Canada: Proposed OSC Rule 72-503 Aims To Provide Clarity On Distributions From Ontario To Outside Canada

On June 30, 2016, the Ontario Securities Commission (OSC) published for comment Proposed OSC Rule 72-503 Distributions Outside of Canada (Rule 72-503) and Proposed Companion Policy 72-503CP (Companion Policy, and together with Rule 72-503, the Proposed Rule).

The Proposed Rule aims to provide Ontario issuers and dealers acting for Ontario issuers with certainty regarding the application of Ontario prospectus and dealer registration rules to distributions of securities to investors outside Canada. The Proposed Rule includes four new prospectus exemptions, one new dealer registration exemption and a new form, Form 72-503F, to notify the OSC of distributions made outside Canada in reliance on certain of the new exemptions. The comment period closes on September 28, 2016.

The Proposed Rule would replace OSC Interpretation Note 1 Distributions of Securities Outside Ontario (Interpretation Note). The Interpretation Note, published in 1983, memorialized the OSC's view that where an issuer and its intermediaries have taken "reasonable precautions" to ensure that securities distributed outside Ontario "come to rest" with investors outside Ontario and will not "flow back" into Ontario, neither a prospectus nor reliance on an exemption from the prospectus requirement is required under Ontario law.

The Interpretation Note did not provide bright line tests for determining when "flow back" risk requires an Ontario prospectus, and has therefore proven challenging to apply in various contexts. For example, an Ontario issuer with equity securities listed on the Toronto Stock Exchange that seeks to distribute such equity securities abroad is typically required to analyze — in the absence of a bright line numerical test — whether sufficient foreign trading volume will exist relative to trading volume in Canada such that the issuer and its underwriters can be comfortable that the securities will "come to rest" abroad.

Resale outside Canada by Ontario sellers of securities of non-reporting issuers originally distributed into Ontario on a prospectus-exempt basis has also proven challenging, due to the need to either rely on the Interpretation Note or determine that the percentage of beneficial ownership of the class of securities held in Canada does not exceed minimum thresholds set out in section 2.14 of National Instrument 45-102 Resale of Securities. In this connection, Quebec's Autorité des marchés financiers recently published two blanket orders granting certain Canadian institutional investors exemptions from the prospectus requirement in connection with the resale of securities outside Canada. See our July 2016 Blakes Bulletin: Relief in Quebec Granted to Select Canadian Institutional Investors for Resale of Securities to Outside Canada for more information on that topic.

The Proposed Rule is intended to eliminate the need for the analysis required by the Interpretation Note, and the related uncertainty, in most circumstances.

SUMMARY OF THE PROPOSED RULE

Prospectus Exemptions

Under the Proposed Rule, four new exemptions from the Ontario prospectus requirement would be available:

  1. Foreign Public Offering Exemption: Public offerings of securities made in the U.S. or other "designated foreign jurisdictions" provided that a receipt, notice of effectiveness or similar acknowledgment of regulatory approval of the offering document has been obtained. The list of "designated foreign jurisdictions" is lifted from National Instrument 71-102 Continuous Disclosure and Other Exemptions Relating to Foreign Issuers and is limited to Australia, France, Germany, Hong Kong, Italy, Japan, Mexico, the Netherlands, New Zealand, Singapore, South Africa, Spain, Sweden, Switzerland and the United Kingdom.
  2. Concurrent Canadian Prospectus Exemption: Distributions of securities outside Canada made concurrently with a prospectus offering in Ontario and in accordance with foreign securities laws.
  3. Canadian Reporting Issuer Exemption: Distributions of securities outside Canada if the issuer of the securities is and has been a reporting issuer in a Canadian province or territory for the four months immediately preceding the distribution outside Canada and the distribution is made in accordance with foreign securities laws.
  4. Restricted Canadian Resale Exemption: Any other distribution in a jurisdiction outside Canada in accordance with foreign securities laws.

