Changes Expected to Limit Canadian "Wrapper" Sales in British Columbia
New private placement trade reporting requirements came into effect in British Columbia on October 3, 2011. The British Columbia Securities Commission (BCSC) has now also introduced some limited exemptions from these new requirements.
When are Canadian Private Placement Trade Reports Required?
A private placement trade report must be filed when newly-issued securities are sold by an issuer, or an underwriter on its behalf, in reliance upon one of the exemptions from the Canadian prospectus requirements that triggers a requirement to report the use of that exemption. The report must be filed within ten calendar days of the completion of the distribution of securities. However, for an investment fund (within the meaning of Canadian securities laws), a single report may be filed within 30 days of the fund's financial year-end covering all securities distributed during that financial year.
Resales of previously issued and outstanding securities are never subject to a private placement trade report requirement. Sometimes this is because the prospectus requirements do not apply to that resale, so no exemption from the prospectus requirements is being used. In other situations, such as a resale of securities by a "control person", the prospectus requirements will apply to that resale and an exemption from the prospectus requirements will be used, but even then no report is required.
Some Canadian prospectus exemptions do not trigger a trade report requirement. One example is the exemption for sales of "Specified Debt Securities". This exemption covers debt securities issued or guaranteed by the Canadian federal government or a provincial government, or by a government of a jurisdiction outside Canada if it has an approved credit rating, or by certain supranational agencies if the securities are payable in Canadian or U.S. dollars.
A trade report is required when the "accredited investor" prospectus exemption is used by an issuer or an underwriter making a sale on the issuer's behalf. However, there is an exemption from the reporting requirement available if: (1) the security is a debt security, or an equity security that is being sold together with a debt security of the same issuer, and (2) the purchaser is any bank, loan corporation, trust company, insurance company, treasury branch, credit union or caisse populaire that is authorized to carry on business in Canada, or is a Canadian Schedule III bank.
What are the Current Trade Reporting Requirements?
Form 45-106F1 is the trade report form currently in use in every province and territory of Canada (the National Form). It requires disclosure of information such as: the name, address and telephone number of the issuer of the securities; the name, address and telephone number of the underwriter (if an underwriter is filing the report); whether or not the issuer is a reporting issuer in Canada; the issuer's industry; details of the distribution, including the date; details of the securities being distributed, and the Canadian prospectus exemption being relied upon; the number of purchasers in each province or territory of Canada where a prospectus exemption is being relied upon and the total dollar value raised from purchasers in those jurisdictions; and details of commissions and finder's fees.
Schedule I to the National Form requires listing the full name, residential address and telephone number of each purchaser being reported on the National Form; the number and type of securities purchased; the total purchase price paid; the Canadian prospectus exemption relied upon; and the date of the distribution. The information in Schedule I is not placed on the public file of any securities regulatory authority in Canada. However, the information on Schedule I may be subject to disclosure under freedom of information legislation in certain provinces or territories.
What are the New British Columbia Requirements?
Starting on October 3, 2011, the BCSC will require the use of a new Form 45-106F6 (the B.C. Form) to report sales of securities made under a Canadian prospectus exemption to any purchaser in British Columbia, and all sales of securities made anywhere in the world by an issuer that has a significant connection to British Columbia (such as, for example, being headquartered in that province), unless an exemption from the trade report requirement is available. However, all investment funds (within the meaning of Canadian securities laws) are permitted, at their option, to file the National Form instead of the B.C. Form.
Additional Disclosure About Purchasers – In addition to the other information about purchasers required by the National Form, the B.C. Form requires, in all cases, disclosure as to whether each purchaser named in the report is either an "insider" of the issuer (within the meaning of Canadian securities laws) or registered as a dealer, adviser or otherwise in any province or territory of Canada (the "Additional Purchaser Disclosure"). For non-individual purchasers, the Additional Purchaser Disclosure is included in the body of the report and will be publicly available in electronic format on the BCSC's website. For purchasers in British Columbia who are individuals, the name, insider or registrant status, number and type of securities purchased, total purchase price paid and distribution date is disclosed in a Schedule which is made available for public inspection at the BCSC's offices in paper format only. A second Schedule, containing the residential address, telephone number and exemption relied upon for individual purchasers, will not be publicly available in either electronic or paper format.
Additional Disclosure About Recipients of Compensation – In addition to the other information about commissions and finder's fees required by the National Form, the B.C. Form requires, in all cases, disclosure of whether each person who has received or will receive compensation in connection with the distribution (including commissions, discounts or other similar fees or payments) is either an "insider" of the issuer (within the meaning of Canadian securities laws) or registered as a dealer, adviser or otherwise in any province or territory of Canada (the "Additional Compensation Disclosure"). This information will be publicly available in electronic format on the BCSC's website.
Additional Disclosure Regarding Insiders and Promoters of the Issuer – The B.C. Form requires the following additional disclosure about insiders and promoters of the issuer (the "Insider and Promoter Disclosure"):
- the name, municipality and country of residence of each"insider" and "promoter" of the issuer (as those terms are defined under Canadian securities laws),
- if any "insider" or "promoter" of the issuer is not an individual, then the name, municipality and country of residence of each director and officer of the insider or promoter must also be disclosed, and
- for each "insider" and "promoter", and each of the directors and officers of any non-individual insiders or promoters, a list of all of the securities of the issuer held by each of them individually, including the price paid on each date that any securities were acquired, for both previously held securities and securities purchased in the distribution subject to the report.
