulator has a similar authority under section 32 of the draft uniform act.
(3) The British Columba specific receipt refusal ground is being carried forward in order to give the new chief regulator greater discretion in determining whether to issue a receipt for a prospectus. It will help ensure that the new chief regulator has confidence that the directors and officers of the issuer or investment fund know enough about the business they are going to operate that they can conduct that business in the best interests of the entity's security holders. Historically, this additional ground has been considered important in British Columbia because qualified and experienced directors and officers are particularly important to protect the interests of investors in venture issuers, which are heavily concentrated in British Columbia.