Securities distributed outside Canada under the first three new prospectus exemptions would be freely tradable and could therefore be subsequently sold back into Canada without restriction. Securities distributed under the fourth "catch-all" Restricted Canadian Resale Exemption would remain subject to restrictions on sales back into Canada, such that a resale back into Canada would be considered a distribution unless (1) the trade is to a person or company outside Canada or (2) (a) the issuer is and has been a reporting issuer in a Canadian province or territory for the four months immediately preceding the resale and (b) at least four months have elapsed from the distribution date.

Dealer Registration Exemption

The Proposed Rule would also provide an exemption from the dealer registration requirement for a dealer acting in connection with a distribution outside Canada that, among other requirements, has its head office or principal place of business in the U.S., Canada or a "designated foreign jurisdiction" and is registered or otherwise permitted under applicable foreign law to act as a dealer on the distribution.

Form Filing Requirement

Issuers that rely on the Concurrent Canadian Prospectus Exemption, the Canadian Reporting Issuer Exemption or the Restricted Canadian Resale Exemption would be required to file a trade report with the OSC on proposed new Form 72-503F within 10 days after closing. The new form would require relatively limited disclosures regarding the issuer, the underwriters and the securities distributed, including the aggregate amount and purchase price of the securities distributed. The new form would not require disclosure of the identity of purchasers in the distribution outside Canada.

BACKGROUND

Canadian securities regulators have historically been split on the question of whether the prospectus requirements of provincial securities legislation should apply extraterritorially. Alberta, British Columbia and Quebec take the view that a distribution of securities by an issuer with sufficient connecting factors to their provinces (e.g., head office location, reporting issuer in the province) to investors located outside the province must be made in accordance with the province's prospectus requirements or an exemption from the prospectus requirements. Ontario's current position, as expressed in the Interpretation Note, is that the prospectus requirements of the Securities Act (Ontario) do not apply if the securities distributed out from Ontario "come to rest" in a foreign jurisdiction and will not "flow back" into Ontario.

The other provinces have left it open to market participants to determine that distributions of securities to foreign investors are not subject to such provinces' securities regimes, presumably on the basis that foreign investors are more appropriately protected by the securities regulations of their home jurisdictions.

Notably, when consultation drafts of the regulations under the uniform provincial capital markets legislation, the Capital Markets Act, for the proposed Cooperative Capital Markets Regulatory System were published for comment late last year, the regulators (including Ontario) had proposed to adopt the Alberta, British Columbia and Quebec position that distributions from the jurisdiction are distributions in the jurisdiction for purposes of determining whether the provincial prospectus requirements would apply.

As a result of the purported extraterritorial application of their provincial securities laws, Alberta, British Columbia, Quebec and, to a lesser extent, Ontario issuers, have faced practical difficulties accessing foreign capital markets. For example:

  • Issuers offering securities into the U.S. in private placements under Rule 144A have been required to receive representations from U.S. purchasers regarding such purchasers' status as "accredited investors" under Canadian law.
  • Canadian incorporated issuers that are "domestic issuers" for U.S. securities law purposes, or are not reporting issuers in Canada eligible to use the U.S.-Canada Multijurisdictional Disclosure System (MJDS), may be required to either (1) file and have receipted a Canadian prospectus in order to IPO in the U.S. or (2) receive "accredited investor" representations from U.S. IPO purchasers and impose transfer restrictions on the offered securities (which is impossible to implement in practice).
  • The regulators in Alberta, British Columbia and Quebec require the issuer or underwriters to list all purchasers of securities in the offering, including the U.S. purchasers, in the Form 45-106F1 Report of Exempt Distribution filing made in connection with a private placement in Canada.

