The Canadian Securities Administrators (CSA) in each province and territory of Canada – other than Ontario – have adopted Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets (MI 51-105) effective July 31, 2012.
What is an OTC Reporting Issuer under MI 51-105?
Under MI 51-105, an issuer will become an "OTC reporting issuer" fully subject to Canadian public company reporting and other obligations if all of the following conditions apply:
- the issuer does not have any class of securities listed or quoted on the TSX, TSX Venture Exchange, Canadian National Stock Exchange, Alpha Exchange, NYSE, NYSE Amex or NASDAQ;
- the issuer has a class of securities (in practice, limited to equity securities or convertible debt) that has been assigned a ticker symbol by the Financial Industry Regulatory Authority (FINRA), the self-regulatory organization governing U.S. broker-dealers, for use on any U.S. over-the-counter (OTC) market, including any class of securities whose trades have been reported in the grey market; and
- on or after July 31, 2012
- the issuer's business has been directed or administered in Canada (other than Ontario), or
- the issuer, or someone acting on its behalf, has carried on "promotional activities" in or from any province or territory of Canada other than Ontario, including any communications from outside Canada with persons in Canada that promotes, or reasonably could be expected to promote, the purchase or sale of any class of securities of the issuer.
It is important to note that an OTC Issuer may also become a reporting issuer based on sales into Canada (other than Ontario) before July 31, 2012 of securities that are of the same class as securities that are assigned a ticker symbol by FINRA for use on an OTC market on or after July 31, 2012.
Usually an issuer decides to become a reporting issuer in Canada by filing a prospectus or listing its securities on a Canadian exchange. However, without involvement of the issuer, a U.S. broker-dealer may request FINRA to assign a ticker symbol to a class of securities in connection with OTC trading in the U.S. with the unintended result of the issuer becoming a reporting issuer in Canada.
The requirements of MI 51-105 apply to issuers of all domiciles and there is no exemption from MI 51-105 for issuers that are not incorporated in Canada.
An example of the potential impact of MI 51-105 is that if the equity of a German issuer is listed in Frankfurt and London, but not in Canada or the U.S., and the equity has been assigned a ticker symbol for U.S. OTC trading, the German issuer would become an OTC reporting issuer if it issues debt securities in a private placement to an Alberta institutional investor after July 31, 2012.
The German issuer would become a reporting issuer in Canada even though it may not be an SEC registrant, although it would likely be able to rely upon National Instrument 71-102 Continuous Disclosure and Other Exemptions Relating to Foreign Issuers and file home-country continuous disclosure documents in Canada in satisfaction of most applicable Canadian requirements.
Consequences of Becoming an OTC Reporting Issuer
An OTC reporting issuer is subject to full Canadian public company continuous disclosure requirements including filing of audited financial statements, MD&A and material change reports. These issuers will generally be able to rely upon the less stringent disclosure standards for "venture issuers", but will be required to prepare an annual information form document, which is not required for venture issuers. Shareholders of an OTC reporting issuer will be subject to Canadian public company insider reporting and beneficial ownership disclosure requirements.
Reporting issuer status resulting from MI 51-105 may not be terminated until a number of conditions are met, including at least one year having passed since the last date that promotional activities were carried on in Canada (except in Ontario), and at least one year having passed since the date of the assignment of the ticker symbol by FINRA.
Implications for Canadian Investors
MI 51-105 generally prohibits for a four-month hold period resale of securities of an OTC issuer that were privately placed to investors in Canada (other than Ontario) on or after July 31, 2012. Usually privately placed securities may be re-sold to accredited investors in Canada during the four-month hold period, but such resales are not permitted under MI 51-105. Resales must be made only through a Canadian registered investment dealer (and not an exempt market dealer or exempt international dealer) over an OTC market in the U.S.
Shareholders in Ontario will not be able to rely on section 2.14 of National Instrument 45-102 Resales of Securities for resales of securities outside Ontario that they acquire on or after July 31, 2012 if the issuer is a reporting issuer in any other province or territory of Canada on the distribution date of the securities.
Implications for Issuers and Underwriters
MI 51-105 may have an adverse impact on private placements into Canada by issuers who are not already listed on a Canadian or U.S. stock exchange, and who do not wish to become reporting issuers in Canada.
Unless the CSA address what may be unintended consequences of MI 51-105 before it becomes effective, issuers not already listed in North America and their underwriters will have to consider the implications of MI 51-105 before making any private placement sales in Canada to investors in any province or territory other than Ontario.
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.