Canada: Proposed Amendments To Report Of Exempt Distribution

Last Updated: September 30 2015
Article by Ralph Shay, Andrea C. Johnson, Daniel McElroy, Andreas Kloppenborg and Eric Dalke

Overview

On August 13, 2015, the Canadian Securities Administrators (CSA) published for comment proposed amendments to National Instrument 45-106 Prospectus Exemptions and its Companion Policy. The proposed amendments seek to harmonize the form of report for prospectus exempt distributions across Canada, while increasing the disclosure requirements.

The market for securities distributed under exemptions from the prospectus requirement—known as the "exempt market"— has been the subject of increased regulatory focus since the 2007-2008 financial crisis. The proposed amendments are the latest in a series of proposed or enacted reforms in this area,1 and they supersede changes to exempt market reporting proposed by provincial securities regulators in February and March of 2014.

The CSA is accepting comments on the proposed amendments until October 13, 2015. If you have any questions about the proposed amendments, or require support to submit a comment, please contact one of our securities lawyers.

Background and comparison

Currently, issuers and underwriters are required to file a report on Form 45-106F1 following an exempt distribution in any Canadian jurisdiction other than British Columbia.  Since 2011, British Columbia has required reporting of exempt distributions on its own, more comprehensive, Form 45-106F6. Under the proposed amendments there would once again be a single, national form of report (the Proposed Form), which would replace Form 45-106F1, and Form 45-106F6 would be rescinded.

For a tabular comparison of the requirements of Form 45-106F1, Form 45-106F6 and the Proposed Form, please click here.

Proposed reporting requirements

As described below, the proposed amendments increase the amount of information that must be disclosed about the issuer, certain individuals related to the issuer, and investors. The increase is significant relative to the current Form 45-106F1, and less so relative to Form 45-106F6.

The main question being asked by the CSA is whether the Proposed Form strikes the appropriate balance between the benefits associated with greater public information and the associated cost and burden on issuers.

Other than as noted below, the information reported would be accessible to the public. For information that is to be reported confidentially, freedom of information legislation may require regulators to make the information available under certain conditions if requested.

Identifying numbers for issuers, underwriters and securities being distributed. The Proposed Form would require disclosure of certain identifying numbers, as follows:

Summary details of non-SEDAR filers. The following would have to be disclosed by issuers that do not file continuous disclosure documents on SEDAR: date of formation, financial year-end, value of assets and, if applicable, jurisdictions where reporting and stock exchange listings. This would apply primarily to private Canadian companies, and public and private non-Canadian companies.

Number of employees. The Proposed Form would require disclosure of the number of employees of the issuer, expressed as one of four listed ranges varying from below 50 to 500 or more.

Key individuals related to certain non-public issuers. The Proposed Form includes significant disclosure requirements for key individuals in respect of most non-public issuers. This is similar to a requirement of the current Form 45-106F6, but is new to all jurisdictions other than British Columbia. Specifically, these new rules apply to any issuer that is neither: (i) a reporting issuer in Canada; (ii) a "foreign public issuer";2 nor (iii) only distributing "eligible foreign securities" to "permitted clients"3 in Canada.

The following disclosure would be required by the applicable non-public issuers. This will likely be the most contentious aspect of the proposed amendments, particularly for large shareholders who expect to keep their holdings confidential for business or strategic reasons.

  • For directors, executive officers, control persons and promoters:
    • Names, jurisdiction of residence, relationship to the issuer, number of voting securities and the amount paid for such securities would be made publicly available. Where a control person or promoter of an applicable non-public issuer is a company, the Proposed Form would also require public disclosure of the name and jurisdiction of residence of the company's directors and executive officers.
    • Residential addresses would be reported confidentially to the applicable securities commission(s).
  • The CEO's email address would be reported confidentially.

Details of certain prospectus exemptions, by investor. The Proposed Form requires additional information about investors subscribing under the "accredited investor", "family, friends and business associates" and "offering memorandum" exemptions. In each case the applicable criterion of the exemption that the investor satisfies would be specified, whereas currently only the applicable exemption must be disclosed. As with other details of each purchaser, the information is to be reported confidentially. If an investor satisfies multiple exemptions or categories, only one need be identified.

