Canada: Public Offerings And Continuous Disclosure Under Cooperative Capital Markets Regulatory System: Tip Of The Iceberg

The federal government and the governments of British Columbia, New Brunswick, Ontario, Prince Edward Island and Saskatchewan (Participating Provinces) have signed a memorandum of agreement to formalize the terms and conditions of the new proposed cooperative capital markets regulatory system (Cooperative System), which will be administered by a single Capital Markets Regulatory Authority (Authority).

Given the scope of the new proposed federal and provincial legislation, Blakes is publishing a series of bulletins regarding various aspects of the proposed Cooperative System, which can be accessed here. This bulletin concerns the proposed regulation of public offerings of securities and the continuous disclosure obligations of reporting issuers under the draft Provincial Capital Markets Act (PCMA) published in September 2014.

PLATFORM APPROACH

By design, the PCMA takes a "platform" approach to many aspects of capital markets regulation. Therefore, many requirements that are currently contained in the securities legislation of Participating Provinces will instead be addressed in regulations to be made by the Authority. This approach is intended to "promote regulatory flexibility" and allow the Authority "to respond to market developments in a timely manner and appropriately tailor its regulatory treatment of various entities and activities."

Consistent with the "platform" approach, the provisions of the PCMA concerning the public offerings of securities and the continuous disclosure obligations of reporting issuers set out limited basic requirements, leaving further requirements to be included in securities regulations.

PUBLIC OFFERINGS

The PCMA provides, similar to the securities laws currently applicable in the Participating Provinces, that (i) a person may not distribute a security unless a preliminary prospectus and a prospectus have been filed with, and receipted by, the Authority, (ii) the final prospectus must be sent to purchasers of the securities and must provide full, true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed, and (iii) purchasers are entitled to terminate their purchase of the securities by exercising available withdrawal rights.

However, the specifics concerning the required form and content of a preliminary prospectus and a final prospectus, including who must sign and certify such documents, as well as the length of time during which withdrawal rights may be exercised, will be located in the regulations. Further, the PCMA provides that a preliminary prospectus must "substantially" comply with the form and content requirements under "capital markets law," which is broadly defined as including the PCMA and its regulations as well as any securities regulatory decisions to which the offeror of securities under the prospectus is subject.

In a departure from the current regulatory approach, the PCMA also provides for a potential parallel system for public offerings which, in lieu of using a prospectus, would permit an offeror of securities to instead file a "prescribed disclosure document" to be reviewed and receipted by the Authority and delivered to purchasers. It is not currently clear what such a document would look like since the PCMA succinctly states that a prescribed disclosure document must comply with the requirements prescribed by regulation.

CONTINUOUS DISCLOSURE

Comprised of just a few brief sections, the continuous disclosure requirements under the PCMA specify that reporting issuers must, in accordance with and subject to the regulations, provide disclosure of material changes and, in certain situations, send forms of proxy and management information circulars to holders of its voting securities.

Similar to the current Securities Act (British Columbia), the remaining continuous disclosure obligations are open-ended, in that a reporting issuer is required to provide prescribed periodic disclosure about its business and affairs, including financial reports, and provide any other disclosure required by the regulations.

In a departure from the current regulatory approach, the PCMA also provides for certain of the continuous obligations to apply to "any other issuer within a prescribed class," which is noted, in commentary accompanying the proposed PCMA, as potentially including non-reporting issuers engaged in "crowd-funding."

RELATED CHANGES TO DEFINITIONS

The PCMA is also intended to "update and modernize" current provincial securities legislation by "introducing new elements to promote flexibility within a robust regulatory framework." However, commentary accompanying the proposed PCMA is not comprehensive and numerous proposed changes are not explained.

For example, the definition of "misrepresentation" which, in the existing securities legislation of the Participating Provinces, refers to "an untrue statement of material fact" is proposed to be changed to "a false or misleading statement of a material fact" without commentary. The term "misrepresentation" is a key element of the provisions relating to both prospectus and secondary market civil and regulatory liability. See our November 2014 Blakes Bulletin: New Cooperative Capital Markets Rules Affect Civil Liability for Misrepresentation, Insider Trading.

Additionally, the definition of "reporting issuer" appears to only apply on a prospective basis and, unlike the current securities legislation of the Participating Provinces, does not include a qualifying category for issuers whose securities are listed for trading on a specified stock exchange. The PCMA definition broadly includes qualifying categories for issuers designated as reporting issuers by the Authority and issuers within a class of issuers who are prescribed by regulation to be reporting issuers. However, the PCMA does not appear to include transitional provisions and it is unclear how and which existing reporting issuers will become reporting issuers under the Cooperative System.

THE ROAD AHEAD

As "platform" legislation, the PCMA is only the tip of the iceberg concerning the proposed regulation of public offerings of securities and the continuous disclosure obligations of reporting issuers under the Cooperative System. The federal government and the Participating Provinces have announced that draft initial regulations to the PCMA will not be ready for publication by the previously announced milestone date of December 19, 2014 and are now scheduled to be released for public comment in the early spring of 2015.

The Participating Provinces have stated that they plan to propose initial regulations that "substantially maintain the harmonization achieved under the current structure." While the PCMA includes many unexplained departures from current securities legislation, the Participating Provinces have committed to "propose changes to the existing rules only as necessary to fit them under the PCMA and to eliminate differences in requirements in order to create a single set of regulations that will apply across the participating jurisdictions" and to "publish versions of the draft initial regulations with revisions marked to highlight proposed changes and with a commentary to explain the proposals." This approach is intended to "maintain continuity and minimize disruption for market participants" and "simplify transition to the Cooperative System and provide a strong basis for cooperation with provinces that choose not to participate."

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