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 Topics
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions