Introduction
Members of the Canadian Securities Administrators, except the Ontario Securities Commission, announced the adoption of Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets (OTC Rule). The OTC Rule is to come into effect in all jurisdictions except Ontario on July 31, 2012.
The OTC Rule builds on British Columbia Instrument 51-509 Issues Quoted in the U.S. Over-the-Counter Markets (BCI 51-509). Under the OTC Rule, OTC issuers (as defined below) with significant connections to a local Canadian jurisdiction that adopted the OTC Rule are designated reporting issuers in that local jurisdiction and are subject to continuous disclosure and other regulatory obligations in the local jurisdiction, including the requirement to file financial statements and MD&A. The OTC Rule will replace BCI 51-509 in British Columbia.
How do OTC issuers become "reporting issuers" under the OTC Rule?
The OTC Rule defines an "OTC issuer" as an issuer that:
- has issued a class of securities that have been assigned a ticker symbol by the Financial Industry Regulatory Authority in the United States (FIRA) for use on any of the over-the-counter markets in the United States and includes a class of securities whose trades have been reported in the grey markets; and
- has not issued any securities that are also listed or quoted on
one or more of the following:
- TSX Venture Exchange Inc.,
- The Toronto Stock Exchange,
- Canadian National Stock Exchange,
- Alpha Exchange Inc.,
- New York Stock Exchange LLC,
- NYSE Amex LLC, or
- The NASDAQ Stock Market LLC.
Under the OTC Rule, an OTC issuer is designated a "reporting issuer" under securities legislation (an OTC reporting issuer) if one or more of the following apply:
- on or after July 31, 2012, the OTC issuer's business has been directed or administered in or from the local jurisdiction;
- on or after July 31, 2012, promotional activities have been carried on in or from the local jurisdiction by or on behalf of the OTC issuer; or
- the OTC issuer is assigned a ticker symbol for any class of its securities by FIRA on or after July 31, 2012 and, on or before the date that the ticker symbol is assigned, the OTC issuer has distributed a security to a person resident in the local jurisdiction which is of the class of securities for which a ticker symbol has been assigned.
When is an issuer's business directed or administered in or from a jurisdiction that has adopted the OTC Rule?
The companion policy (Companion Policy) to the OTC Rule states that generally, an OTC issuer's business is directed or administered in or from a local jurisdiction if:
- its head office, or another office where executive functions take place, is located in the local jurisdiction;
- some or all of its directors are located in the local jurisdiction; or
- any director, officer, consultant or other person who carries out executive functions for the issuer does so from an office in the local jurisdiction, or is resident in the local jurisdiction.
What are promotional activities?
"Promotional activities" is defined as activities or communications, by or on behalf of an issuer, that promote or could reasonably be expected to promote the purchase or sale of securities of the issuer, but does not include any of the following:
- the dissemination of information or preparation of records in
the ordinary course of the business of the issuer
- to promote the sale of products or services of the issuer, or
- to raise public awareness of the issuer, or
- activities or communications necessary to comply with the
requirements of
- the securities legislation of any jurisdiction of Canada,
- the securities laws of any foreign jurisdiction governing the issuer, or
- any exchange or market on which the issuer's securities trade.
The Companion Policy states that an OTC issuer is carrying out promotional activities in a jurisdiction if it communicates from anywhere with persons in the jurisdiction, or communicates from the jurisdiction with persons anywhere, in a way that promotes, or reasonably could be expected to promote, the purchase or sale of its securities. It also states that these activities would generally include providing information to potential investors who request information, or to potential private placement investors.
What are the requirements imposed on OTC reporting issuers?
An OTC reporting issuer is subject to all of the provisions of securities legislation of the local jurisdiction that apply to reporting issuers, including continuous disclosure obligations, corporate governance standards, and insider reporting requirements. Moreover, there are additional reporting requirements that are imposed on an OTC reporting issuer under the OTC Rule, such as providing:
- information about persons the OTC reporting issuer retains for promotional activities, including materials terms of the agreements entered into with those persons;
- in certain circumstances, the most recent registration statement the OTC reporting issuer filed with the SEC; and
- personal information forms and authorizations for directors, officers, promoters and control persons of an OTC reporting issuer.
An OTC reporting issuer is also restricted from using some of the prospectus, take-over bid and disclosure exemptions. In particular, the OTC Rule imposes different resale restrictions on securities that are issued pursuant to exemptions from applicable prospectus requirements by an OTC reporting issuer in certain circumstances.
Can an OTC issuer cease to be an OTC reporting issuer?
Except in Québec, an OTC issuer will cease to be an OTC reporting issuer if the following conditions are met:
- its business is not directed or administered, and has not been directed or administered for at least one year, in or from the local jurisdiction;
- promotional activities are not carried on, and have not been carried on for at least one year, in or from the local jurisdiction;
- more than one year has passed since the ticker-symbol date;
- it has filed Form 51-105F1 Notice – OTC Issuer Ceases to be an OTC Reporting Issuer.
In Québec, an OTC reporting issuer must apply to the securities regulatory authority to have its status as an OTC reporting issuer revoked in order to cease to be a reporting issuer.
Are there any transitional provisions?
The OTC Rule is expected to come into effect on July 31, 2012. However, there are some transitional provisions available for certain OTC reporting issuers. These transitional provisions are not applicable to British Columbia.
Conclusion
The OTC Rule will have repercussions for OTC issuers with connections to a local jurisdiction of Canada that has adopted the rule. While certain OTC reporting issuers that have a class of securities registered in the United States and certain designated foreign issuers that are designated as an OTC reporting issuer by the OTC Rule may have exemptions from a number of the OTC Rule continuous disclosure requirements, OTC reporting issuers that are unable to avail themselves of these exemptions or other exemptions are subject to significant continuous disclosure and reporting obligations.
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.
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