Canada: Legend Requirements for Private Placements of Book-Entry Only Securities

CDS Declines to Accept Legended Securities in the Book-Entry System

With the coming into force of National Instrument 45-106 - Prospectus and Registration Exemptions (NI 45-106), the Canadian Securities Administrators (CSA) also adopted a number of consequential amendments to various related policies and instruments. These included consequential amendments to Multilateral Instrument 45-102 - Resale of Securities (now National Instrument 45-102 or NI 45-102).

Under NI 45-102, the first sale of securities issued in reliance upon certain private placement exemptions is considered to be a distribution (i.e. generally requiring a prospectus), unless certain prescribed conditions are satisfied. One of these conditions is that the certificate representing the security carries a legend indicating that the securityholder may not sell the security until the later of four months and a day after the acquisition date or the date the issuer becomes a reporting issuer. This requirement was amended, effective March 30, 2004 to respond to the increased use of book-entry-only securities. Since the time of this amendment, subsection 2.5(2)3 of NI 45-102 has required that the certificate representing the security, or an ownership statement issued under a direct registration system or other electronic book-entry system, carry the prescribed legend. Section 1.7 of the Companion Policy to NI 45-102 (the Companion Policy) stated (prior to the implementation of the amendment discussed below) that "[i]nvestors may receive either a paper certificate representing their security or an electronic alternative such as an ownership statement under a direct registration system."

As part of the consequential amendments made to NI 45-106 effective September 14, 2005, the CSA changed this provision of the Companion Policy to read that a "[b]eneficial securityholder must receive either a paper certificate or an electronic alternative such as an ownership statement under a direct registration system, scheduled to be phased into operation during 2005." The CSA’s intentions in requiring what appears to be the mandatory delivery of a confirmation statement to beneficial securityholders are not clear. Nor is it clear that, in adding this requirement, the CSA considered whether clearing agencies such as The Canadian Depositary for Securities Limited (CDS) would have the technological capability to carry it out. It is also not known what the CSA intended when referring to a "…direct registration system, scheduled to be phased into operation during 2005."

These, amendments, whose effects appear to have been inadvertent, are part of the Companion Policy and not part of the Instrument itself. While they may represent the view of the CSA, they do not have the force of law. CDS has nevertheless taken the position that it will no longer accept restricted securities (i.e. those required to carry a legend indicating a restriction on resale) in the book-entry system. This effectively means that unless an issuer can deliver an ownership statement carrying the required legend to each beneficial purchaser, every security issued under a private placement (pursuant to a prospectus or registration exemption) will have to be certificated.

However, in at least one offering, staff at the Ontario Securities Commission (OSC) agreed to an interim solution that allowed CDS to accept debt securities that were privately placed. In that case the issuer sent a letter to CDS, with a copy to the OSC, stating that the issuer was not a reporting issuer and was unlikely to be one, that the debt securities being offered would be sold under the "accredited investor" exemption under NI 45-106, that the issuer took the position that subsection 2.5 of NI 45-102 does not require it to legend the certificate representing the debt securities and therefore the issuer would deposit with CDS a global certificate representing the aggregate number of securities to be issued without the legend. Staff at the OSC confirmed that they would not object to the deposit by the issuer of the global certificate without a legend and CDS agreed to hold and transfer the debt securities in the book-entry system. This solution may be viable for offerings where the securities issued will always be subject to a restriction on resale. As discussed above, the conditions set out under subsection 2.5 of NI 45-102 must be satisfied so that the first sale of securities previously issued under a prospectus or registration exemption does not require a prospectus. Where the securities in question are not contemplated to be sold to secondary market purchasers, satisfaction of the conditions set out under section 2.5 of NI 45-106, including the condition that the security certificate or confirmation statement carry the required legend, is therefore not relevant.

In another transaction, we have been able to develop what appears to be an alternative interim solution that is also acceptable to CDS. We propose that a confirmation statement carrying the required legend be sent to purchasers at the time their purchase is confirmed by the applicable dealer (that is, at the time the dealer’s confirmation slip or ticket is sent to purchasers). In conjunction with this, the issuer of the security would apply to the applicable regulator for confirmation that the delivery of such a statement is in accordance with Section 1.7 of the Companion Policy (requiring that beneficial securityholders receive an ownership statement carrying the required legend). Based on discussions with CDS, we believe that this is an acceptable alternative interim solution that will allow other types of private placements to proceed in the book-entry system until the CSA have resolved this issue. While this method does impose an additional obligation to deliver a written confirmation statement, it has been proposed only as an interim measure to deal with CDS’s reluctance to accept these securities in the book-entry system. Ideally, any long-term solution implemented by the CSA would support more efficient methods of holding and transferring securities and not impose additional paper-based obligations.

Effectively barring privately placed securities from the book-entry system represents a significant setback in the progress that has been made in the electronic holding and transfer of securities over the last number of years. With an increasing number of issuers moving to a book-entry only system, and investors preferring this system, this issue is a matter of great significance for Canadian capital markets and it is to be hoped that it will be resolved in the very near future.

We are currently working with the CSA and CDS to resolve this issue for all types of offerings.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.