on record · on february 25, 2016, the canadian securities administrators (the “csa”) announced...
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APRIL 2016 SECURITIES
Amendments to the Early Warning System: Multilateral Instrument 62-104, National Instrument 62-103 and National Policy 62-203Prospectus Exemptions for Retail Investors and Existing Security Holders: Alberta Securities Commission Rule 45-516Amendments to the Offering Memorandum Exemption: National Instrument 45-106
on record
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SECURITIES, EDITOR-IN-CHIEFJessica [email protected] 403-260-0137
SECURITIES, MANAGING EDITORRhonda G. [email protected] 403-260-0268
GENERAL NOTICEOn Record is published by BD&P to provide our clients with timely information as a value-added service. The articles contained here should not be considered as legal advice due to their general nature. Please contact the authors, or other members of our Securities team directly for more detailed information or specific professional advice.
On Record Contents:
1 Amendments to the Early Warning System: Multilateral Instrument 62-104, National Instrument 62-103 and National Policy 62-203
3 Prospectus Exemptions for Retail Investors and Existing Security Holders: Alberta Securities Commission Rule 45-516
5 Amendments to the Offering Memorandum Exemption: National Instrument 45-106
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PAGE 1SECURITIES
Amendments to the Early Warning SystemMultilateral Instrument 62-104,
National Instrument 62-103 and National Policy 62-203
By Shanlee von Vegesack
BackgroundOn February 25, 2016, the Canadian Securities Administrators (the “CSA”) announced the adoption of amendments to the early warning reporting regime (the “Amendments”). Changes to the early warning system were originally published for comment by the CSA on March 13, 2013 (the “2013 Proposals”). As a result of the CSA’s consideration of the comments it received, the Amendments differ in certain respects from the 2013 Proposals, most notably with respect to the reporting threshold. The purpose of the Amendments is to enhance the transparency of significant holdings of reporting issuers’ securities as well as to provide certain clarifications to the rules. The Amendments are expected to come into force on May 9, 2016.
PAGE 2SECURITIES
Key Amendments to the Early Warning Regime
Reporting ThresholdThe early warning reporting threshold will remain at 10%. The 2013 Proposals suggested decreasing the reporting threshold to 5%, which would have brought the regime in line with the rules in the United States. However, due to concerns over liquidity, access to capital of smaller issuers and increased compliance costs, the CSA determined that it was not appropriate to reduce the reporting threshold at this point in time.
Reporting DecreasesThe Amendments will require securityholders who have met the 10% reporting threshold to report decreases of 2% or more in ownership, in addition to the current reporting requirements to report ownership increases of 2% or more. The Amendments will also require securityholders to report when their ownership falls below the 10% reporting threshold. A cooling off period of one business day from the date the report is filed is required before the securityholder may acquire or offer to acquire any securities in respect of which the report is made.
Enhanced DisclosureIn an effort to address transparency concerns and to achieve more comprehensive disclosure with respect to an acquiror’s interests in the issuer’s securities and the purpose of the transaction, the Amendments will require additional disclosure. This disclosure will take the form of an early warning report and associated news release about the material terms of related financial instruments, any securities lending arrangement and other agreements, arrangements or understandings involving the securities.
Report CertificationEarly warning reports will be required to be certified and signed by the filer. Conformed copies of signatures are permitted to be filed on SEDAR.
Disclosure TimeframesThe Amendments clarify that an early warning news release must be issued and filed no later than the opening of trading on the business day following the acquisition or disposition giving rise to the requirement to issue a news release.
Securities LendingThe Amendments provide an exemption from the early warning reporting trigger for securities that are transferred or lent pursuant to a “specified securities lending arrangement.” “Specified securities lending arrangements” require, among other things, that the lender has an unrestricted right to recall all securities before the record date for voting at any meeting of securityholders and/or that the lender requires the borrower to vote the securities in accordance with the lender’s instructions. Specified securities lending arrangements in effect at the time of a reportable transaction must be disclosed in the report even if the triggering transaction did not involve a securities lending arrangement.
