IN THIS ISSUE
- From the Regulators
- Legal Briefs and Commentary
- CBB Knowledge Centre
- Public Company Activity
- What We're Reading
- What We've Been Up To
Our First Issue...
On behalf of the Cassels Brock Securities Group, welcome to the inaugural issue of our Capital Markets Bulletin. Our goal in publishing the Bulletin is to provide our clients and friends with a concise, timely overview of important legal developments and issues, links to notable commentaries, articles and papers on capital markets matters, summaries of important developments in caselaw, and our analysis, tips and observations. We also intend to provide information and intelligence about what reporting issuers are doing in the markets.
We hope you will find the Bulletin useful – if you have any thoughts on how to make it even better, please let us know.
Alex and Greg
FROM THE REGULATORS
News and Notices
CSA Staff Notice 31-336 - Guidance on Know-Your-Client ("KYC"), Know-Your-Product ("KYP") and Suitability Obligations
In order to improve registrants' understanding of, and compliance with, the KYC, KYP and suitability obligations, the Canada Securities Administrators ("CSA") has provided guidance and "best practice" tips to registrants, including portfolio managers, exempt market dealers and those registrants who are not members of a self-regulatory organization (SRO) on such requirements. The Notice also sets out selected requirements and guidance for KYC, KYP and suitability requirements for dealer members of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA).
Some highlights of the Notice include:
- Adequate documentation of the suitability process (including KYC) is critical to ensuring that a registrant is meeting its securities law obligations
- A meaningful suitability assessment is required - assessing suitability is more than a mechanical fact-finding or "tick the box" exercise
- Failure to adequately know your client may lead to a distribution of securities by an issuer or dealer in breach of a prospectus exemption which is a serious breach of securities law
The Notice also addresses the KYC obligation when dealing with an Accredited Investor ("AI"). A registrant's obligation to determine that a prospectus exemption is available is supplemented and informed by the registrant's obligation to "know" the client or purchaser. While a person may rely on factual representations by a purchaser in determining if they qualify as an AI, the Notice suggests that relying solely on a representation in a subscription agreement that the client is an AI will generally not be sufficient for a registrant to satisfy its KYC obligation. The following are suggested practices for registrants that distribute securities in reliance on a prospectus exemption:
- Develop a KYC form that collects sufficient information (e.g, minimum income and asset thresholds consistent with NI 45-106);
- Tailor or develop a separate KYC form for clients that are corporations, partnerships, trusts or other entities, and not individuals, to support reliance on the exemption;
- Consider a client's willingness vs. ability to accept risk;
- Obtain a breakdown of financial assets and net assets of the client;
- Make further enquiries about the client's financial circumstances if there is reasonable doubt;
- Do NOT rely solely on the investor's representation on the AI certificate without collecting KYC information to assess reliance on the prospectus exemption;
- Do NOT assume that another person has complied with the KYC obligation or the obligation to determine that the client is eligible to purchase securities on a prospectus-exempt basis; and
- Do NOT process trades without complete and adequate KYC information to support reliance on the exemption
OSC Staff Reviews Use of Non-GAAP and Additional GAAP Measures
The Ontario Securities Commission ("OSC") has published Staff Notice 52-722, a report on OSC staff's review of non-GAAP financial measures and additional GAAP measures. The filings of 50 Ontario head office reporting issuers were reviewed. The review focused on the following:
- The location of non-GAAP financial measures or additional GAAP measures;
- Calculations of non-GAAP financial measures or additional GAAP measures;
- The presentation of non-GAAP financial measures or additional GAAP measures; and
- Disclosure of non-GAAP financial measures or additional GAAP measures.
The OSC concluded that the results of its review were "disappointing," identifying concerns relating to the use of these measures in 86% of the issuers reviewed.
The terms "non-GAAP financial measure" and "additional GAAP measure" are defined in CSA Staff Notice 52-306, which provides guidance on the use of such measures in public disclosure documents. Examples of these measures include: EBITDA, Adjusted Earnings, Cash Cost/Ounce, Free Cash Flow and Net Operating Income.
The OSC flagged the following areas where improvement is needed in relation to the use of non-GAAP financial/additional GAAP measures:
- providing explanations relating to the objectives of such measures and why their inclusion in disclosure is useful to investors;
- providing a clear quantitative reconciliation of the non-GAAP financial measure against the nearest directly comparable GAAP measure;
- providing meaningful, non-confusing names for additional GAAP measures; and
- disclosing how additional GAAP measures are calculated in relation to minimum disclosure items required by IFRS.
