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 relating to the registration and prospectus requirements of the draft uniform act for distributions of securities to purchasers outside of the participating provinces and territories. You can view other sections of the guide here.
The participating provinces and territories are proposing to provide exemptions from the registration and prospectus requirements of the draft uniform act for certain distributions of securities to purchasers outside of the participating provinces and territories. These are set out in subsections 4(1) and (4) of CMRA Regulation 71-501 International Issuers and Securities Transactions with Persons Outside the CMR Jurisdictions and are based, respectively, on BC Instrument 72-503 Distribution of Securities Outside British Columbia and BC Instrument 72-504 Distribution of Eurobonds. The adoption of the exemptions will represent a change in Ontario.
Exemption for distribution of securities to purchasers outside the participating provinces and territories
A distribution of securities is exempt under subsection 4(1) of CMRA Regulation 71-501 from the registration and prospectus requirements if:
- the distribution is not made to a purchaser resident in a participating province or territory;
- the purchaser certifies in the subscription agreement or similar document that the purchaser is not (and the issuer does not believe, and has no reasonable grounds to believe, that the certification is false):
- resident in a participating province or territory;
- purchasing the security for the benefit of any person resident in a participating province or territory, other than as manager of a fully discretionary account being managed outside all of the participating provinces and territories, provided the decision to invest in the security is not being made in any of the participating provinces and territories and no acts in furtherance of the trade in the security take place in any of the participating provinces and territories; or
- purchasing the security with a view to continuing the distribution by reselling the security to a person in a participating province or territory.
- the purchaser acknowledges in the subscription agreement or similar document certain information, including, for example, that there are restrictions on the resale of the securities and that as a consequence of acquiring securities pursuant to the exemption, certain protections, rights and remedies, including statutory rights of rescission or damages, will not be available to the purchaser;
- the issuer has equity securities listed or quoted on a "qualified market"; and
- the issuer files a report of exempt distribution.
CMRA Regulation 71-501 defines "qualified market" to include any of the TSX, Tier 1 or Tier 2 of the TSXV, Bourse de Montréal Inc., NYSE Amex Equities, Nasdaq Global Market, Nasdaq Capital Market, the New York Stock Exchange, the London Stock Exchange Limited, Aequitas NEO Exchange Inc, and an exchange recognized for the purposes of CMRA Regulation 71-501.
Issuers should note that "qualified market" does not currently include the Canadian Securities Exchange.
Exemption for Eurobond offerings
A distribution of non-convertible debt securities is exempt under subsection 4(4) of CMRA Regulation 71-501 from the registration and prospectus requirements if:
- the distribution is not made to a person in Canada;
- the debt has been accepted for listing on a "genuine market" outside Canada;
- the issuer files a report of exempt distribution;
- the offering circular carries a legend that the securities are not qualified for sale in a participating province or territory and may not be offered or sold in a participating province or territory, except pursuant to an exemption from the prospectus requirement, and the underwriters contractually agree to observe this restriction;
- the securities are initially issued in temporary form exchangeable for definitive securities 40 days after completion of the distribution on certification by the holder that the definitive securities are not beneficially owned by residents in the participating provinces and territories; and
- the issuer has not been advised in writing by the new chief regulator of its ineligibility to use the exemption.
CMRA Regulation 71-501 defines "genuine market" to mean the Eurobond market and a market place designated for the purposes of CMRA Regulation 71-501.
Rationale behind BC Instruments 72-503 and 72-504
The exemptions under BC Instruments 72-503 and 72-504 are intended to provide relief from the approach to "distributions out" in British Columbia under BC Interpretation Note 72-702 Distribution of Securities to Persons Outside British Columbia. Under that approach, where an issuer distributes securities from British Columbia, it must comply with the prospectus requirement or rely on an exemption from that requirement.
CMRA Policy 71-601 Distribution of Securities to Persons Outside CMR Jurisdictions adopts BC Interpretation Note 72-702. This will represent a change in Ontario from the current approach to "distributions out" under OSC Interpretation Note 1 Distributions of Securities Outside Ontario. For more information, see our segment on Distributions Outside the System. The British Columbia exemptions are being proposed for adoption under CMRA Regulation 71-501 in order to minimize the impact to Ontario of adopting CMRA Policy 71-601.
How does subsection 4(1) of CMRA Regulation 71-501 differ from BC Instrument 72-503?
