Article by Ernest McNee and Eric Moncik
This article was originally published in Blakes Bulletin on Securities Law - January 2005
©2005 Blake, Cassels & Graydon LLP
- Proposed National Instrument consolidates and harmonizes the prospectus and registration exemptions available in each Canadian jurisdiction into a single national instrument
- Revised OSC Rule 45-501 consolidates many of Ontario’s local exemptions that are not included in the Proposed National Instrument
- Québec has endorsed the Proposed National Instrument as part of a movement to harmonize its securities rules with the other Canadian jurisdictions
The Canadian Securities Administrators (the CSA) have published for comment proposed National Instrument 45-106 – Prospectus and Registration Exemptions (the Proposed National Instrument). The Proposed National Instrument consolidates and harmonizes the prospectus and registration exemptions contained in various provincial securities statutes and other instruments into a single national instrument. Concurrently, the Ontario Securities Commission (the OSC) published for comment an amended and restated OSC Rule 45-501 – Ontario Prospectus and Registration Exemptions (Revised OSC Rule 45-501) which consolidates many of Ontario’s local exemptions that are not included in the Proposed National Instrument.
Currently, most provinces provide for similar, but not identical exemptions, with the result that market participants that wish to effect a multi-jurisdictional exempt distribution must comply with the differing exempt distribution regimes in each jurisdiction. The implementation of the Proposed National Instrument is intended to reduce participants’ transaction costs as they would only have to comply with one set of rules for exempt distributions under the Proposed National Instrument.
In addition to harmonizing the majority of exemptions, the CSA has consolidated many exemptions to make them more straightforward and user-friendly. For example, an issuer that wished to rely on the "accredited investor" exemption to distribute securities across Canada would need to review only one exemption and complete only one form of exempt distribution.
Exemptions that are of a local nature have not been incorporated into the Proposed National Instrument. In Ontario, many of the exemptions have been consolidated into Revised OSC Rule 45-501. A small number of new exemptions have been included in Revised OSC Rule 45-501 and several existing exemptions have been broadened in response to a number of relatively routine exemptive relief applications. The implications in British Columbia, Alberta and Québec are addressed below.
PROPOSED NATIONAL INSTRUMENT 45-106
Implications in Ontario
The Proposed National Instrument contains a small number of provisions that do not apply in Ontario and several provisions where Ontario imposes different requirements than the other CSA jurisdictions. For example, Ontario is not adopting the family, friends and business associates exemption or the offering memorandum exemption available in most other jurisdictions. The Proposed National Instrument includes an Ontario-only exemption for founders, affiliates of founders, control persons and certain family members of founders, directors and executive officers, which is consistent with the exemption currently provided for under Ontario securities legislation.
The Proposed National Instrument, to a great extent, reproduces exemptions existing already under Ontario securities legislation. However, the Proposed National Instrument contains some provisions differing from the analogous provisions currently in Ontario securities legislation. These changes include:
- Replacing the existing "closely-held issuer" exemption with a "private issuer" exemption.
- Broadening the petroleum, natural gas and mining properties exemption and the estates, bankruptcies and liquidation exemption.
- Broadening the exemption to acquire "business assets" to permit an issuer to use the exemption to acquire any assets, including cash assets.
- Narrowing the filing requirements so that only the issuer of the security being traded is required to file a "private placement" report.
The Proposed National Instrument contains certain exemptions not currently available under Ontario securities legislation. These
- A $150,000 minimum amount exemption, which is substantially similar to the minimum amount exemption that used to be available in Ontario.
- An exemption for a trade by an issuer to a creditor to settle a bona fide debt of that issuer.
- An exemption for deposits of Schedule III banks codifying relief granted by securities regulatory authorities.
Implications in British Columbia
The Proposed National Instrument has been drafted with the expectation that British Columbia’s new securities legislation will be in place when the Proposed National Instrument comes into force and accordingly it reflects a number of changes pending in British Columbia. For example, the Proposed National Instrument requires that debt issued or guaranteed by municipalities or Canadian financial institutions be rated by a designated rating agency; and transaction exemptions for business combinations and reorganizations are proposed to be broadened to include a dissolution or winding up of an issuer.
A number of provisions of the Proposed National Instrument do not have identical application in each jurisdiction. For example, British Columbia, New Brunswick, Nova Scotia and Newfoundland and Labrador are adopting one version of the offering memorandum exemption, other provinces are adopting a slightly modified version of the exemption and Ontario is not adopting the offering memorandum exemption. Similarly, the Proposed National Instrument provides that any form required under the exemptions in British Columbia will be specified by the British Columbia Securities Commission.
