On Aug. 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 underwriter prospectus certificate exemptions. To view other sections of the guide, click here.
Overview
The participating provinces and territories are proposing to provide exemptions from the requirement in section 5.9 of National Instrument 41-101 General Prospectus Requirements that a prospectus contain a certificate signed by each underwriter who is in a contractual relationship with the issuer of securities offered by the prospectus (or "underwriter certificate requirement"). These are set out in subsection 3(3) and paragraphs 4(3)(a) and (b) of CMRA Regulation 71-501 International Issuers and Securities Transactions with Persons Outside the CMR Jurisdictions and are based, respectively, on BC Rule 71-802 Distributions Outside of British Columbia under the United States Multijurisdictional Disclosure System and BC Instrument 43-501 Exemption from Certificate Requirement for Foreign Underwriters. The adoption of the exemptions will represent a change in Ontario.
Details
MJDS Southbound Offerings ― Under subsection 3(3) of CMRA Regulation 71-501, an exemption from the underwriter certificate requirement is available to an issuer in a participating province or territory that files a prospectus in respect of a distribution of securities to be made in the U.S. pursuant to an applicable registration statement under the multijurisdictional disclosure system, provided that the prospectus is not used for a distribution of securities to a purchaser resident in Canada.
Foreign Underwriters ― Under paragraph 4(3)(a) of CMRA Regulation 71-501, an exemption from the underwriter certificate requirement is available to a person registered as a dealer under the laws of the U.K. or the U.S. (or a "foreign underwriter") where the offering is a public offering of securities made concurrently in Canada and the U.K. or U.S., provided that (i) there is a person registered under the laws of a Canadian jurisdiction to act as an underwriter in the offering, (ii) all sales to Canadian residents under the offering are made through the Canadian underwriter, and (iii) the Canadian underwriter complies with the underwriter certificate requirement.
A further exemption is available to foreign underwriters under paragraph 4(3)(b) of CMRA Regulation 71-501 in circumstances where the securities qualified by the prospectus are offered and sold exclusively to purchasers resident in one or more of the U.K. or the U.S. This exemption is not currently available under BC Instrument 43-501, but is consistent with relief that British Columbia has given in the past for an "outbound" only prospectus.
Rationale behind BC Rule 71-802 and BC Instrument 43-501
It is proposed that an issuer located in a participating province or territory that is distributing securities in the U.S. under the multijurisdictional disclosure system will be subject to the requirement to file a prospectus with the new regulatory authority because the 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. In these circumstances, if BC Rule 71-802 was not adopted under subsection 3(3) of CMRA Regulation 71-501, an issuer filing a prospectus in a participating province or territory would need to include in the prospectus an underwriter's certificate. This would be a departure from the status quo in British Columbia.
BC Instrument 43-501 results in streamlined regulation and provides certainty to issuers and underwriters. As the availability of the exemption is conditional upon the foreign underwriters not participating in the Canadian part of the offering and the Canadian underwriters complying with the certificate requirements, no significant investor protection concerns should arise as a result of carrying forward the exemption in BC Instrument 43-501 under paragraph 4(3)(a) of CMRA Regulation 71-501.
How does subsection 3(3) of CMRA Regulation 71-501 differ from BC Rule 71-802?
Subsection 3(3) of CMRA Regulation 71-501 adopts BC Rule 71-802, largely, in its current form as of March 2, 2015. The noteworthy change that has been proposed relates to the availability of the exemption. BC Rule 71-802 limits the availability of its exemption to Canadian federal, provincial or territorial incorporated issuers. In contrast, subsection 3(3) of CMRA Regulation 71-501 provides relief to any issuer filing a prospectus in a participating province or territory, irrespective of where the issuer was incorporated.
How does paragraph 4(3)(a) of CMRA Regulation 71-501 differ from BC Instrument 43-501?
Paragraph 4(3)(a) of CMRA Regulation 71-501 adopts BC Instrument 43-501, largely, in its current form as of March 2, 2015. The noteworthy change that has been proposed relates to the availability of the exemption. It is proposed that the reference to "a person qualified" in the current definition of "foreign underwriter" under BC Instrument 43-501 be replaced with "a person registered as a dealer" under the laws of a foreign jurisdiction. This change presumably reflects an intention to include only registered (or the equivalent) dealers acting as underwriters, and not persons acting in circumstances where they fit an exemption or are not subject to a requirement to register.
What are the implications for Ontario?
To the extent the exemptions in subsection 3(3) or paragraphs 4(3)(a) or (b) of CMRA Regulation 71-501 apply, the specific "underwriter certificate form" requirements in National Instruments 41-101, 44-101, 44-102 and 44-103 would not need to be complied with.
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.