Insider and Promoter Disclosure is not required to be included in the B.C. Form if: (i) the issuer is an investment fund (within the meaning of Canadian securities laws) that has elected to file the B.C. Form (despite being permitted to file the National Form instead) and is managed by an investment fund manager registered in a province or territory of Canada; or (ii) the issuer is a "reporting issuer" in any province or territory of Canada; or (iii) the issuer is a "foreign public issuer". An issuer qualifies as a "foreign public issuer" if it has a class of securities registered under section 12 of the U.S. Securities Exchange Act of 1934, as amended or is required to file reports under section 15(d) of that Act. An issuer also qualifies as a "foreign public issuer" if it is required to provide disclosure to the public, to securityholders or to a regulatory authority and that disclosure is publicly available in a "designated foreign jurisdiction" (see below).
The Insider and Promoter Disclosure will be publicly available in electronic format on the BCSC's website.
What is a "Designated Foreign Jurisdiction"?
The following countries are designated foreign jurisdictions: Australia, France, Germany, Hong Kong, Italy, Japan, Mexico, the Netherlands, New Zealand, Singapore, South Africa, Spain, Sweden, Switzerland and the United Kingdom of Great Britain and Northern Ireland.
Are there any Special Considerations for Investment Funds?
If the issuer is an investment fund managed by an investment fund manager registered in a province or territory of Canada, the B.C. Form requires disclosure of the name of the investment fund manager and the provinces or territories of Canada where it is registered.
Investment funds managed by a Canadian-registered investment manager that choose to file the B.C. Form instead of the National Form are exempt from the Insider and Promoter Disclosure requirements of the B.C. Form.
All investment funds are permitted to utilize the National Form instead of the B.C. Form, at their election.
Which Purchasers of Securities Must be Listed in the B.C. Form?
Any issuer or underwriter filing the B.C. Form must include disclosure regarding all purchasers that are resident in the Province of British Columbia. However, it is not necessary to include any disclosure regarding other purchasers in Canada, or elsewhere in the world, unless the issuer has a significant connection to British Columbia (such as, for example, being headquartered in that province). If the issuer has no significant connection to British Columbia, and there are no purchasers resident in British Columbia, then there is no requirement to file the B.C. Form.
If the issuer has a significant connection to British Columbia, then disclosure must be provided in the B.C. Form regarding all purchasers in the distribution on a worldwide basis (even if no purchasers are resident in British Columbia, or elsewhere in Canada).
What are the Implications of the New B.C. Form Requirement for "Wrapper" Sales?
U.S. and other non-Canadian offerings of securities are often extended into Canada by non-Canadian dealers on a private placement basis using a Canadian "wrapper", or supplement to the non-Canadian prospectus or other offering document.
The new B.C. Form requirement will likely mean that most non-Canadian dealers will generally not be in a position to make Canadian private placement or "wrapper" sales to purchasers in the Province of British Columbia under a Canadian prospectus exemption except where: (1) the nature of the trade does not give rise to a trade reporting requirement; or (2) if there is a trade reporting requirement, the trades can be reported in British Columbia using the National Form; or (3) if the B.C. Form must be used to report the trade, an exemption from the Insider and Promoter Disclosure requirements is available and the Additional Purchaser Disclosure and Additional Compensation Disclosure requirements of the B.C. Form can be satisfied.
Sales of securities to purchasers in British Columbia should not be adversely impacted by the new B.C. Form requirement in the following cases:
- Resales of previously issued and outstanding securities even where the use of a prospectus exemption is required because the resale is from the holdings of a "control person" within the meaning of Canadian securities laws (no trade report requirement);
- Sales of Specified Debt Securities, as discussed above (no trade report requirement);
- Sales of debt securities, or equity securities together with debt securities of the same issuer, to a purchaser that is a bank, loan corporation, trust company, insurance company, treasury branch, credit union or caisse populaire that is authorized to carry on business in Canada, or is a Canadian Schedule III bank (exemption from the trade report requirement);
- Sales of securities of any "investment fund" within the meaning of Canadian securities laws (the fund may elect to report sales on the National Form rather than the B.C. Form); and
- Sales of securities of a "foreign public issuer" (as discussed above) which will be exempt from the Insider and Promoter Disclosure requirements, provided that the dealers distributing the securities into Canada are able to establish that the issuer so qualifies, and are able to obtain and provide the Additional Purchaser Disclosure and Additional Compensation Disclosure required by the B.C. Form, and provided that none of the parties involved have objection to the public disclosure of that information (to the extent required) in electronic format on the BCSC's website.
In all other cases, the desire to make sales to investors in the Province of British Columbia would have to be sufficiently compelling to justify collecting all of the information necessary to comply with the Insider and Promoter Disclosure requirements (in which case all necessary information to complete the B.C. Form should be obtained by the issuer or the underwriter before making any sales in British Columbia, to ensure that the subsequent reporting obligations can be satisfied).
Rob Lando is a cross-border corporate and securities lawyer with significant practice experience in the United States and Canada.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.