  • For a person investing under the "family, friends and business associates" exemption, the Proposed Form would require the name and position of the individual at the issuer with whom the investor has a relationship.
  • For accredited investors, the Proposed Form would require disclosure of the applicable category of the definition under which the investor qualifies. In many cases this will involve specifying whether an individual satisfies the income, net assets or financial assets test, as set out in National Instrument 45-106.
  • For an investor qualifying under the offering memorandum exemption as an "eligible investor", the applicable category must be specified. This applies only in Alberta, Manitoba, Prince Edward Island, Quebec, Saskatchewan and the territories.

This is a new reporting requirement, but it should not impose a significant burden on issuers. It is consistent with recent changes to National Instrument 45-106 and its Companion Policy requiring issuers to gather additional information about investors participating under these exemptions.

Other information about each investor. The Proposed Form would require a statement as to whether each investor is a registrant and/or an insider of the issuer, to be reported confidentially. This is a current requirement of Form 45-106F6.

The existing forms of report and the Proposed Report require disclosure of all investors, not just those in the jurisdiction where the report is being filed. An exception exists for non-Canadian issuers, which only must disclose information about Canadian investors.

Notably, under Form 45-106F6 certain information about each investor—including the name and the amount being invested—is made publicly available. This would not be the case under the Proposed Form.

Information about persons being compensated. As under the current forms, the identity of persons being compensated in connection with the distribution, and the details of such compensation, would be made publicly available. The Proposed Form would also require disclosure of the relationship between any person being compensated and the issuer and, confidentially, the relationship between any person being compensated and each purchaser associated with that person.

Offering materials. For an exempt distribution in New Brunswick, Nova Scotia, Ontario, Quebec or Saskatchewan, the Proposed Form mandates a listing of all offering materials (such as offering memoranda) that are required to be filed with the applicable regulator in connection with the distribution. There is no new filing requirement in respect of such materials; the Proposed Form only requires that they be listed.

Investment fund issuers. Issuers that are investment funds would have the following new reporting obligations under the Proposed Form: the type of fund, net asset value (expressed as a range), date of formation, financial year-end, reporting issuer status and net proceeds of the offering (being gross proceeds less redemptions). If applicable, investment funds would also have to disclose CUSIP numbers and exchange listings. The proposed amendments provide that for distributions made in reliance on certain prospectus exemptions, reporting would be required by investment funds within 30 days after the calendar year-end, i.e. by January 30. The current deadline is 30 days after the investment fund's financial year-end.

Comparison of disclosure requirements

The following table compares the disclosure requirements of Form 45-106F1, Form 45-106F6 and the Proposed Form, to the extent of any significant differences. For a PDF version of the table, please click here.

Issuer contact and other information

  Form 45-106F1 Form 45-106F6 Proposed Form
Employees/SEDAR profile number No requirement No requirement Size of issuer, by number of employees
SEDAR profile number, if applicable
Identifying information Address and telephone number of issuer's head office Address, email address and telephone number of issuer's head office Address and telephone number of issuer's head office, if without SEDAR profile
Legal entity identifier, if applicable
Industry information Industry type from CSA-selected categories Industry type from CSA-selected categories North American Industry Classification Standard code
Other information No requirement No requirement If without SEDAR profile:
- date of formation
- financial year-end
- CUSIP number and listed exchange(s), if any
- assets as at most recent financial year-end

Underwriter information

  Form 45-106F1 Form 45-106F6 Proposed Form
General information Name, address and telephone number Name, address, telephone number, email address and website Name, address, telephone number, website and Firm NRD number, if applicable