We published an eLert on the Notice, which can be read here.
OSC Provides Update on its Exempt Market Review
The OSC announced that the following new capital raising prospectus exemptions will be published for comment in the first quarter of 2014:
- offering memorandum exemption;
- family, friends and business associates exemption;
- existing security holder exemption (to consider comments on the CSA's proposed TSX-V existing securityholder exemption – see item below); and
- crowdfunding exemption, together with a registration framework for online funding portals.
The objective of these exemptions is to facilitate capital raising for start-ups and small and medium-sized enterprises and to modernize Ontario's exempt market regulatory regime.
We published an eLert on the proposal, which can be read here.
CSA Proposes Changes to Registrant Regulation
The CSA is seeking public comment on various proposed changes to the registrant regulatory framework. The comment period ends on March 5, 2014.
The CSA's proposed changes are centred around NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, but also affect NI 33-109, NI 52-107 and their respective companion policies and forms, as well as OSC Rules 33-506 and 33-502.
The proposed changes to NI 31-103 and its companion policy include:
- restricting the activities that exempt market dealers are permitted to conduct, including prohibiting exempt market dealers from conducting brokerage activities (an area where the CSA had previously expressed concern);
- clarifying that the exemption for trades made through registered dealers is not available if the person relying on the exemption contacts/solicits a purchaser in relation to the trade; and
- providing an exemption from the dealer registration requirement for trades in short-term debt.
There are many more changes being proposed. A comprehensive summary is available in the CSA Notice published in relation to these changes. The complete set of proposed changes is available as a supplement to the OSC Bulletin.
New Exemption for Distributions to Existing Security Holders Proposed (but not in Ontario)
On November 21, 2013, regulators in BC, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Yukon, Northwest Territories, Nunavut, and PEI published for comment a proposed prospectus exemption that would, subject to certain conditions, allow issuers listed on the TSX-V to raise money by distributing securities to their existing security holders.
Currently, if a TSX-V issuer wishes to distribute securities to an existing securityholder that is not an accredited investor, the issuer must issue a prospectus or distribute under an exemption to the prospectus rules. As a result, non-accredited investor security holders are forced to acquire additional securities on the secondary market and incur brokerage fees when doing so.
The proposed exemption (not yet applicable to Ontario, but see previous item) considers allowing TSX-V issuers to distribute securities to existing security holders in reliance on their continuous disclosure record.
The proposed exemption would be subject to certain limitations, including the type of security eligible for issue (shares and units) and investment amount ($15,000 per investor within any 12-month period, unless advised otherwise by a registered professional). The offering would need to be announced via press release and would only be available to investors that were securityholders as of the record date. Liability for misrepresentations in any offering document voluntarily provided to such investors would also apply.
The comment period for these proposed changes closes on January 20, 2014.
We published an eLert on the proposal, which can be read here.
LEGAL BRIEFS AND COMMENTARY
Updates and commentary from Canada and around the world.
FAIR Canada Provides Commentary on the OSC's Proposed Offering Memorandum Exemption
By: Adria Leung Lim
The Canadian Foundation for Advancement of Investor Rights ("FAIR Canada") recently published an article relating to the new offering memorandum ("OM") exemption proposed by the OSC which will be published for public comment in the first quarter of 2014.
Unlike all other Canadian provinces and territories, the OSC previously chose not to introduce the OM exemption because it considered the OM exemption too risky for retail investors. However, in an effort aimed to harmonize itself with the other provinces and to reduce inefficiencies and confusion in the market, the OSC is proposing that the OM exemption, which will be modelled after the Alberta regime, be available to purchasers satisfying certain eligibility criteria in order to invest more than $10,000.
FAIR Canada questions the rationale behind the OSC's proposal to implement the OM exemption, given that compliance with this exemption in other provinces has been found to be "woefully lacking" and retail investor fraud is regularly reported. In general, OMs are often poorly prepared and do not provide the necessary disclosure required, leading to widespread financial loss. FAIR Canada questions whether the OSC has adequate resources to oversee Ontario's current exempt market, and suggests that the OSC should focus on improving compliance with the current exempt market requirements before proceeding with an OM exemption.
The full commentary can be viewed here.
CBB KNOWLEDGE CENTRE
Tips and guidelines to assist our clients in understanding the law and becoming better drafters.
