Canada: CSA Grants Wrapper Relief

After nearly two years before the Ontario Securities Commission ("OSC"), the long-awaited wrapper relief has finally arrived. On April 23, 2013, the OSC, on behalf of the Canadian Securities Administrators (the "CSA"), granted exemptive relief to several dealers allowing them to offer foreign securities to certain institutional investors in Canada using a foreign offering document. The order significantly lowers the technical barriers to entry for private placements by foreign issuers into Canada. It will improve access to foreign securities for the benefit of Canadian institutional investors and, indirectly, the many Canadian retail investors whose money they manage. Davies Ward Phillips & Vineberg LLP and Blake, Cassels & Graydon LLP represented the applicants. The relief will become effective in all provinces and territories of Canada on June 22, 2013.

In addition, as a result of the dialogue with the OSC during the application process and the overwhelmingly positive feedback received by the CSA from market participants, the OSC has published for comment proposed rule amendments in order to incorporate the Ontario elements of the relief into Ontario securities laws. We are hopeful that the other provinces will publish similar proposed rule amendments, but none of them have committed to doing so.

Scope of the Relief

In summary, the order grants relief from:

  • the requirement that an offering document delivered to potential Canadian purchasers include a summary of the statutory rights of action, if any, available to such purchasers;

  • related and connected issuer disclosure;

  • the prohibition on inclusion of listing representations in an offering document; and

  • the requirement to notify purchasers of the indirect collection of personal information.

The relief applies to securities that are offered primarily outside of Canada and sold in Canada only to "permitted clients" (as defined in National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations) on a private placement basis. The relief requires that the securities being distributed must be:

  • issued by a foreign issuer that is not a reporting issuer in Canada or an investment fund and that does not have its head office or principal place of business in Canada, or

  • issued or guaranteed by a foreign government.

The relief will allow the dealers named in the order to offer foreign securities and foreign government securities to permitted clients using a prospectus or other offering document prepared in compliance with U.S. securities laws. The U.S. offering document will no longer have to be "wrapped" to include the Canadian-mandated disclosure described above.

Underwriting Conflicts of Interest Disclosure Must Comply with U.S. Securities Laws

The exemption from the requirement to provide connected and related issuer disclosure in respect of relationships between the issuer or a selling security holder and the underwriters in the offering will only be available where the offering document complies with the requirements of U.S. securities laws regarding the disclosure of underwriter conflicts of interest applicable to a U.S. registered offering. Rule 144A private placements will also benefit from the exemption so long as the offering memorandum contains underwriter conflict disclosure that complies with the requirements applicable to U.S. registered offerings.

In the case of foreign government securities, the order provides a complete exemption from the requirement to provide connected issuer disclosure. However, if related issuer disclosure would have been required under Canadian securities law, then the body of the offering document must either include the disclosure regarding underwriter conflicts of interest applicable to a registered U.S. offering (whether or not the particular offering is registered), or include the related issuer disclosure required by Canadian law.

Notice to Permitted Clients

Dealers relying on the relief must provide certain disclosure currently provided in Canadian wrappers in a notice delivered to a permitted client prior to the first sale of securities to such permitted client in reliance on the exemption. In addition, the permitted client is required to sign and return a written consent and acknowledgement relating to the reliance of the dealer on the exemptive relief. The dealers must maintain a record of the delivery of the required notices and receipt of the mandated acknowledgments from permitted clients and may be asked to provide information relating thereto to securities regulators from time to time.

Expanded Trade Reporting Requirements

Dealers making sales of securities into Canada by private placement will still be required to file an exempt trade report and pay the requisite filing fee in each jurisdiction of Canada in which a sale is made. The relief requires dealers to maintain records of all distributions it or its affiliates make in reliance on the order, including the name of the issuer, the security distributed, the total value of the offering in Canadian dollars, the value in Canadian dollars of the securities distributed in Canada, the date the trade report was filed with the applicable regulators and a list of jurisdictions in which it was filed. This information must be provided to the regulators on a periodic basis or upon request.

Sunset Provision

The order will expire on June 22, 2016, or earlier if rule amendments come into force in each jurisdiction of Canada providing substantially the same relief as the order.

Limitations of the Relief

There remain a significant number of circumstances where private placements by foreign issuers may still encounter Canadian regulatory hurdles and may require the preparation of a Canadian "wrapper", including where:

  • the underwriting syndicate includes dealers not named in the order;

  • the issuer is incorporated under Canadian federal or provincial laws, has its head office or principal place of business in Canada or is a reporting issuer in any jurisdiction of Canada;

  • the issuer is an "investment fund";

  • the issuer is a limited partnership;

  • the issuer is or may be a bank, foreign bank or financial institution;

  • a selling securityholder is resident in Canada;

  • the offering is not being conducted primarily in a foreign jurisdiction (i.e., a significant portion of the offering is being conducted in Canada);

  • the securities are not being sold in an SEC-registered offering or pursuant to Rule 144A in the United States or it is otherwise not possible or practicable to ensure that the U.S. offering document complies with the disclosure requirements regarding underwriting conflicts of interest applicable to a registered U.S. offering;

  • the proposed offering could put the issuer at risk of becoming an "OTC reporting issuer" in Canada pursuant to Multilateral Instrument 51-105 – Issuers Quoted in the U.S. Over-the-Counter Markets;

  • the security being offered is "novel" or "unusual" and may have different tax consequences to a Canadian holder than a U.S. holder (i.e., trusts (other than publicly traded REITs), partnerships, securitization vehicles, securities convertible into securities of another issuer, etc.);

  • there is a directed share program or reserved share program pursuant to which the issuer intends to sell securities to Canadian directors, officers or employees;

  • the underwriters intend to market the offered securities to Canadians who are not "permitted clients";

  • residents of Canada hold more than 10% of the outstanding securities of the class being distributed or represent more than 10% of the total number of holders; or

  • the underwriters intend to market to residents of Ontario who are natural persons.

Nevertheless, the relief is a positive development and a great step forward in eliminating needless and costly barriers to access to foreign securities by Canadian institutional investors.

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.

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