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Current as of September 2014
The focus of securities regulation in Canada is disclosure of information on the one hand, and the regulation of market participants on the other.
Capital markets in Canada are highly regulated, primarily through provincial and territorial legislation. There is currently no federal securities regulator in Canada, although this has been subject to debate for a number of years. In the fall of 2013, the Federal Minister of Finance along with his counterparts from the Provinces of Ontario and British Columbia announced the creation of the Cooperative Capital Markets Regulators to be based in Toronto, Ontario, which is to take responsibility for overseeing common national rules. The Provinces of Saskatchewan and New Brunswick have subsequently announced that they will also participate in this initiative. The common regulator initiative is expected to be put into place during the summer of 2015.
Currently in Ontario, the Securities Act (Ontario) (OSA) governs the area and is supplemented by extensive regulations, regulatory rules and policies. There is also a relevant body of national and multilateral instruments, policy statements and other sources of regulation. Further securities rules and regulations may also be found in the listing rules and requirements of any securities exchange on which securities of an issuer may be listed, such as the Toronto Stock Exchange (the TSX) or the TSX Venture Exchange (the TSXV).
How are Securities Offered?
The Prospectus Requirement
As a general rule, the issuance of securities in Canada requires the filing with securities regulators and delivery to investors of a comprehensive disclosure document known as a prospectus. This document sets out detailed material disclosure relating to the issuer and the securities being issued and must be reviewed by the applicable Canadian securities regulators. A prospectus must contain full, true and plain disclosure about the securities and the issuer. The requirement to prepare a prospectus is, however, subject to certain statutory and discretionary exemptions (see below).
Unlike securities distributed under a prospectus exemptions, securities distributed under a prospectus are generally freely tradable. However, an issuer that files a final prospectus becomes a reporting issuer (i.e., a public company) and is subject to continuous disclosure obligations (see below).
In many provinces and territories, securities can be sold without providing a prospectus (the Prospectus Requirement) through the use of a statutory exemption. From an issuers perspective, reliance on an exemption from Prospectus Requirement is generally based upon an assessment of whether the securities can be successfully marketed to a limited number of investors who meet certain criteria that would make them eligible to acquire the securities without the need for a prospectus.
National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106) largely harmonizes prospectus
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exemptions across the various Provinces and Territories of Canada. The following outlines certain key exemptions provided by NI 45-106:
Private Issuer Exemption
The private issuer exemption is available to private companies that are closely held. It is a very useful exemption for start-ups. A private issuer will qualify as such if its securities are (i) subject to restrictions on transfer that are contained in the issuers constating documents or securities holder agreements; (ii) beneficially owned by not more than 50 persons (apart from current and former employees of the issuer and its affiliates); and (iii) has distributed securities only to specifically identified classes of investors who are persons that are not considered the public, including directors, officers, control persons, the family members and close business associates thereof, employees, existing securities holders and accredited investors.
Accredited Investor Exemption
This is the most popular exemption for private placement financings in Canada. Under the accredited investor exemption, a trade of securities of any value can be affected on an exempt basis if the purchaser is an accredited investor who purchases as principal. The accredited investor approach creates a laundry list of persons or entities that satisfy the notion of sophistication for specific reasons. The most notable types of accredited investor categories for individuals are based on high net financial assets or net income. The net financial asset test qualifies an individual as an accredited investor if individually or together with a spouse their financial assets (i.e., cash or securities) have an aggregate realizable value before taxes, net of any related liabilities, greater than $1 million. However, as an individuals principal residence is excluded from the definition of financial assets, the number of individuals who would qualify on the high net worth basis is likely to be few. Another category of accredited investor is an individual whose pre-tax annual income is greater than $200,000 in each of the two most recent years, or greater than $300,000 if combined with a spouses income in each of those years. To fall under this category, the investor (and the spouse, where applicable) must have a reasonable expectation of exceeding the same net income level in the current calendar year.
Employees, Executive Officers, Directors and Consultants
Distributions by an issuer, a control person of an issuer or related entity of an issuer to employees, executive officers, directors or consultants of such issuer or a related entity of the issuer will be exempt from the Prospectus Requirement if participation in the trade is voluntary (the employee, executive officer and director and consultant exemption).
The Prospectus Requirement does not apply to any distribution of securities conducted in connection with: (i) an amalgamation, merger, reorganization or arrangement under a statutory procedure; or (ii) the dissolution or winding-up of an issuer (the business combination and reorganization exemption). Trades may also be completed on an exempt basis in connection with amalgamations, mergers, reorganizations or arrangements that are: (i) described in an information circular that complies with National Instrument 51-102 Continuous Disclosure Obligations or a similar disclosure document that is delivered to each security holder whose approval is required; and (ii) approved by the securityholders.
NI 45-106 exempts any issue of securities pursuant to three-cornered amalgamations, as the business combination and reorganization exemption applies to a distribution made in connection with an amalgamation or merger done under a statutory procedure. Also, according to the companion policy, the business combination and reorganization exemption is available for all distributions of securities that are necessary to complete an exchangeable share transaction, even where such trades occur several months or years after the transaction.
The Prospectus Requirement will not apply in respect of distributions made in connection with a take-over bid or issuer bid.
Minimum Amount Exemption
The prospectus requirement does not apply to a distribution to a person if that person purchases as principal, the security has an acquisition cost to the purchaser of not less than $150,000 paid in cash at the time of the distribution, and the distribution is of a security of a single issuer. The exemption will not apply, however, to a distribution of a security of a person if the person was created, or is used, solely to purchase or hold securities in reliance on the exemption.
Resale of Securities Acquired under an Exempt Distribution
In many provinces, securities offered pursuant to exemptions from the Prospectus Requirement are subject to what is known as the closed system. The purpose of the closed system is to promote an acceptable level of disclosure for a prospective purchaser. The rules regarding the resale of securities sold pursuant to exemptions are found in National Instrument 45-102 Resale of Securities (NI 45-102), which has been adopted by all of the securities commissions in Canada. NI 45-102 provides that unless certain conditions are met, first trades of securities distributed under an exemption will be subject to the Prospectus Requirement. Depending on the nature of the exemption under which the securities were originally sold, the securities may be subject to a four-month restricted period from the date of distribution during which they cannot be traded without a further exemption. In addition, among other things, the issuer of the securities must be a reporting issuer at the time of the first trade as well as for a four-month period preceding the time of the first trade. Alternatively, depending on the nature of the exemption under which the securities were issued, the securities may be subject to a seasoning period, which requires that the issuer of the securities is a reporting issuer at the time of the first trade as well as for the four-month period preceding the time of the first trade. However, the seasoning period requirements do not require that the holder of the securities have held the securities for four months. It should be noted that the restricted period conditions will generally apply to most sales made pursuant to available prospectus and registration exemptions.
Continuous Disclosure Obligations for Public CompaniesA company that is a reporting issuer (i.e., a public company) or the equivalent in a province or territory of Canada is subject to ongoing disclosure requirements under securities laws known as continuous disclosure obligations.