Earlier this summer, the Canadian Securities Administrators (CSA) introduced a series of related regulatory amendments1 (collectively, the Wrapper Relief Amendments) bringing much anticipated relief from onerous disclosure requirements for many foreign issuers offering their securities in Canada. The amendments, which came into force on September 8, 2015, were designed to avoid the requirement for a foreign issuer to prepare and deliver certain supplementary information to Canadian permitted clients (primarily institutions and ultra-high net worth investors) in the context of a private placement of securities. This disclosure was previously provided in the form of a "wrap" disclosure document (the Canadian Wrapper) attached to the front of the issuer's offering document.
However, rumors of the death of the Canadian Wrapper have been greatly exaggerated. In particular, foreign domiciled investment funds may not realize the full benefit of the Wrapper Relief Amendments as there are a number of additional disclosure requirements that may apply to private placement offerings conducted in Canada by such issuers that may still necessitate the use of a form of wrapper or other supplemental disclosure document.
Life Before Wrapper Relief
Prior to the Wrapper Relief Amendments coming into effect, foreign domiciled investment funds would typically prepare and deliver a Canadian Wrapper containing some or all of the following types of disclosure:
- disclosure relating to conflicts of interest between the fund and any affiliated entity to acting as principal dealer in connection with the offering in Canada;
- disclosure regarding currency exchange rate and other risks of making an investment in the fund that would be specific to a Canadian investor and not covered in the fund's principal offering document;
- disclosure required to be provided to clients in the provinces of Ontario, Québec and Newfoundland and Labrador if the manager of the fund was relying on the exemption contained in Multilateral Instrument 32-102 Registration Exemptions for Non-Resident Investment Fund Managers (MI 32-102) from the requirement to register as an investment fund manager in those jurisdictions;
- disclosure required to be provided to clients if the fund manager or affiliate was relying on the international dealer exemption contained in section 8.18 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) in connection with the offering of the fund's securities in Canada;
- disclosure of the Canadian tax considerations associated with an investment in the fund;
- notices relating to resale restrictions and use of personal information under applicable Canadian securities laws; and
- disclosure of the statutory rights of action for rescission and damages available to the investors in certain Canadian jurisdictions (such as Ontario) in the event that the fund's offering document contains a "misrepresentation" (as defined under applicable Canadian securities laws).
In some provinces, the issuer also needed to obtain the consent of the applicable securities regulator if the offering document contained a representation that the securities would be listed on an exchange.
Under applicable Canadian securities laws, issuers (including foreign issuers) have an obligation to ensure that a distribution of their securities by way of private placement is being made in reliance on an available exemption from the requirement for the issuer to prepare and file a prospectus in the applicable Canadian jurisdiction. The most common prospectus exemption relied upon in the context of private placements by foreign issuers is the "accredited investor" exemption. Furthermore, in order to rely on the exemption from the requirement to register as an investment fund manager in MI 32-102 or the international dealer exemption in NI 31-103, sales must be restricted to the "permitted client" class of investors (as such term is defined in NI 31-103). As a result, most foreign domiciled investment funds utilize a Canadian addendum to their subscription materials which contains detailed representations and warranties from Canadian investors that they qualify as both an "accredited investor" and as a "permitted client". This addendum may or may not have formed part of the Canadian Wrapper prior to the Wrapper Relief Amendments coming into effect.
What do the Wrapper Relief Amendments Do?
The Wrapper Relief Amendments provide foreign issuers with exemptions under applicable securities legislation from:
- disclosure requirements relating to conflicts of interest between the issuer and the principal dealer (the Conflict of Interest Disclosure Exemption);
- the requirement to provide detailed disclosure to investors of the statutory rights of action for a misrepresentation in the offering document in those jurisdictions where such statutory rights exist; and
- the requirement to obtain approval of the local securities regulatory authority before making a representation regarding the listing of securities on an exchange.
