The Ontario Securities Commission (the "OSC") is seeking comment on Proposed OSC Rule 72-503 – Distributions Outside of Canada and its related companion policy (the "Proposed Rule"), to eliminate longstanding uncertainty about how outside of Canada distributions of securities will be regulated.
Purpose of the Proposed Rule
A distribution of securities by an issuer to foreign investors may or may not fall under the jurisdictional scope of the Securities Act (Ontario) (the "Act") depending on the connecting factors to Ontario (e.g. the issuer having an active trading market in Ontario or a head office in Ontario).
In an interpretation note published in 19831 (the "Interpretation Note"), the OSC stated that where reasonable steps are taken by the issuer, underwriter and other market participants in the context of an outbound distribution to ensure that such securities "come to rest" outside of Ontario, and there are no other circumstances that would call into question the integrity of Ontario capital markets, a prospectus is not required under the Act, nor is an exemption from the prospectus requirement necessary.2
It has proven difficult for market participants to know with certainty whether sufficient steps have been taken to ensure that the securities are not treated as a part of a distribution to residents of Ontario.
The Proposed Rule creates explicit prospectus-filing exemptions in the context of outbound distributions. The OSC then partially recreates the uncertainty it sought to eliminate concerning the Act's jurisdictional scope by stating that the exemptions are not determinative of whether Ontario securities law would otherwise apply. The Proposed Rule also retains the general framework established by the Interpretation Note for determining when the Ontario prospectus requirement applies to outbound distributions.
Proposed Prospectus Exemptions
The Proposed Rule creates four new prospectus exemptions. Compliance with the securities laws of the relevant foreign jurisdiction is a condition to the availability of each exemption. The proposed exemptions are as follows:
- Distributions under Public Offering Document in Foreign Jurisdictions: The Ontario prospectus requirement would not apply where (i) the issuer has filed a registration statement in accordance with the Securities Act of 1933 of the Unites States of America registering the securities in connection with the distribution, and the registration has become effective, or (ii) the issuer has filed a document similar to a final prospectus for which a receipt or similar acknowledgement of approval has been obtained in accordance with the securities laws of a "designated foreign jurisdiction" registering the securities in connection with the distribution or qualifying the securities for distribution. The designated jurisdictions are Australia, France, Germany, Hong Kong, Italy, Japan, Mexico, the Netherlands, New Zealand, Singapore, South Africa, Spain, Sweden, Switzerland and the United Kingdom.
- Concurrent Distribution under Final Prospectus in Ontario: The Ontario prospectus requirement would not apply where the issuer of the securities has filed with the OSC, and a receipt has been issued for, a final prospectus qualifying the concurrent distribution of such securities in Ontario. Since even foreign purchasers of Ontario prospectus-qualified securities may be entitled to certain rights and investor protections under the Act, any prospectus filed in such circumstances should clearly state whether or not it also qualifies the distribution of securities to investors outside of Canada.
- Distributions by Reporting Issuers: The Ontario prospectus requirement would not apply where the issuer of the securities is and has been a reporting issuer in a jurisdiction of Canada for the four months immediately preceding such distribution.
- Other Distributions: The Proposed Rule provides that the Ontario prospectus requirement would not apply even when an outbound distribution does not fall under one of the above categories, but that in such circumstances, unlike for the exemptions set out above, the first trade of such securities would be subject to resale restrictions except where the first trade is to a person or company outside of Canada, or where (A) the issuer has been a reporting issuer in a jurisdiction of Canada for the four months immediately preceding the trade, and (B) at least four months have elapsed from the distribution date.
The OSC notes that although nothing in the Proposed Rule prohibits or restricts the resale of the securities distributed under one of the first three exemptions listed above, it nevertheless expects the issuer, the underwriters and other participants in the offering to take reasonable steps to ensure that the securities come to rest outside of Canada and are not redistributed back into Canada in a manner that constitutes an indirect distribution in Ontario. This statement is somewhat surprising. Under the current regime, issuers can avoid the Ontario prospectus requirement by taking steps to ensure that securities are not redistributed back into Canada. It is unclear why such steps would still have to be taken when securities are distributed under one of the new prospectus exemptions and are not subject to resale restrictions.
Exemptions from the Registration Requirement
The proposed rule also sets out an exemption from the Ontario dealer and underwriter registration requirements for outbound distributions, subject to certain conditions.
Form of Report of Distributions Outside of Canada
An issuer that relies on one of the proposed prospectus exemptions (other than the Distribution under Public Offering Document in Foreign Jurisdictions exemption) would be required to file a new prescribed report of distribution outside of Canada on or before the tenth day after the distribution date. The new report would be required to be filed electronically through the OSC's Electronic Filing Portal and requires certain limited information concerning the distribution, including information relating to the identity of the issuer, the type and number of securities distributed and the purchase price, the date of distribution and the name and address of any person acting as dealer or underwriter in connection with the distribution. The certification of the report may not be delegated to an agent or other individual preparing the report on behalf of the issuer.
This post-distribution filing would represent an additional obligation for issuers that use one of the new outside of Canada prospectus exemptions that does not exist under the current regime. However, the new report would require much less information compared to post-trade reports required for certain other prospectus exempt distributions in Canada (including distributions relying on the accredited investor exemption).
Comment Period
The OSC has requested comments on the Proposed Rule by September 28, 2016.
Footnotes
1. Interpretation Note 1 Distributions of Securities Outside Ontario published in connection with the Notice of Repeal of OSC Policy 1.5 Distribution of Securities Outside of Ontario (March 25, 1983) 6 OSCB 226.
2. Some other jurisdictions are more definitive in applying the prospectus requirement in similar circumstances. In Quebec, for example, Section 12 of the Securities Act (Quebec) provides that "every person intending to make, from Québec, a distribution of securities to persons established outside Québec shall prepare a prospectus and obtain a receipt from the Authority." Section 12 also provides, however, that no prospectus will be required where the Authority agrees or does not object within 15 days after receiving certain prescribed information concerning the distribution.
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