Disclosure Matters: Majority Voting Policy – Management Information Circular Disclosure for TSX Listed Issuers
In connection with a securityholder meeting at which directors are to be elected, TSX listed issuers are required to disclose in their management information circular whether they have adopted a majority voting policy for uncontested meetings. If they have not adopted a majority voting policy, they must explain their practices for electing directors and the reason they have not adopted such a policy (section 461.3, TSX Company Manual).
Glass Lewis generally recommends that shareholders withhold votes for all members of the governance committee of companies in the S&P/TSX composite index that "explain" rather than adopt a majority voting policy. In addition, Institutional Shareholder Services considers whether an issuer has adopted a majority voting policy for a number of voting recommendations with respect to director elections.
Legal Phrase of the Month: Due Diligence Out
"Due diligence out" is a phrase that describes a condition precedent which allows a party to not complete a transaction if its due diligence review has not been completed with satisfactory results before the closing date of the transaction.
In the context of a financing transaction, this provision, typically described in both the engagement letter and the definitive agreement between the issuer and the dealer, provides the dealer with the ability to walk away from the deal if its due diligence investigations of the issuer are not completed to its satisfaction.
Recently, the Canadian Securities Administrators made amendments to the prospectus marketing and pre-marketing regimes in Canada where they clarified that due diligence out clauses should not be used by underwriters in "bought deals" in a way so as to defeat the policy rationale of the bought deal exemption. They suggest that where underwriters are not willing or able to conduct sufficient due diligence in advance of proposing a bought deal to an issuer, the underwriters may want to consider proposing a fully marketed offering to the issuer, rather than a bought deal.
PUBLIC COMPANY ACTIVITY
Information and intelligence about what public companies are doing in the market.
Public Offerings [lead underwriters noted]
- On January 9, Chemtrade Logistics Income Fund filed a preliminary short form prospectus to qualify the distribution of 15,800,000 subscription receipts for gross proceeds of $300,200,000. [BMO Nesbitt Burns Inc. and Scotia Capital Inc.]
- On January 10, Financial 15 Split Corp. filed an amended and restated preliminary short form prospectus to qualify the distribution of 1,531,000 Preferred Shares and 1,531,000 Class A Shares for gross proceeds of $30,007,600. [National Bank Financial Inc., CIBC World Markets Inc. and RBC Dominion Securities Inc.]
- On January 13, Firm Capital Mortgage Investment Corporation filed a preliminary short form prospectus to qualify the distribution of 1,700,000 common shares for gross proceeds of $20,570,000. [TD Securities Inc.]
- On January 14, Long Run Exploration Ltd. filed a preliminary short form prospectus to qualify the distribution of $75,000,000 aggregate principal amount of 6.40% convertible unsecured subordinated debentures due January 31, 2019. [National Bank Financial Inc. and Scotia Capital Inc.]
- On January 14, Pure Industrial Real Estate Trust filed a preliminary short form prospectus to qualify the distribution of 14,300,000 units for aggregate gross proceeds of $65,065,000. [Canaccord Genuity Corp., RBC Dominion Securities Inc. and BMO Nesbitt Burns Inc.]
- On January 14, a take-over bid circular was filed under the profile of Osisko Mining Corporation ("Osisko") by Goldcorp Inc. Pursuant to the bid, Goldcorp. Inc. has offered to purchase all of the issued and outstanding common shares of Osisko, together with the associated rights issued under the shareholder rights plan of Osisko, for consideration of $5.95 per Osisko share (the common shares together with the associated rights) consisting of $2.26 in cash and 0.146 of a Goldcorp Share.
Upcoming Shareholder Meetings
- On January 31, 2014, shareholders of Mantis Mineral Corp. will be asked to vote to approve a reorganization resolution whereby Mantis will amalgamate with Gondwana Energy Corp.
- On February 10, 2014, shareholders of Novik Inc. will be asked to vote to approve an arrangement whereby 9293-3985 Quebec Inc., an indirect wholly-owned subsidiary of Clearview Capital Fund III, LP, will acquire all of the issued and outstanding common shares of Novik for $0.85 per share in cash.
Disclosure Highlights - Risk Factors
Our focus on risk factors is intended to highlight the ways in which issuers are disclosing specific, material risks to their business rather than relying on market standards or boilerplate.
Urthecast Corp. Prospectus (December 12, 2013)
Urthecast Corp. intends to build, launch and operate cameras to provide commercially available video of Earth, streamed from space.