Additional exemptions that would be available in British Columbia under the Proposed National Instrument include: capital raising for "affiliates" of an issuer; $150,000 minimum amount; trades in securities pursuant to an offer to acquire to a security holder outside British Columbia that would have been a take-over bid or issuer bid if it had been made to a security holder in British Columbia; trades in a security by a control person to a lender or other encumbrancer for the purpose of giving collateral; trades between an individual or associate of that individual and the RRSP or RRIF established by or for that individual; and trades by a control person after a take-over bid.
Implications in Alberta
The "affiliate" exemption included in the Proposed National Instrument is new to Alberta. Also, the Proposed National Instrument proposes to raise the "minimum amount investment" exemption amount to $150,000 from the current $97,000.
The Proposed National Instrument carries forward most of the exemptions currently available under Alberta securities regulation and under Multilateral Instrument 45-103 – Capital Raising Exemptions (MI 45-103).
Implications in Québec
Québec has endorsed the Proposed National Instrument and proposes to adopt it as a regulation. Recent amendments to the Securities Act (Québec) (the QSA) contained in Bill 72 are to be proclaimed into force at the same time as the Proposed National Instrument receives ministerial approval. Bill 72 eliminates most of the current statutory prospectus and registration exemptions under the QSA in order to make way for the national exemptions provided for in the Proposed National Instrument.
The Autorité des marchés financiers has also announced that it intends to adopt Multilateral Instrument 45-102 – Resale of Securities (MI 45-102) as it further harmonizes its securities rules with the other Canadian jurisdictions.
AMENDED AND RESTATED OSC RULE 45-501
Many of the prospectus and registration exemptions in the current OSC Rule 45-501 have been incorporated into the Proposed National Instrument. Revised OSC Rule 45-501 consolidates various exemptions that are set out in various other provisions of Ontario securities legislation including exemptions for certain trades in commodity futures, options and commodity futures contracts, trades in securities of a co-operative, trades in membership shares of a credit union, trades in securities of a credit union and trades in a self-directed RESP.
Neither Proposed National Instrument 45-106 nor Revised OSC Rule 45-501 imposes any significant new filing or disclosure requirements on Ontario issuers.
REVOCATION OF CERTAIN INSTRUMENTS AND RULES
Many instruments and rules have, with certain modifications, been incorporated into the Proposed National Instrument and will be revoked upon the coming into force of the Proposed National Instrument including, Multilateral Instrument 45-105 – Trades to Employees, Senior Officers, Directors and Consultants; National Instrument 32-101 – Small Security Holder Selling and Purchase Arrangements; and National Instrument 62-101 – Control Block Distribution Issues.
Certain rules have also, with certain modifications, been incorporated into Revised OSC Rule 45-501 and will be revoked upon the coming into force of Revised OSC Rule 45-501 including, OSC Rule 32-502 – Registration Exemption for Certain Trades by Certain Financial Intermediaries; OSC Rule 32-503 – Registration and Prospectus Exemption for Trades by Financial Intermediaries and Mutual Fund Securities to Corporate Sponsored Plans; and OSC Rule 46-501 – Self-Directed Registered Education Savings Plans.
Certain provisions of the regulations to the Securities Act (Ontario) have also been incorporated into the Proposed National Instrument or Revised OSC Rule 45-501 and will be revoked upon the coming into force of such instrument or rule, as applicable.
In Alberta, the ASC proposes to amend or revoke several of its rules, including MI 45-103 to reflect the registration and prospectus exemptions incorporated in the Proposed National Instrument. As well, the ASC will recommend to the Alberta Government that the registration and prospectus exemptions and related transitional provisions and filing requirements currently found in the Securities Act (Alberta), with few minor exemptions, be repealed. Those exemptions being retained will appear in the ASC Rules and include exempt purchaser and promoter exemptions.
The resale provisions have been consolidated into a revised MI 45-102 and the relevant legislative references have been updated.
Any comments on the Proposed National Instrument or Revised OSC Rule 45-501 must be received by the CSA or OSC, as applicable, by March 17, 2005. The CSA or OSC have not indicated a target date for final implementation of the Proposed National Instrument or Revised OSC Rule 45-501. The full text of the Proposed National Instrument, Revised OSC Rule 45-501 and corresponding companion policies are set out in the supplement to the OSC Bulletin dated December 17, 2004. They may also be read on the Ontario Securities Commission Web site at www.osc.gov.on.ca or on Blakes Web site under "Publications".
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.