Canada: What The CSA Has In Store - Exemptions, Shareholder Democracy, And Further OTC Market Regulation

In July, the Canadian Securities Administrators (the "CSA") released a three-year business plan setting out its priorities over the next three years (the "Plan"). The CSA's Plan appears to be good news as it demonstrates an awareness of the need to make it easier for small, medium, and venture issuers to connect with investors, as well as an understanding of the issues and controversies surrounding proxy votes and battles.

Specifically, the Plan sets out the following seven priorities:

Of these seven priorities, most issuers will be most interested in those which relate to capital raising and exemptions, shareholder democracy and proxy matters, new market regulation with respect to OTC markets and OTC derivatives, and the development of a new national filing system to replace SEDAR, SEDI, and NRD and include an exempt distribution reporting system.  

Capital Raising and Exemptions

The CSA plans to review the definition and characterization of the accredited investor, as well as minimum amount and short term debt exemptions. The Plan does not provide details of how the definition of accredited investor might change, or whether the definition will become more broad. The CSA does state that, "in light of market development in recent years, CSA members have undertaken a review of the accredited investor, minimum amount and short term debt exemptions to assess whether these exemptions continue to be appropriate for our capital markets".

One of the more interesting initiatives with respect to capital raising will be exploring crowdfunding as a prospectus exemption. According to the Plan, the CSA will assess and review whether to allow crowdfunding as part of the regulatory regime. As Canadians now have access to the popular American crowdfunding site, Kickstarter¹, and ATB Financial's Alberta BoostR in Edmonton², and as the Canadian on-line corporate financing platform, Optimize Capital Markets³, has increased its focus on institutional investors, crowdfunding has become a more popular and accessible means of raising capital. Briefly, the crowdfunding prospectus exemption would allow issuers to raise necessary capital through funding portals which would give the issuer access to a much larger pool of investors, though the individual amounts would be smaller than those issued under the existing regime. The Securities and Exchange Commission ("SEC") in the United States permits securities crowdfunding pursuant to the recently passed JOBS Act, and the CSA will certainly be monitoring how the SEC navigates the application and enforcement of the JOBS Act as it develops a Canadian version of the exemption⁴.

The CSA is open to considering additional prospectus exemptions favouring the ability of junior and venture issuers to raise capital in the current economic climate. In light of the CSA's recent decision not to adopt National Instrument 53-101, (a proposed disclosure regime designed specifically for venture issuers), the CSA's Plan suggests that, as far as capital raising goes, things may get easier for small, medium, and venture issuers.

Shareholder Democracy and Protection

One part of the Plan that will affect all issuers are the potential changes to shareholder rights and the way proxy matters are voted and recorded. As part of its shareholder democracy initiative, the CSA plans to do the following:

Again, the Plan is short on details and it is not clear from the Plan itself whether a new regulatory regime for proxy advisory firms would create a more transparent process thereby encouraging shareholder activism. This will likely be another interesting aspect of the Plan as proxy battles become more frequent and more heated.

OTC Market Regulation

The Plan proposes to increase regulation of OTC markets. The market regulation initiative aims to "develop and implement rules for an OTC Derivatives regulatory framework" which would include new clearing and trade reporting in OTC markets. Despite the implementation of Multilateral Instrument 51-105 ("MI 51-105") over a year ago, there have been no significant changes to the operation and activity on OTC markets - whether the CSA's latest business plan will change that remains to be seen. One of the effects of MI 51-105 was to make it more complicated for U.S. issuers to list on Canadian OTC markets, and the language of the Plan suggests the proposed regulations might make it more difficult. The CSA has said it will "Implement operational and technological frameworks to carry out the CSA regulatory responsibilities" but says nothing about what such operations and technological frameworks will look like or how they will operate in practical terms.

Enforcement and Filing

The CSA addresses enhanced enforcement effectiveness very briefly. According to the CSA's plan, the enhancement of enforcement will focus on information sharing among jurisdictions and improving access to information through increased market surveillance. The Plan does not specifically address whether issues of tipping and insider trading will be the focus of enhanced enforcement, or whether proposed changes to enforcement will result from the changes to prospectus exemptions.

The CSA makes an explicit commitment to unify the various current information technology filing systems and "plans to replace the National Systems in phases over the next five years to integrate the stand-alone system into a single intuitive, secure filing system for regulators and market participants". In addition, the CSA will develop a national exempt distribution reporting system, and pursue the aggregation of data across the country. Together, these deliverables demonstrate the CSA is preparing for the centralization of at least some aspects of the securities regulatory regime in practice and substance, if not in form.

In conclusion, the CSA's Plan is sympathetic to the plight of small, medium sized, and venture issuers seeking greater access to capital but will continue to balance this against appropriate investor protection. Although the Plan is short on details, issuers may look forward to more flexible parameters and increased access to capital, but can also expect more demanding regulations with respect to proxy matters and their impact on corporate governance.

1. As of August 6, 2013 Kickstarter became available to Canadians. See this CBC article for details.

2. Please see this Edmonton Journal article for details.

3. See this Financial Post article for details.

4. Please see here for an in-depth discussion of proposed crowdfunding exemption by the OSC.

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