Canada: CSA Proposed Amendments: Foreshadowing Future Changes To The Securities Resale Regime?

CSA Proposed Amendments to Increase Canadian Investors' Access to Exempt Market Offerings by Foreign Issuers

Background

On June 29, 2017, the Canadian Securities Administrators (CSA) released proposed amendments to National Instrument 45-102 Resale of Securities (NI 45-102) and corresponding amendments to  Companion Policy 45-102CP to National Instrument 45-102 Resale of Securities for a 90-day comment period.  The proposed amendments relate primarily to section 2.14 of NI 45-102 which sets out a prospectus exemption permitting the resale of securities by an investor where the issuer of those securities is not a reporting issuer in any Canadian jurisdiction.

Currently, section 2.14 permits the resale of securities on a prospectus exempt basis only if the issuer was a non-reporting issuer at the time of the distribution or at the time of the resale; residents of Canada, at the distribution date, did not own more than 10% of the outstanding securities of the class or series and did not represent more than 10% of the total number of security holders (10% Ownership Ceiling); and the resale is made on an exchange or market outside of Canada or to a person or company outside of Canada.

The purpose of the existing section 2.14 exemption is to permit the resale of securities over foreign markets or to persons outside of Canada if the issuer has minimal connection to Canada and it is unlikely that a market for these securities would be developed in Canada.  The 10% Ownership Ceiling was initially intended to define when an issuer has minimal connection to Canada.  The proposed amendments to section 2.14 remove the 10% Ownership Ceiling for Canadian residents.

The CSA now believe that the 10% Ownership Ceiling is an obstacle that limits participation by Canadian residents in foreign issuers' prospectus exempt offerings. Canadian investors, especially institutional investors, are increasingly acquiring securities of foreign issuers to access foreign market growth and to achieve appropriate risk/reward profiles by practicing global portfolio diversification.  As a result, the CSA are concerned that foreign issuers may avoid Canadian investors because the 10% Ownership Ceiling would impose additional regulatory burdens upon the issuer to determine the ownership proportion of Canadian investors in its securities.  If the 10% Ownership Ceiling is exceeded, then Canadian investors would either be unable to divest themselves of those securities indefinitely, forced to rely upon another prospectus exemption or apply for exemptive relief to resell the securities which may be time consuming and costly if investors are unable to sell at an opportune time. Furthermore, increased globalization of securities ownership may mean that utilizing objective criteria like a 10% Ownership Ceiling is an imprecise determinant of a foreign issuer's connection to Canada especially if a single Canadian institutional investor has taken a material position in a foreign issuer's exempt offering.

Proposed Amendments

The policy rationale for the amendments is virtually identical to the justification for the existing 10% Ownership Ceiling.  The CSA do not view restricting the resale of securities over a foreign market or to a person or company outside of Canada as necessary if the issuer has minimal connection to Canada and there is little or no probability that a market for these securities will develop in Canada.

The proposed amendments replace the 10% Ownership Ceiling concept with the requirement that the issuer of the security must have been a "foreign issuer" on the day the securities were distributed.  A "foreign issuer" would be defined to mean an issuer that is not incorporated or organized by law of a Canadian jurisdiction and does not have its head office in Canada, the majority of the executive officers or directors do not ordinarily reside in Canada and the majority of the issuer's consolidated assets are not located in Canada.

The CSA believe that the amendments reflect a better proxy for assessing an issuer's connection to Canada and that these factors would be easier to determine than the state of Canadian residents' security ownership relative to the 10% Ownership Ceiling.

Conclusion

These proposed amendments are logical, reasonable and stand to improve the efficiency of the exempt market while continuing to protect Canadian investors by ensuring that certain prescribed information about an issuer is publicly available long enough for investors to incorporate this information into the investment decision making process before the securities are freely traded.  These proposed changes reflect the CSA's willingness to reduce the regulatory burden placed upon issuers and investors if the integrity of the markets are advanced or maintained by the changes.

It is also worth mentioning that the CSA appear to be signalling additional, potentially significant, changes to the resale regime set out in NI 45-102 as they commented that they are currently reviewing the entire resale regime to determine its relevance in today's markets and they are assessing alternative methods to regulate subsequent trading of securities acquired through an exempt offering.

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