Subsection 4(1) of CMRA Regulation 71-501 adopts BC Instrument 72-503, largely, in its current form as of March 2, 2015. The noteworthy changes that have been proposed include:
(a) Expanding the definition of "qualified market"
It is proposed that the definition of "qualified market" under BC Instrument 72-503 be expanded to also include an exchange recognized for the purposes of CMRA Regulation 71-501. This change broadens the availability of the exemption and is being proposed presumably in order to limit the need to amend the proposed regulation as new exchanges are recognized. It also however would allow the participating provinces and territories the flexibility to bring in exchanges that are not currently recognized if they believe that listing on that exchange removes the risks relating to trading in the securities.
(b) Providing alternatives to certifications in a subscription agreement
BC Instrument 72-503 requires that the requisite certifications of the purchaser be made in a subscription agreement. The participating provinces and territories propose to relax this requirement by permitting the certifications to either be made in a subscription agreement or a similar document or in neither (in which case the purchaser would be given notice that by purchasing the securities, the certifications will be deemed to be representations made by the purchaser).
(c) Requiring new certifications from purchasers of securities issued in reliance on the exemption
It is proposed that the purchaser of the security make two additional certifications which are not required under BC Instrument 72-503. The first is that the purchaser is not acting for the benefit of a resident in a participating province or territory (except where the purchaser is purchasing as manager of a fully discretionary account in specific circumstances) and the second is that the purchaser is not purchasing the security with a view to continuing the distribution in a participating province or territory.
These additional certifications are intended to protect against a backdoor distribution.
How does subsection 4(4) of CMRA Regulation 71-501 differ from BC Instrument 72-504?
Subsection 4(4) of CMRA Regulation 71-501 adopts BC Instrument 72-504, largely, in its current form as of March 2, 2015. The noteworthy change that has been proposed relates to the offering circular legend required under BC Instrument 72-504. It is proposed that that legend be revised by adding the words ", except pursuant to an exemption from the prospectus requirement of Canadian securities laws" at the end. This would permit non-convertible debt securities acquired in Eurobond market offerings to be sold to investors in a participating province or territory under a prospectus exemption (such as the accredited investor exemption under National Instrument 45-106 Prospectus Exemptions, for example).
What are the implications for Ontario?
We highlight below the significant changes to current market practice in Ontario resulting from the adoption of subsections 4(1) and (4) of CMRA Regulation 71-501.
(a) Qualified market
An issuer in Ontario currently expects to be able to distribute securities to purchasers outside the province without being subject to a prospectus requirement regardless of whether it has equity securities listed on a "qualified market".
(b) Report of exempt distribution
The report of exempt distribution to be filed in connection with a distribution in reliance on the exemptions in subsection 4(1) or (4) of CMRA Regulation 71-501 will need to disclose the identity of non-Canadian purchasers. This requirement could be difficult to comply with for an Ontario issuer selling securities in a public offering in another country where it may be selling its securities to thousands of purchasers.
Both exemptions require the issuer to file a report of exempt distribution using Form 45-106F6 of National Instrument 45-106 Prospectus Exemptions. Today, this is the report of exempt distribution required to be filed in connection with British Columbia exempt distributions. It requires more disclosure to the market regarding insiders, registrants and promoters purchasing securities than is required under the report of exempt distribution currently used in Ontario. However, as the proposed initial regulations do not include a draft of National Instrument 45-106 or its related forms, it remains to be seen whether the Form 45-106F6 contemplated under subsections 4(1) and (4) of CMRA Regulation 71-501 differs from the form in use in British Columbia today.
The proposed exemptions include restrictions on resale. In particular, if an issuer relies upon the exemption in subsection 4(1) of CMRA Regulation 71-501 to distribute securities to an outside purchaser, then the first trade of the securities will be subject to the restricted period conditions under National Instrument 45-102 Resale of Securities. This means that the first trade is a distribution, unless, among other things, a four month restricted period has elapsed and the certificates representing the securities carry a prescribed legend. This could have a significant impact on the ability of those securities to be lawfully resold back into Ontario. In addition, non-convertible Eurobond debt securities issued under the exemption in subsection 4(4) of CMRA Regulation 71-501 may not be traded until 40 days after the date the securities were issued.
As a result of the changes that will result for Ontario by the adoption of CMRA Regulation 71-501, the participating provinces and territories have outlined certain questions for market participants to consider and have specifically invited comments on the regulation.
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.