The Canadian Securities Administrators (CSA), including the Ontario Securities Commission (OSC), recently announced significant changes to streamline the process for private placements by non-Canadian issuers to "permitted clients" by reducing the type of disclosure typically required in a Canadian "wrapper" to an offering document.
When securities are offered to Canadian investors in reliance upon certain prospectus exemptions and an offering memorandum is provided, prescribed Canadian disclosure is typically provided in the form of a Canadian wrapper. The "wrapper relief amendments" announced yesterday provide relief from the disclosure requirements related to underwriter conflicts of interest and statutory rights of action, as well as prohibitions on making certain listing representations, where securities are sold to permitted clients provided certain conditions are satisfied.
Base Condition for the Relief
The relief from all three requirements will only be available in respect of "eligible foreign securities," being securities that are offered primarily in a foreign jurisdiction as part of a distribution of securities and that are:
- a security issued by an issuer
- that is incorporated, formed or created under the laws of a foreign jurisdiction;
- that is not a reporting issuer in Canada;
- that has its head office outside of Canada; and
- that has a majority of its executive officers and a majority of its directors ordinarily resident outside of Canada; or
- a security that is issued or guaranteed by the government of a foreign jurisdiction.
Underwriter Conflicts of Interest
NI 33-105 (defined below) requires that certain disclosures be made in specified circumstances when an issuer or selling security holder is a "related issuer" or a "connected issuer" of the specified firm registrant for the distribution. The NI 33-105 amendments provide an exemption to this requirement for eligible foreign securities where the distribution is made to "permitted clients" through a "registered dealer" or an "international dealer" (each as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations). Further, the registered dealer or international dealer must deliver a prescribed written notice to the permitted clients, either by including it in an exempt offering document (which is an offering memorandum in Ontario and certain other jurisdictions) or in an alternative acceptable format for repeat clients.
In addition to the written notice, to rely on the exemption for eligible foreign securities, other than a security that is issued or guaranteed by the government of a foreign jurisdiction, the following additional conditions must be met:
- an exempt offering document must be prepared and delivered to the permitted client;
- a concurrent distribution of the security must be made by the issuer to investors in the U.S.;
- the exempt offering document must contain the same disclosure as that provided to US investors;
- if applicable, the disclosure provided in the exempt offering document is made in compliance with FINRA rule 5121; and
- the distribution must be made in compliance with applicable U.S. federal securities laws.
Securities legislation in certain jurisdictions of Canada prohibits certain types of representations relating to the listing of securities on an exchange unless specified conditions are satisfied. The wrapper relief amendments also provide relief from such prohibitions where made in an exempt offering document provided in connection with a distribution of an eligible foreign security provided:
- each purchaser is a permitted client;
- the listing representation contains no misrepresentation; and
- the representation is made in compliance with the rules of the exchange referred to in the representation.
These amendments will be implemented through amendments to OSC Rule 45-501 in Ontario and through MI 45-107 in other jurisdictions (each as defined below).
Statutory Rights of Action
The third category of relief extended under the wrapper relief amendments is from the required disclosure of statutory rights of action for damages or rescission in certain Canadian jurisdictions.
In Ontario, this disclosure is required by section 5.3 of OSC Rule 45-501 which provides that the statutory rights in section 130.1 of the Ontario Securities Act be described in an offering memorandum delivered in connection with certain prospectus exemptions. Under the amendments, the requirement to disclose statutory rights will be deemed to be satisfied if a specified form of disclosure statement is provided to permitted clients in connection with a distribution of an eligible foreign security. The disclosure statement may be provided either in the exempt the offering memorandum or in a stand-alone document which accompanies the offering memorandum that is delivered to the permitted client. In addition, a written notice containing the required disclosure can be delivered by a registered dealer or international dealer that proposes to make future distributions of securities to the permitted client.
The MI 45-107 amendments provide relief from the statutory rights disclosure obligation in New Brunswick, Nova Scotia and Saskatchewan (the other provinces where such disclosure is required) on the same basis as the OSC Rule 45-501 amendments.
The OSC Rule 45-501 amendments follow the publication of the OSC's proposed amendments to OSC Rule 45-501 on April 25, 2013 (the April 2013 Proposal). Importantly, under the OSC Rule 45-501 amendments, there is no requirement for permitted clients to acknowledge receipt of the required disclosure for statutory rights as was originally set out in the April 2013 Proposal.
Background and Coming Into Force
In order to accomplish these objectives, the wrapper relief amendments will be implemented through amendments to National Instrument 33-105 Underwriting Conflicts (NI 33-105), OSC Rule 45-501 Ontario Prospectus and Registration Exemptions (OSC Rule 45-501) and a new Multilateral Instrument 45-107 Listing Representation and Statutory Rights of Action Disclosure Exemptions (MI 45-107).
The wrapper relief amendments are based on similar proposed amendments announced in April 2013 and November 2013. The April 2013 proposal comprised proposed amendments to OSC Rule 45-501 while the November 2013 proposal comprised proposed amendments to NI 33-105 and proposed the adoption of MI 45-107. These proposals were an attempt to codify exemptive relief orders granted to certain dealers.
These amendments are proposed to come into force on September 8, 2015.
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.