Distributions outside the system

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 distribution of securities to purchasers outside of the participating provinces and territories. You can view other sections of the guide here.

Overview

The participating provinces and territories are proposing 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 by an issuer in a participating province or territory to a person outside the participating provinces and territories. The adoption of CMRA Policy 71-601 will represent a change in Ontario from the current approach to "distributions out" under OSC Interpretation Note 1 Distributions of Securities Outside Ontario.

Details

Below, we summarize the key attributes of CMRA Policy 71-601.

(a) Distributions made from a participating province or territory

If a distribution of securities is made from a participating province or territory, the issuer must either comply with the prospectus requirement of the draft uniform act or rely on a prospectus exemption, even if the securities are being offered and sold only outside the participating provinces and territories.

The existence of any of the following factors would generally indicate that the distribution is "made from" a participating province or territory:

1. the issuer's mind and management being primarily located within a participating province or territory (for example, the issuer's head office or the residences of the issuer's key officers and directors are located in a participating province or territory);
2. the business of the issuer is administered from, and the operations of the issuer are conducted in, a participating province or territory;
3. acts, advertisements, solicitations, conduct or negotiations in furtherance of the distribution take place in a participating province or territory (including any underwriting or investor relations activities)⁽¹⁾

Where a distribution of securities to a person outside the participating provinces and territories is made by an issuer from a participating province or territory, the issuer may rely on exemptions proposed under CMRA Regulation 71-501 International Issuers and Securities Transactions with Persons Outside the CMR Jurisdictions in certain circumstances. For more information, see our segment on Registration and Prospectus Exemptions for Distributions Outside the System.

(b) Indirect distribution into a participating province or territory

If an issuer located outside the participating provinces and territories distributes securities outside those jurisdictions and the securities are resold into a participating province or territory, or through a market in a participating province or territory in a manner that indicates that the securities did not come to rest outside these jurisdictions, the resale will generally be considered a continuation of the distribution in the participating provinces and territories. In these circumstances, the issuer must comply with the prospectus requirement of the draft uniform act or rely on an exemption from that requirement.

CMRA Policy 71-601 states that issuers and other participants undertaking a distribution that would not be considered to be "made from" a participating province or territory should consider taking certain steps or precautions (including, for example, a restriction in the underwriting agreement against the underwriters selling the securities being offered to any resident of a participating province or territory) to ensure that the securities remain outside these jurisdictions at least for the equivalent of the domestic "hold period" (i.e., 4 months). This is in order to avoid a subsequent determination that the distribution did in fact take place in a participating province or territory. These additional steps would be especially important where the issuer has a significant connection with a participating province or territory (by, for example, being a reporting issuer in the participating province or territory), but may not be necessary where the distribution is being made solely in another jurisdiction that has comparable continuous disclosure and hold period requirements.

(c) Prospectus exempt distributions

If a distribution is made under a prospectus exemption to an initial purchaser, either within or outside of a participating province or territory, any subsequent trade of those securities in these jurisdictions will be deemed a distribution subject to the prospectus requirement of the draft uniform act. In these circumstances, the resale requirements in National Instrument 45-102 Resale of Securities must be complied with unless a prospectus exemption is available. This includes hold periods and legend requirements. For clarity, securities distributed from a participating province or territory under a prospectus exemption may be resold outside of these jurisdictions during the hold period.

Rationale behind BC Interpretation Note 72-702

BC Interpretation Note 72-702 provides guidance regarding the application of the British Columbia Securities Act where an issuer distributes securities to a person outside of the province.

The activities of an issuer that is located in the participating provinces and territories can damage the market and investors, even when the purchasers of that issuer's securities are not within these jurisdictions. By adopting the approach to "distributions out" under BC Interpretation Note 72-702, the new regulatory authority, who is charged with protecting the public and enabling market efficiency, will have the ability to impose appropriate regulatory requirements when an issuer in a participating province or territory distributes its securities, regardless of where the purchaser is located, and when a purchaser of securities is resident in one of these jurisdictions.