Directors, executive officers, control persons and promoters of the issuer

  Form 45-106F1 Form 45-106F6 Proposed Form
Disclosure of directors, executive officers, control persons and promoters No requirement Disclosure requirement only if issuer is not a reporting issuer Disclosure requirement only if issuer is not (a) a reporting issuer or a subsidiary; (b) a foreign public issuer or a subsidiary; or (c) distributing eligible foreign securities only to permitted clients
Information required for individuals No requirement Name, municipality and country of principal residence Name, residential address, municipality, province/state and country of principal residence
    Positions held (e.g. director, officer, promoter, control person) Positions held (e.g. director, officer, promoter, control person)
    Number and type of securities of the issuer beneficially owned, or controlled, on the distribution date Number and type of securities of the issuer beneficially owned, or controlled, on the distribution date
    Total price paid for all securities beneficially owned, or controlled, on the distribution date Total price paid for all securities beneficially owned, or controlled, on the distribution date
      Business contact information of Chief Executive Officer
Information required for non-individual control persons or promoters No requirement Same information as above for all directors and officers of the control person or promoter Same information as above for all directors and officers of the control person or promoter

Information about the distribution

  Form 45-106F1 Form 45-106F6 Proposed Form
Type of securities distributed Type of security Type of security Type of security, 3-letter code and CUSIP
Total dollar amount per type of security
Summary of the distribution by jurisdiction Number of purchasers, price per security and total amount raised, by jurisdiction Number of purchasers, price per security and total amount raised, by jurisdiction Number of purchasers and total amount raised, by jurisdiction and exemption
Distribution date State the distribution date(s) State the distribution date(s) State the distribution start and end date(s)
Offering materials No requirement No requirement List offering materials if distribution occurred in Saskatchewan, Ontario Quebec, New Brunswick or Nova Scotia
Currency No requirement No requirement State foreign currency if distribution not in Canadian dollars

Information about the purchasers

  Form 45-106F1 Form 45-106F6 Proposed Form
General information Name, address and telephone number Name, address and telephone number Name, address, telephone number and email address
Details of securities purchased Number and type of securities purchased Number and type of securities purchased  Number and type of securities purchased, using 3-letter code
Details of exemption relied on Exemption relied on Exemption relied on Exemption relied on, with section and (if applicable) subsection. If relying on section 2.5 (family, friends or business associates), name and position of the individual claiming a relationship to the purchaser
Insider/Registrant No requirement Status as insider or registrant Status as insider or registrant
Publicly available information about individual purchasers N/A Name
Number and type of securities
Status as insider or registrant
Total purchase price
N/A
 Publicly available information about non-individual purchasers N/A As above, plus address and exemption relied on N/A

Information about persons being compensated

  Form 45-106F1 Form 45-106F6 Proposed Form
Information other than contact and compensation details No requirement Status as insider or registrant Status as insider or registrant
Relationship to the issuer
Purchaser(s) with whom person is associated
NRD number, if applicable
Deferred compensation details, if applicable

Investment fund issuer information

  Form 45-106F1 Form 45-106F6 Proposed Form
Investment fund manager information Contact information Contact information Firm NRD number, if applicable; otherwise contact information and website
Type of investment fund No requirement No requirement Type of investment fund and whether fund primarily invests in other investment funds or is a UCITs Fund
Offering proceeds, in addition to disclosure required by all issuers No requirement No requirement Net proceeds by jurisdiction
Other information No requirement No requirement Date of formation
Financial year-end
Reporting issuer status
CUSIP number
Listed exchange(s), if any
Net asset value as of the most recent NAV calculation

Footnotes

1 See, for example, the Ontario Securities Commission's Exempt Market Review, published in 2014 and the CSA's Notice of Amendments to National Instrument 45-106 Prospectus and Registration Exemptions published in February of this year.

2 "Foreign public issuer" is a new term being introduced by the proposed amendments. Broadly speaking, it means a public company in the United States, the United Kingdom, Australia, France, Germany, Hong Kong, Italy, Japan, Mexico, the Netherlands, New Zealand, Singapore, South Africa, Spain, Sweden or Switzerland. Wholly-owned subsidiaries of such companies are also exempt from the additional reporting requirements.

3 The term "permitted client" is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. It includes institutions, registrants and individuals with greater than $5 million in financial assets. An "eligible foreign security" is defined in the proposed amendments. Broadly, it means a security issued by a non-Canadian company or issued or guaranteed by a non-Canadian government.

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