IMPLICATIONS, ANALYSIS AND COMMENTARY

Uncertainty Regarding Extent to Which Preventing "Flow Back" Still Animates OSC Policy

Rule 72-503's new prospectus exemptions would appear, on their face, to reflect a reduced concern regarding the risk of flow back into Canadian markets, except where the issuer is not a Canadian reporting issuer and the securities are not being distributed to the public in the U.S. or a "designated foreign jurisdiction." In place of prevention of "flow back," the principle underpinning Rule 72-503's prospectus exemptions appears to be related to the availability of sufficient acceptable disclosure to substitute for a Canadian prospectus. If an issuer is filing Canadian continuous disclosure documents or foreign offering documents in the U.S. or a designated foreign jurisdiction, the implicit presumption seems to be that such documents will sufficiently protect any Canadian "flow back" purchasers, and restrictions on sales back into Canada need not be imposed.

Interpretation Note Preserved as "Fall-Back" Position in Companion Policy Guidance

The OSC continues to state its view in the Companion Policy that: "[It] does not interpret the prospectus requirement as applying to a distribution of securities outside of Canada . . . provided that the issuer, underwriters and other participants in the offering take reasonable steps to ensure that the securities come to rest outside of Canada and are not redistributed back into Canada." This additional interpretive gloss is helpful in that it preserves the Interpretation Note as a fall-back position or safety valve for issuers and underwriters that sell securities abroad but which cannot easily fit into the enumerated exemptions. For example, under this guidance it may be open to an Ontario incorporated issuer to conclude that a Rule 144A offering of US$ denominated debt securities may be made in the U.S. without putting a Canadian restrictive legend on the notes or otherwise imposing Canadian resale restrictions, on the basis that the risk of flow back into Canada is minimal.

New Form Filing Requirement Would Apply to Rule 144A Tranches of Canadian Public Offerings if Concurrent Canadian Prospectus Exemption is Relied on

Under the Proposed Rule, U.S. Rule 144A tranches that are added on to Canadian public offerings would trigger the requirement to file new Form 72-503F within 10 days after closing if the Concurrent Canadian Prospectus Exemption is relied on for the U.S. tranche.

Clarity on "Name Give Up" for Offerings by Ontario Issuers

Where an issuer with connections to Ontario offers securities abroad (usually in the U.S.) and concurrently sells the securities into Ontario in a private placement, market practice has been to list only the Ontario purchasers — and not list the foreign purchasers — on the exempt distribution report filed on Form 45-106F1. The Proposed Rule would provide important certainty on this point since none of the new prospectus exemptions are to be included on the list of prospectus exemptions that trigger a filing on Form 45-106F1. The new Form 72-503F does not require disclosure of purchaser information.

New Dealer "Exemption" Raises Possibility of Extraterritorial Regulation of Foreign Dealers Selling Securities of Ontario Issuers Abroad

The Proposed Rule's new dealer exemption would only apply to dealers that are (1) registered in the U.S. or in one of the designated foreign jurisdictions and (2) in compliance with "all applicable dealer registration requirements and other broker-dealer regulatory requirements" applicable in connection with the distribution. This raises the question of how the OSC would intend to handle either a dealer in a non-designated foreign jurisdiction or a U.S. broker-dealer that might be in technical non-compliance with any conduct and other regulatory requirements of U.S. federal and state securities law and Financial Industry Regulatory Authority rules in connection with the distribution.

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 Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
14 Nov 2018, Speaking Engagement, Ontario, Canada

Join members of the Blakes Environmental and Enterprise Risk & Crisis Response groups for a discussion of hot topics and trends in Canadian environmental law.

15 Nov 2018, Webinar, Toronto, Canada

Join us for a live webcast with partners from our Employment & Labour and Litigation & Dispute Resolution groups as they discuss employment-related challenges and considerations surrounding the recent legalization of recreational cannabis in Canada.

15 Nov 2018, Webinar, Toronto, Canada

Join us for a live webcast with partners from our Employment & Labour and Litigation & Dispute Resolution groups as they discuss employment-related challenges and considerations surrounding the recent legalization of recreational cannabis in Canada.

 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
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

Mondaq.com (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 www.mondaq.com

To Use Mondaq.com 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.

Disclaimer

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.

General

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