On June 30, 2016, the Ontario Securities Commission (OSC) published for comment Proposed Rule 72-503 Distributions Outside of Canada (the Proposed Rule) that would:
- provide an exemption from the prospectus requirement in respect of a distribution of securities to individuals or companies outside of Canada subject to certain conditions;
- provide an exemption from the dealer and underwriter registration requirement in respect of a distribution of securities to individuals or companies outside of Canada subject to certain conditions; and
- require the filing of a report of the exempt distribution through the OSC's Electronic Filing Portal.
Purpose of the Proposed Rule
The purpose of the Proposed Rule is to provide Ontario market participants with greater certainty in cross-border transactions. Historically, the only guidance on the application of the prospectus requirements to distributions outside Ontario has been a note published by the OSC in 1983 entitled "Interpretation Note 1 Distributions of Securities Outside Ontario" (the Interpretation Note), which provided that neither a prospectus nor a prospectus exemption is required when the securities distributed outside Ontario "come to rest" with investors outside of Ontario. This requires a rigorous analysis of whether the circumstances of the cross-border offering would result in flow back or an indirect distribution occurring in Ontario, and a consideration of steps to take to ensure such flow back or indirect distribution does not occur.
Over time, as the OSC's approach to distributions outside Canada has evolved with global market practices, as has case law on provincial jurisdiction over activities outside the province, the Interpretation Note has become outdated, thereby creating undesirable uncertainty around the extent of the application of the prospectus requirement and the registration requirement for these distributions. The Proposed Rule would replace the 33-year old Interpretation Note and remove this uncertainty by providing explicit prospectus exemptions and align current market practices and OSC staff's current practice.
The Proposed Rule provides four explicit exemptions from the prospectus requirement for certain distributions of securities outside Canada that comply with the laws of the foreign jurisdiction, namely:
- foreign distributions under a public offering document in the United States or a designated foreign jurisdiction, which includes Australia, France, Germany, Hong Kong, Italy, Japan, Mexico, the Netherlands, New Zealand, Singapore, South Africa, Spain, Sweden, Switzerland, or the United Kingdom of Great Britain and Northern Ireland (the Foreign Public Offering Exemption);
- foreign distributions that are qualified under a prospectus in Ontario (the Concurrent Prospectus Exemption);
- foreign distributions where the issuer is and has been a reporting issuer in a jurisdiction of Canada for the four months immediately preceding the distribution (the Reporting Issuer Exemption); and
- all other foreign distributions (which may be subject to restrictions on resale) to a person or company in a jurisdiction of Canada (the Other Distributions Exemption).
As a result, Ontario issuers would be able to rely on these prospectus exemptions in most cross-border offering scenarios, including initial public offerings (IPO), bought deals or other secondary offerings, and private placements in foreign jurisdictions. Ontario issuers and selling security holders would have the following options under the Proposed Rule:
Although Ontario issuers and selling security holders would still be able to rely on the "accredited investor" exemption or other prospectus exemptions under National Instrument 45-106 Prospectus Exemptions (NI 45-106) in connection with foreign private placements or other offerings, the prospectus exemptions under the Proposed Rule provides two distinct advantages. First, all of the prospectus exemptions provided under the Proposed Rule, with the exception of the Other Distributions Exemption, do not have Canadian resale restrictions. Second, the reporting requirement under the Proposed Rule (discussed in Proposed Reporting Requirement below) is much simpler than that under NI 45-106, which requires a list of the names of the purchasers.
Dealer and Underwriter Registration Exemptions
The Proposed Rule also provides an exemption from the dealer and underwriter registration requirement for distributions of securities outside Canada if all of the following conditions are met:
- the head office or principal place of business of the purchaser is in the US or a designated foreign jurisdiction;
- in the case of a distribution to a purchaser in the US, the purchaser is appropriately registered with the Securities Exchange Commission and Financial Industry Regulatory Authority and complies with all applicable regulatory requirements;
- in the case of a distribution to a purchaser located in a designated foreign jurisdiction, the purchaser is registered in a category similar to dealer in that jurisdiction and complies with all applicable regulatory requirements;
- subject to a limited exception, the purchaser does not carry on business as a dealer or underwriter from an office or place of business in Ontario;
- other than the issuer or seller security holder, the purchaser does not trade securities to, with or on behalf of anyone in Ontario; and
- the purchaser relying on the exemption is not registered as a dealer in any jurisdiction f Canada.
This exemption will assist Ontario issuer's to engage the services of a foreign dealer to distribute securities in the US or other designated foreign jurisdictions. It will also eliminate the uncertainty relating to whether registration requirements of Ontario dealers and underwriters are applicable to these distributions.
In relying on the Concurrent Prospectus Exemption, the Reporting Issuer Exemption or the Other Distributions Exemption under the Proposed Rule, issuers will be required to file a short post-closing report of the exempt distribution with the OSC within ten days of the distribution date, in the format of the new Form 72-503F. This report only requires a description of the offering and does not require identifying the names of, or any other information about, the non-Canadian purchasers as a conventional private placement trade report would for an exempt distribution under NI 45-106.
All comments should be submitted to the OSC in writing by September 28, 2016. The full text of the Proposed Rule and further instructions relating to public comment can be found here.
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.