A new exemption from the early warning reporting threshold trigger has also been introduced for short selling borrowers. The exemption is subject to certain conditions, including that the borrowed securities must be disposed of by the borrower within three business days and that the borrower does not intend to vote and does not vote the securities.
Alternative Monthly Reporting RegimePursuant to the Amendments, eligible institutional investors (“EIIs”) will be disqualified from alternative monthly reporting (“AMR”) for EIIs who solicit proxies from securityholders in order to contest director elections or a reorganization, amalgamation, merger, arrangement or similar corporation action involving the securities of the reporting issuer. For example, in a board-related contest, if an EII solicits proxies in support of a director nominee other than the persons proposed by management, then the AMR regime is unavailable
for that EII. Similarly, in a transaction-related contest, if an EII solicits proxies in support of a corporate action that is not supported by management or in opposition to a corporation action that is recommended by management, the AMR regime will be unavailable for that EII. The CSA has clarified that “solicit” has the same meaning as defined in National Instrument 51-102 — Continuous Disclosure Obligations, which identifies and excludes certain activities as constituting solicitation — a notable exclusion being a public announcement of how a securityholder intends to vote.
DerivativesThe 2013 Proposals contemplated including “equity equivalent derivatives” for the purposes of determining when an early warning reporting obligation is triggered. The CSA’s intention behind this proposal was to provide greater transparency of potential “hidden ownership” positions through the use of derivatives. However, concerns were raised during the comment period that such inclusions would complicate the early warning regime, would create a significant compliance burden and would fail to recognize that certain investors use derivatives for risk management purposes or as part of a trading strategy rather than as a means to accumulate substantial economic positions without public disclosure.
After considering the comments, the CSA opted not to proceed with the 2013 Proposals relating to derivatives at this time. It did however provide guidance in National Policy 62-203 — Take-Over Bids and Issuer Bids indicating that certain derivative arrangements, in certain circumstances, will be subject to inclusion in the early warning threshold calculation. These circumstances namely include the situation where the investor has the ability to obtain the voting or equity securities or to direct the voting of voting securities held by any counterparties to the transaction.
SECURITIESPAGE 3
Key Conditions to Utilizing the Investment Dealer Exemption under ASC Rule 45-516The investment dealer exemption found in Section 4 of ASC Rule 45-516 is subject to the following conditions:• The issuer must be a reporting issuer in at least one jurisdiction
in Canada;• The issuer must be listed on either the TSX, TSX Venture
Exchange, Canadian Securities Exchange or Aequitas Neo Exchange Inc.;
• All timely and periodic disclosure documents must be filed in accordance with continuous disclosure requirements;
• The investor must obtain advice regarding the suitability of the investment from a registered investment dealer;
• The news release announcing the offering must: (i) describe the distribution in reasonable detail, including the number of securities to be distributed under the exemption and the use of proceeds; and (ii) include a statement that there is no material fact or material change about the issuer that has not been disclosed;
• Offerings can only consist of listed securities, a unit consisting of a listed security and a warrant to acquire another listed security or another security convertible into a listed security at the holder’s sole discretion;
• In Alberta, investors will be provided a statutory right of action under Part 17.01 of the Securities Act (Alberta). In British Columbia, Saskatchewan, Manitoba and New Brunswick, the investor must be provided with a contractual right of action in the event of a misrepresentation in the issuer’s continuous disclosure record regardless of whether the investor relied on the misrepresentation; and
IntroductionOn January 14, 2016, the securities regulatory authorities in each of British Columbia, Alberta, Saskatchewan, Manitoba and New Brunswick (collectively, the “Participating Jurisdictions”) adopted a new prospectus exemption that, subject to certain conditions, allows issuers listed on a Canada exchange to raise money by distributing securities to investors that have obtained advice about the suitability of the investment from an investment dealer. This exemption was adopted in Alberta by way of Alberta Securities Commission Rule 45-516 — Prospectus Exemptions for Retail Investors and Existing Security Holders (the “ASC Rule 45-516”), which also repeals Alberta Securities Commission Rule 45-513 — Exemption for Distribution to Existing Security Holders and consolidates the existing security holder exemption and investment dealer exemption into ASC Rule 45-516.
