Proposed initial regulations on securities transactions outside the system

14 minute read
01 August 2015

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 securities transactions outside the system. To view other sections of the guide, click here.

National Instruments

In order to maintain continuity and minimize disruption for market participants, the proposed initial regulations are derived principally from the existing “7-series” national instruments(1) in their current forms as of March 2, 2015. Changes that have been proposed are those necessary:

  • to fit the “7-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 “7-series” in the non-participating jurisdictions.

If you are interested in understanding the types of technical drafting changes being made generally to the “7-series” and seeing some examples, see note (2) below.

New Developments

(a) CMRA Policy 71-601 Distribution of Securities to Persons Outside CMR Jurisdictions

The participating provinces and territories have proposed one new stand-alone policy that would apply only to these jurisdictions. Proposed CMRA Policy 71-601 Distribution of Securities to Persons Outside CMR Jurisdictions is derived from BC Interpretation Note 72-702 Distribution of Securities to Persons Outside British Columbia. The intent of this proposed policy is to provide guidance on the application of the prospectus requirement of the draft uniform act to a distribution of securities to a person outside the participating provinces and territories.

The proposed policy represents a regulatory change in Ontario (to bring it in line with British Columbia) relating to distribution of securities to a person outside the province. It is proposed that in order to distribute securities to persons outside of the participating provinces and territories, a Canadian issuer in a participating province or territory must, absent an exemption, qualify the distribution under a prospectus filed with the new regulatory authority. Consequently, an issuer located in a participating province or territory that is distributing securities to a person in the U.S. under the U.S. multijurisdictional disclosure system (or “MJDS”) will be subject to a requirement to file a prospectus in Canada because the U.S. distribution is being made from a participating province or territory, even if the securities qualified by the prospectus are offered and sold only in the U.S. For more information, see our segment on Distributions Outside the System.

(b) CMRA Regulation 71-501 International Issuers and Securities Transactions with Persons Outside the CMR Jurisdictions

The participating provinces and territories have proposed one new regulation relating to international issuers and securities transactions outside the system that would apply only to these jurisdictions. Proposed CMRA Regulation 71-501 International Issuers and Securities Transactions with Persons Outside the CMR Jurisdictions, together with its companion policy, is derived from existing local rules of the participating provinces and territories. 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 two main parts to this proposed regulation: (i) International Issuers; and (ii) Distributions Outside the Participating Provinces and Territories. Below, we summarize some of the key aspects of these parts.

(i) International Issuers

This part of the proposed regulation relates to the implementation of MJDS under National Instrument 71-101 The Multijurisdictional Disclosure System. Its intent is to reduce duplicative regulation by, for example, providing an exemption from National Instrument 41-101 General Prospectus Requirements for certain MJDS southbound offerings in compliance with National Instrument 71-101, as well as an exemption from particular requirements of Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids for take-over bids and issuer bids for securities of U.S. issuers made in accordance with Part 12 of National Instrument 71-101. The requirements in this part are generally the same as the existing harmonized requirements contained in provincial legislation.

An area that will see a regulatory change in Ontario (arising from a local rule in British Columbia) relates to the prospectus certificate requirement for underwriters in MJDS southbound offerings. It is proposed that an issuer in a participating province or territory offering securities under an MJDS southbound offering will be exempt from the underwriter’s certificate requirement in National Instrument 41-101, provided the prospectus is not used to qualify a distribution in Canada. For more information, see our segment on Underwriter Prospectus Certificate Exemptions.

(ii) Distributions Outside the Participating Provinces and Territories

Registration and Prospectus Exemptions for Distributions to Purchasers Outside of the Participating Provinces and Territories and for Eurobond Offerings

An area that will see a regulatory change in Ontario (arising from a local rule in British Columbia) relates to the registration and prospectus requirements of the draft uniform act for distributions of securities to purchasers outside of the participating provinces and territories. The proposed regulation provides an exemption from the registration and prospectus requirements in circumstances where a distribution is made to a purchaser resident outside of the participating provinces and territories by an issuer located in a participating province or territory that has equity securities listed or quoted on a qualified market, subject to certain conditions. A further exemption from the registration and prospectus requirements will be available for a distribution by an issuer located in a participating province or territory of non-convertible Eurobond debt securities to persons outside Canada where a genuine market exists outside Canada, among other conditions. Since the approach under proposed CMRA Policy 71-601 is new in Ontario, these corresponding exemptions will also be new. For more information, see our segment on Registration and Prospectus Exemptions for Distributions Outside the System.

Prospectus certificate exemption for foreign underwriters

An area that will see a regulatory change in Ontario (arising from a local rule in British Columbia) relates to the prospectus certificate requirement for foreign underwriters. It is proposed that U.S. and U.K. registered dealers participating in a public offering made concurrently in Canada and the U.S. or U.K. will be exempt from the underwriter’s certificate requirement in National Instrument 41-101 if there is a Canadian underwriter of the offering, among other conditions. For more information, see our segment on Underwriter Prospectus Certificate Exemptions.

A further exemption from the underwriter’s certificate requirement in National Instrument 41-101 is proposed to be available to U.S. and U.K. registered dealers where the securities qualified by the prospectus are offered and sold exclusively to purchasers resident in one or more of the U.S. or the U.K.

Interface Mechanism

Currently, subsection 3.2(11) of the Companion Policy to National Instrument 71-101 provides that an issuer making an offering in Canada and the U.S. using MJDS must select a principal jurisdiction in Canada, but that as of the date of the Companion Policy, the Canadian securities regulatory authorities of New Brunswick, Prince Edward Island and Yukon (as well as of some of the non-participating jurisdictions) have indicated that they will not agree to act as principal jurisdiction under section 5.1 of National Instrument 71-101. The participating provinces and territories have not revised this provision to reflect the integration of the applicable provincial and territorial regulators in the system, but instead have indicated that it will be considered when determining the interface to be established with the non-participating jurisdictions. Proposals for 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 Cyngiseror 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 “7-series” includes two national instruments and their related forms and companion policies:

NI 71-101 The Multijurisdictional Disclosure System

NI 71-102 Continuous Disclosure and Other Exemptions Relating to Foreign Issuers

(2) The types of technical drafting changes being made generally to the “7-series” are summarized below.

  • 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, subsection 2.1(2) of National Instrument 71-102 Continuous Disclosure and Other Exemptions Relating to Foreign Issuers requires a person to file any document they deliver to securityholders in English or French if they only filed the document in the other language. Section 183 of the draft uniform act contains a broader requirement person to file all linguistic versions of documents sent to securityholders or potential investors. A carve-out has been introduced in order that in the participating provinces and territories, section 183 of the draft uniform act will apply instead of the requirement in subsection 2.1(2) of National Instrument 71-102.
  • 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, the carve-out for Ontario in the definition of the term “recognized exchange” in section 1.1 of National Instrument 71-102, which provides that in Ontario, a recognized exchange is an exchange recognized by the securities regulatory authority to carry on business as a stock exchange, has been extended to all of the participating provinces and territories as the term is defined in the draft uniform act.

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