National Instrument 45-106 – Prospectus and Registration Exemptions ("NI 45-106") will come into force on September 14, 2005. NI 45-106 is an attempt to harmonize the prospectus and registration exempt offering regimes in all Canadian jurisdictions, which, although currently substantially similar in all provinces other than Québec, are not identical. While NI 45-106 does create uniformity across Canadian jurisdictions in respect of many commonly used prospectus and registration exemptions, it falls short of complete harmonization as some exemptions are not available in certain jurisdictions and other exemptions are applied differently as amongst different jurisdictions.
The goal of NI 45-106 is to provide market participants seeking to effect a distribution on a multi-jurisdictional basis with a more efficient distribution regime based on harmonized offering rules. In certain cases, the instrument clarifies the availability of exemptions that existed in most jurisdictions, either pursuant to existing legislation, instruments or policies or that were available pursuant to blanket orders or by obtaining discretionary relief from local regulators.
NI 45-106 changes certain existing exemptions (either broadening or restricting application, depending on the previous regime in a jurisdiction) and introduces a number of exemptions that are new in certain jurisdictions. The instrument represents a significant overhaul of the prospectus and registration exemption regime in the Province of Québec. As a result of the coming into force of NI 45-106, a number of consequential amendments to the instruments and policies of certain jurisdictions, including Ontario, as well as certain national instruments, have been made or will need to be made in the future.
The following is a summary of certain of the key exemptions set forth in NI 45-106 and highlights the significance of the introduction of some of the exemptions in certain provinces. In certain cases, the exemptions will not be available in all Canadian jurisdictions, as noted below.
Prospectus and Registration Exemptions
Under NI 45-106, a trade in a security to an "accredited investor" will be exempt from the registration and prospectus requirements. The definition of accredited investor is based on the definitions currently used in Ontario Securities Commission Rule 45-501 - Exempt Distributions and Multilateral Instrument 45-103 - Capital Raising Exemptions ("MI 45- 103") (which provides for such exemption in Canadian jurisdictions other than Ontario and Québec), and preserves most of the categories of accredited investor currently available. Introduction of this exemption in the Province of Québec is significant as the current private placement exemption regime in Québec provides for a minimum investment of at least $150,000 or the issuance to certain "sophisticated purchasers", being a more restricted group of persons than "accredited investors" and limited generally to banks, registered insurance companies, registered trust companies and pension funds of a certain size. The instrument also enhances the ability of fully managed accounts in Ontario to invest in securities of investment funds in reliance on the accredited investor exemption, which is not permitted under the current Ontario rule.
Family, Friends, Business Associates and Founders
A prospectus and registration exemption for trades to family, friends, business associates and founders is currently available in jurisdictions other than Ontario and Québec. NI 45- 106 preserves this exemption and extends its availability to Québec. However, Ontario has adopted a more limited form of this exemption. In jurisdictions other than Ontario, the exemption extends to trades to directors, executive officers and control persons of the issuer and certain family members thereof, as well as close personal friends or business associates of a director, executive officer or control person of the issuer or affiliate of the issuer and a founder of the issuer and certain family members of such persons.
Introduction of this exemption is significant in Québec as, currently, distributions can only be made to such persons if the issuer is a "closed company" for the purposes of the Securities Act (Québec), with the issuer having to make a determination based on tests set forth in jurisprudence and decisions of various securities commissions as to whether the prospective investors constitute the "public" vis à vis the issuer. In Ontario, the exemption will only be available in connection with the distribution of securities to a founder or affiliate of a founder of the issuer or a spouse, parent, brother, sister, grandparent or a child of an executive officer, director or founder of the issuer or a control person of the issuer.
The current "closely held issuer" exemption in Ontario and the "closed company" exempt regime in Québec will be replaced by the introduction of a private issuer exemption similar to that currently available in certain provinces. Under NI 45-106, an issuer is a "private issuer" if (i) it is not a reporting issuer or an investment fund, (ii) its securities (other than non-convertible debt securities) are subject to restrictions on transfer set forth in the constating documents of the issuer or in agreements among security holders, (iii) such securities are beneficially owned, directly or indirectly, by not more than 50 holders, excluding employees and former employees of the issuer or its affiliates and, (iv) it has distributed securities only to certain categories of persons (a director, officer, employee, founder or control person of the issuer or specified family members thereof, close personal friends or close business associates of a director, executive officer, a founder or control person of the issuer or specified family members thereof, accredited investors or security holders of the issuer or other persons that do not constitute the "public" vis à vis the issuer). Under NI 45-106, a private issuer may distribute securities without complying with prospectus and registration requirements only to such persons and will not be required to file any forms or notices with the securities commissions or similar regulatory authority of any province in connection with such distributions.
NI 45-106 will introduce an exemption from the prospectus and registration requirements in all of the Canadian jurisdictions where an affiliate of the issuer is purchasing securities as principal. This exemption was previously subsumed in the definition of "accredited investor" in Ontario.
Currently, in all jurisdictions other than Québec and Ontario, MI 45-103 provides a prospectus and registration exemption where investors receive an offering memorandum in a prescribed form (including as to the availability of certain civil remedies) and sign an acknowledgement of the risks associated with the investment. NI 45-106 preserves this exemption in these provinces and extends its availability to Québec. However, the "offering memorandum" exemption will not be available uniformly across the provinces and territories that recognize it and will not be available in Ontario.