How does CMRA Policy 71-601 differ from BC Interpretation Note 72-702?

CMRA Policy 71-601 adopts BC Interpretation Note 72-702, largely, in its current form as of March 2, 2015. The noteworthy change that has been proposed relates to the application of CMRA Policy 71-601 to distributions by persons other than issuers.

Throughout BC Interpretation Note 72-702 there are references to "issuer". CMRA Policy 71-601 however is intended to apply not only to distributions of securities by issuers but to all distributions of securities (including, for example, a sale by a security holder that is a control person of the issuer). Consequently, CMRA Policy 71-601 includes new language to clarify that the proposed policy applies to any sale that is a "distribution" under the draft uniform act.

What are the implications for Ontario?

Adopting a different approach to "distributions out" than British Columbia, OSC Interpretation Note 1 Distributions of Securities Outside Ontario provides that if there is a distribution of securities to a person outside of Ontario by an Ontario or non-Ontario issuer, and reasonable steps are taken by the issuer, the underwriters and other participants in the distribution to ensure that such securities come to rest outside Ontario, then there is no distribution in Ontario requiring a prospectus, nor is an exemption from the prospectus requirement necessary.

Below, we highlight some of the noteworthy changes to current market practice in Ontario as a result of replacing OSC Interpretation Note 1 with CMRA Policy 71-601.

(i) Distribution of a security to a purchaser outside Ontario

Issuers in Ontario can no longer expect to be able to distribute securities to purchasers outside Ontario without being subject to the prospectus requirement or relying on an exemption from that requirement. Instead, an issuer will need to determine whether it is making a distribution from the participating provinces and territories based on the facts and circumstances of the transaction.

If an issuer in a participating province or territory is distributing securities to a person in the U.S. under the U.S. multijurisdictional disclosure system, the issuer will be subject to a requirement to file a prospectus with the 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.

An issuer that distributes securities from a participating province or territory would also need to comply with applicable securities legislation in the jurisdiction where the purchaser is located. For example, the issuer would also need to file a U.S. registration statement in compliance with U.S. securities legislation for a distribution to persons in the U.S. or rely on a U.S. exemption.

If there is a distribution from a participating province or territory, the issuer or its dealer(s) may be subject to registration requirements. This means that a non-Canadian dealer may need to be registered as a dealer under the draft uniform act in order to act for an issuer in a distribution of the issuer's securities to purchasers outside the participating province and territories.

(ii) Subsequent trades in a security acquired in a distribution of securities outside Ontario

In order to distribute securities to persons outside of the participating provinces and territories, an issuer in a participating province or territory must qualify the distribution under a prospectus or rely upon a prospectus exemption. If the issuer relies upon a prospectus exemption, any subsequent trade of those securities in a participating province or territory will be a distribution requiring a prospectus or an exemption unless the relevant resale requirements in National Instrument 45-102 are satisfied (including hold periods and legend requirements).

The application of resale requirements in the case of distributions outside of the participating provinces and territories may be difficult to comply with. For example, if an issuer in a participating province or territory distributes securities under a prospectus exemption to a person in the U.S. but is selling those securities in an SEC registered offering, industry practice in the U.S. will generally resist complying with the Canadian legend requirements of National Instrument 45-102. As a result, it may be difficult for those securities to be lawfully resold back into Ontario without a prospectus exemption.

As a result of the policy change that will result for Ontario by the adoption of CMRA Policy 71-601, the participating provinces and territories have outlined certain questions for market participants to consider and have specifically invited comments on the policy.

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:

• Kathleen M. Ritchie, Partner, Toronto
• Guy David, Partner, Ottawa
• Bryce A. Kraeker, Partner, Waterloo Region
• Brett A. Kagetsu, Partner, Vancouver

*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.