If the International Space Station ("ISS") or one of our cameras fails to operate as intended, our ability to collect imagery and market our proposed products and services successfully could be materially and adversely affected. The ISS employs advanced technologies and sensors that are exposed to severe environmental stresses in space that could affect our cameras' performance. These environmental stresses could cause hardware component problems and lead to deterioration in performance or loss of functionality of the ISS or our cameras, with attendant costs and net revenue losses. For example, a coolant leak discovered on the ISS on December 11, 2013, could impede ISS functionality until the problem is resolved and electrical systems return to normal operation. The Company believes that this issue will be resolved in the normal course and is not likely to materially affect the expected timeline for installation and the commissioning of the cameras; however, there can be no assurance that the repair efforts will be successfully completed in a timely manner, which may have the effect of delaying the commercialization of the cameras. In addition, human operators may execute improper implementation commands that may negatively impact the ISS' performance and, as a consequence, our cameras' performance. Exposure of the ISS to an unanticipated catastrophic event, such as a meteor shower or a collision with space debris, could reduce the performance of, or completely destroy, the ISS and as a consequence, our cameras.
There is no guarantee that our cameras will operate successfully in space throughout their expected operational lives. Even if a camera is operated properly, technical flaws in that camera, the mounting hardware or other technical deficiencies, as well as damage from space debris, could significantly hinder our performance, which could materially affect our ability to collect imagery and market our proposed products and services successfully.
If we suffer a partial or total loss of a deployed camera, we would need a significant amount of time, and would incur substantial expense, to replace that camera. Our cameras may experience problems, or the ISS may experience problems, that affect our cameras or may reduce their performance. During any period of time in which our cameras are not fully operational, we may lose most or all of the expected net revenue that otherwise would have been derived from the imagery data produced from the cameras mounted on the ISS during that period. Our inability to repair the ISS itself and limitations on our ability to correct any other technical problem in a timely manner could result in a significant loss of anticipated net revenue.
WHAT WE'RE READING
By: Greg Hogan
JOBS Act Changes Reduce Benefits of Equity Crowdfunding? [United States]
The Securities Law Prof Blog pointed us to a paper by Professor Sean O'Connor of the University of Washington School of Law that argues that the "the JOBS Act relaxed disclosure and general solicitation rules for the kinds of unregistered stock offerings currently used by start-ups. This means that there may be less practical value for start-ups to explore crowdfunding."
Litigation Becoming Standard in M&A [United States]
Over at The New York Times, DealBook's Deal Professor, Steven Davidoff, reports on research he undertook that shows that litigation is being instituted in almost all cases where a takeover is announced. Much of it involves disclosure, leading to criticisms that the only parties benefitting are the lawyers. On the positive side, Davidoff notes "[i]t is also a boon to buyers, who are no longer liable for future claims from shareholders. This is not a bad insurance policy for $500,000 or so." Seeing anything approaching this prevalence of lawsuits in Canada would seem unlikely, but stranger things are known to happen. The D&O Diary blog has some additional thoughts on the research here, where the impact of large cash settlements on D&O insurance and insurers is touched on.
Your Coffee Habit Ain't So Bad! [United Kingdom/United States]
A story at NPR.org reports on research at the University of Birmingham in the U.K. that concludes that coffee's hydrating qualities are similar to those of water. If that's not enough, ScienceDaily has a story this week on research at Johns Hopkins that finds that coffee is beneficial to long term memory. The research, published in the journal Nature Neuroscience, concluded that "caffeine enhances certain memories at least up to 24 hours after it is consumed."
WHAT WE'VE BEEN UP TO
We are acting for Goldcorp Inc. in its $2.6 billion hostile take-over bid of Osisko Mining Corporation. Shareholders of Osisko are being offered $5.95 per share consisting of 0.146 of a share of Goldcorp and $2.26 in cash. Click here for more details.
We are acting for Canada Lithium Corp. in its merger with Sirocco Mining Inc. The merger will be effected by way of a statutory plan of arrangement. The newly formed company will have a market cap of approximately $250 million. Click here for more details.
We acted for International Mining & Infrastructure Corporation plc in its $220 million acquisition of Afferro Mining Inc. The acquisition closed on December 19, 2013. Click here for more details.
We acted for Silver Wheaton in an early deposit gold stream agreement with Sandspring Resources Ltd. Silver Wheaton will acquire 10% of the life of mine gold production from Sandspring's Toroparu project located in the Republic of Guyana. Total consideration for the purchase of the gold stream is approximately US$148 million. Click here for more details.
Lexpert/American Lawyer Guide to the Leading 500 Lawyers in Canada
Congratulations to the following securities lawyers who have been named to the 2014 edition of the Lexpert/American Lawyer Guide to the Leading 500 Lawyers in 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.