Prospectus Exemptions for Retail Investors and Existing Security Holders:Alberta Securities Commission Rule 45-516 By Jessica Brown and Jack Schroder
SECURITIESPAGE 4
• Although not required, if an issuer voluntarily provides an offering document, an investor will have certain rights of action in the event of misrepresentation.
Investment Dealer AdviceAn investor must receive suitability advice about the investment from a registered investment dealer. The exemption is not available if the dealer is an exempt market or restricted dealer. Dealers will need to assess an investment’s suitability based on a client’s unique financial situation, risk tolerance, and other relevant circumstances. This condition of the retail exemption is designed for investor protection, as the dealer must ensure the product is suitable for the investor taking into account the results of the know-your-client and know-your-product processes.
Key Conditions to Utilizing the Existing Security Holder Exemption under ASC Rule 45-516 The existing security holder exemption found in Section 3 of ASC Rule 45-516 is subject to the following conditions:• The issuer must be a reporting issuer in at least one
jurisdiction in Canada;• The issuer must be listed on either the TSX, TSX Venture
Exchange, Canadian Securities Exchange or Aequitas Neo Exchange Inc.;
• All timely and periodic disclosure documents must be filed in accordance with continuous disclosure requirements;
• The news release announcing the offering must: (i) describe the distribution in reasonable detail, including the number of securities to be distributed under the exemption and the use of proceeds; and (ii) describe how the issuer intends to allocate securities if the aggregate subscriptions under the proposed distribution exceed the maximum number of securities proposed to be offered;
• An issuer must permit each person or company who, as of the record date, held a listed security of the issuer which is the same as the listed security to be distributed to subscribe under the distribution;
• Offerings can only consist of listed securities or a unit consisting of a listed security and a warrant to acquire another listed security;
• The investor must represent in writing to the issuer that, on or before the record date, the investor acquired and continues to hold a listed security of the issuer;
• The issuer and any salesperson acting for the issuer in connection with the distribution must not have any reason to reasonably believe that the investor’s representation as to holding of the listed security is untrue;
• Unless the investor obtains advice regarding the suitability of the investment from an investment dealer, the aggregate acquisition cost of the securities purchased under the exemption, combined with costs of all other securities of the issuer acquired by the investor under the exemption in the last 12 months, does not exceed $15,000;
• In Alberta, investors will be provided a statutory right of action under Part 17.01 of the Securities Act (Alberta). In British Columbia, Saskatchewan, Manitoba and New Brunswick, the investor must be provided with a contractual right of action in the event of a misrepresentation in the issuer’s continuous disclosure record regardless of whether the investor relied on the misrepresentation; and
• Although not required, if an issuer voluntarily provides an offering document, an investor will have certain rights of action in the event of misrepresentation.
GeneralAn issuer relying on either of the exemptions in ASC Rule 45-516 must provide the following representations to each purchaser in the subscription agreement:1. The issuer’s “core documents” and “documents,” as those
terms are defined in Part 17.01 of the Securities Act (Alberta), do not contain a misrepresentation; and
2. There is no material fact or material change related to the issuer which has not been generally disclosed.
The first trade of securities issued under the exemptions will be subject to resale restrictions under Section 2.5 of National Instrument 45-102 — Resale of Securities. Issuers will be required to file a report of exempt distribution within 10 days utilizing either exemption under ASC Rule 45-516.
The retail exemption is only a prospectus exemption and there is no corresponding exemption from the dealer registration requirement. However, most issuers will not generally be required to register as a dealer as they are not in the business of trading securities.