In British Columbia, Nova Scotia, New Brunswick and Newfoundland and Labrador, an issuer will be able to distribute securities under the exemption without regard to identity of investor or amount invested. In Alberta, Saskatchewan, Manitoba, Québec, Prince Edward Island, the Northwest Territories and Nunavut, an issuer will be able to sell up to $10,000 worth of securities to any single investor under the exemption. In order to issue more than $10,000 worth of securities to a single investor under the exemption, the investor must be an "eligible investor", being a person whose net assets or net income exceeds certain specified levels (which levels are lower than those for "accredited investor" status).
If the issuer is an investment fund, the exemption will only be available if the investment fund is a non-redeemable investment fund or, if it is a mutual fund, is a reporting issuer and, for the purposes of availability of the exemption in certain provinces, has its securities listed on an exchange or quoted on the over the counter market.
Investors will be required to sign a risk acknowledgement statement in connection with investments made under this exemption and the issuer will be required to provide investors with certain rights of withdrawal and of action for rescission or damages if the offering memorandum contains a misrepresentation.
It should be noted that this exemption does not prohibit or restrict issuers from voluntarily delivering an offering document to investors that does not follow the prescribed form in connection with the use of other prospectus and registration exemptions. In addition, Ontario is preserving a prospectus and registration exemption for certain tax shelter investments that requires the use of an offering memorandum the contents of which, unlike in the case of the offering memorandum exemption to be available in other provinces, are not prescribed except for mandatory reference to the availability of certain civil remedies for misrepresentation.
Minimum Investment Amount
NI 45-106 restores the substantial purchase exemption in Ontario and harmonizes similar exemptions currently available in some Canadian jurisdictions. Under NI 45-106, prospectus and registration exemptions are available uniformly throughout Canadian jurisdictions for securities of an issuer with an acquisition cost of not less that $150,000 paid in cash, which amount is equal to the current "private placement" level in Québec and represents an increase from the $97,000 level currently in force in certain other Provinces.
NI 45-106 will provide for a specific exemption in connection with the trade by an issuer in a security of its own issue to a person as consideration for assets, if those assets have a fair value of not less than $150,000. This clarifies the availability of the existing minimum amount exemptions in certain provinces in connection with the acquisition of assets and the exemption does not make any distinction as to the nature of the assets.
Business Combinations and Reorganizations
NI 45-106 provides a prospectus and registration exemption for a trade in a security in connection with an amalgamation, merger or reorganization or arrangement under a statutory procedure or an amalgamation, merger, reorganization or arrangement that is described in an information circular in connection with the seeking of approval of a transaction by security holders where such approval is obtained or in connection with the dissolution or winding-up of an issuer. The majority of Canadian jurisdictions already had a similar exemption, however, NI 45-106 clarifies the circumstances in which the exemption is available, particularly in Québec where the availability of the "consolidation or reorganization exemption" was not always clear, and expands the availability of the exemption to include the dissolution or winding-up of an issuer.
Employees, Executive Officers, Directors and Consultants
NI 45-106 will provide exemptions for trades to employees, executive officers, directors and consultants which are similar to the exemptions currently available in the other jurisdictions of Canada (other than Québec) under Multilateral Instrument 45-105 – Trades to Employees, Senior Officers, Directors and Consultants. Introduction of this regime in Québec is significant as such trades will no longer require an application for approval in Québec or compliance with the requirements of Québec's current policy when dealing with trades under incentive compensation plans.
NI 45-106 also introduces a number of new prospectus and registration exemptions including: exemptions for a trade by an issuer in a security of its own issue to a creditor to settle a bona fide debt, trades by an issuer for the acquisition of petroleum, natural gas or mining properties, trades in negotiable promissory notes or commercial paper maturing within one year of issue provided they are not convertible into a different type of security and have an approved credit rating, as well as exemptions for trades to an RRSP or RRIF of an individual and for debt securities that are issued or guaranteed by certain entities including governments and certain financial institutions.
As a result of the coming into force of NI 45-106, a number of amendments will be made to local securities legislation and policies in the various Canadian jurisdictions, including the revocation of certain existing instruments and policies in order to harmonize local regulation with the new national instrument. In addition, certain substantive changes will be taking place in jurisdictions in order to harmonize other aspects of securities legislation in connection with the introduction of NI 45-106. For example, in Québec, Multilateral Instrument 45-102-Resale of Securities, is expected to be adopted, making it a national instrument applicable throughout Canada. This would represent a positive change in the resale regime in Québec as it would no longer be necessary for an issuer to be a reporting issuer in Québec in order to sell securities previously issued under an exemption in Québec subject to a four month hold period, it would only be necessary that the issuer be a reporting issuer in at least one Canadian province.
NI 45-106 is the result of the effort of the Canadian Securities Administrators to provide a more efficient, user friendly, exempt offering regime to issuers enabling them to access the Canadian capital markets without having to comply with different sets of regulation. This Perspective only summarizes some of the key elements of NI 45-106 and the implication of its introduction for issuers and investors and reference should be made to the instrument itself for a complete understanding of its contents.
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.