To rely on the Wrapper Relief Amendments, a number of conditions must be met:
- The offering must be made primarily in a non-Canadian jurisdiction of securities of a foreign issuer that is not a reporting issuer in Canada and whose head office and majority of executive officers and directors are outside Canada, or securities that are issued or guaranteed by a foreign government.
- Sales must be made in Canada only to investors who qualify as permitted clients.
- A written notice must be delivered to the permitted client specifying the disclosure exemption relied on. A dealer may give a one-time notice to an investor that covers all future distributions that the permitted client participates in with that dealer.
In addition, to rely specifically on the Conflict of Interest Disclosure Exemption, the following conditions must also be met:
- Canadian purchasers must be given any offering documents prepared by the issuer in connection with the distribution.
- The offering must be made concurrently in the US, and Canadian investors must receive the same disclosure as US investors.
- The offering documents must contain, if applicable, disclosure of conflicts of interest that is in compliance with rule 5121 of the US Financial Industry Regulatory Authority (FINRA) and is otherwise in compliance with US securities law.
How do the Wrapper Relief Amendments Affect Foreign Domiciled Investment Funds?
In the case of foreign domiciled investment funds, the Wrapper Relief Amendments will not have the same benefits as for other types of foreign issuers. As noted above, these funds must consider a number of other factors which may require additional disclosure to potential investors. In essence, the Wrapper Relief Amendments will only exempt a foreign domiciled investment from the requirement to provide: (i) detailed disclosure of statutory rights of action to investors in certain Canadian jurisdictions (such disclosure being replaced with a brief form of prescribed disclosure of the existence of such statutory rights of action); and (ii) conflict of interest disclosure (but only in the circumstances where the Conflict of Interest Disclosure exemption is available as described above). As a result, the vast majority of foreign domiciled investment funds will still have Canadian-specific disclosure obligations which must be made to Canadian investors in the context of an offering of fund securities. This disclosure does not necessarily need to be provided in a Canadian Wrapper (in fact, a Canadian Wrapper was never a statutory requirement but was the most convenient method to make any required supplemental Canadian disclosure for many foreign domiciled investment funds). A fund may decide to include any supplemental Canadian disclosure as part of its principal offering document, in the subscription materials for the securities of the fund to be completed by Canadian investors or in a separate disclosure document that is provided to investors. Foreign domiciled investment funds that are currently using a Canadian Wrapper that is otherwise up to date can continue to do so or they may elect to amend the Canadian Wrapper to provide the truncated reference to the available statutory rights of action and to remove the conflict of interest disclosure in circumstances where the Conflict of Interest Exemption is available.
It is important to note that the Wrapper Relief Amendments do not relieve foreign issuers from the requirement:
- to file copies of all offering documents (including a Canadian Wrapper, if used) delivered to Canadian investors in certain provinces, and
- to prepare and file exempt trade reports (including payment of the associated filing fees),
generally within 10 days of the date of the trade in each case, although investment funds currently have the option of filing an annual exempt trade report (and paying the associated fees) within 30 days of the financial year-end of the fund.
The Wrapper Relief Amendments do not remove all of the regulatory requirements for foreign issuers selling their securities in Canada. For example, non-Canadian managers of investment funds, which may include alternative funds branded as hedge funds, private equity funds or venture capital funds, must consider whether a prospectus exemption is available to them, whether they are caught by the registration requirement for investment fund managers, advisers and/or dealers, and whether a supplemental document is still required for Canadian investors in their funds. Canadian legal counsel should be consulted to ensure compliance with all local securities laws.
1. CSA Notice of Amendments to National Instrument 33-105 — Underwriting Conflicts (June 25, 2015), Multilateral CSA Notice — Multilateral Instrument 45-107 — Listing Representations and Statutory Rights of Action Disclosure Exemptions (June 25, 2015); Notice of Amendments to Ontario Securities Commission Rule 45-501 Ontario Prospectus and Registration Exemptions and National Instrument 45-106 Prospectus Exemptions (June 25, 2015).