Additionally, the exemptions under ASC Rule 45-516 are not available if the class of listed securities that are to be distributed have been suspended from trading for failure to comply with ongoing requirements of the applicable stock exchange.
This condition of the retail exemption is designed for investor protection, as the dealer must ensure the product is suitable for the investor taking into account the results of the know-your-client and know-your-product processes.
AMENDMENTS TO THE OFFERING MEMORANDUM EXEMPTION: National Instrument 45-106
By Shanlee von Vegesack
SECURITIESPAGE 5
BackgroundOn October 29, 2015, the securities regulatory authorities in Alberta, New Brunswick, Nova Scotia, Ontario, Québec and Saskatchewan (collectively, the “Participating Jurisdictions”) announced amendments to the offering memorandum prospectus exemption (the “OM Exemption”) in section 2.9 of National Instrument 45-106 — Prospectus Exemptions (“NI 45-106”). The amendments introduce the OM Exemption in Ontario and modify the existing OM Exemption in the other Participating Jurisdictions to provide new investor protection measures. The OM Exemption aims to allow issuers, particularly small and medium sized enterprises, to access capital from a wider range of investors than are accessible under other prospectus exemptions in a more cost-effective manner than filing a prospectus.
Key Features of the New OM ExemptionInvestment Limits: The Participating Jurisdictions have adopted the following investment limits that will apply to all securities acquired under the OM Exemption: • A non-individual investor is permitted
to invest an unlimited amount.• An individual investor who is an
“accredited investor” (as defined in NI 45-106 or under the Securities Act (Ontario), as applicable) or who qualifies under the family, friends and business associates prospectus exemption available under NI 45-106 is permitted to invest an unlimited amount.
• An individual who is an “eligible investor” (as defined in NI 45-106) is not permitted to purchase securities under the OM Exemption in excess of $30,000 in any 12 month period. This limit increases to $100,000 upon the individual eligible investor receiving suitability advice from a portfolio manager, investment dealer or exempt market dealer.
• An individual who is a non-eligible investor is not permitted to purchase securities under the OM Exemption in excess of $10,000 in any 12 month period.
As a result of the imposition of investment limits, amendments have been made to add two additional schedules to the required risk acknowledgement form accompanying an offering memorandum (Form 45-106F4). The new schedules require individuals to confirm their status (e.g. accredited investor, eligible investor, non-eligible or an investor who qualifies under the family, friend and business associates exemption) and confirm that they are within their applicable investment limits.
Additional Disclosure Obligations: Non-reporting issuers using the OM Exemption are required to provide: (i) audited annual financial statements to investors; and (ii) an accompanying annual notice (new Form 45-106F16) which describes how the money raised under the OM Exemption has been used. In New Brunswick, Nova Scotia and Ontario, non-reporting issuers are also required to provide notice (new
Form 45-106F17) to investors of: (i) a discontinuation of the issuer’s business; (ii) a change in the issuer’s industry; or (iii) a change of control of the issuer, within 10 days of such event occurring.
Marketing Materials: Marketing materials used in distributions under the OM Exemption must be incorporated by reference into the offering memorandum. This obligation will result in the marketing materials being subject to the same liability as the disclosure provided in the offering memorandum in the event of a misrepresentation.
Limitations: The OM Exemption is not available for distributions of specified derivatives or structured finance products. Additionally, investment funds in Ontario, Québec and New Brunswick are not allowed to use the OM Exemption. In Alberta, Nova Scotia and Saskatchewan, the OM Exemption will continue to be available to investment funds only if they are non-redeemable investment funds or mutual funds that are reporting issuers.
ImplementationThe amendments came into effect in Ontario on January 13, 2016 and will become effective in the other Participating Jurisdictions on April 30, 2016. Despite the delayed effective date in the other Participating Jurisdictions, issuers should bear in mind that they will be required to comply with all of the requirements of the OM Exemption in Ontario if they initiate a distribution or expand a distribution into Ontario before April 30, 2016.
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