Legal Updates

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Update

Wednesday, May 18, 2016

On April 7, 2016, the Canadian Securities Administrators (“CSA”) published Notice of Amendments to National Instrument 45-106 Prospectus Exemptions, including related changes to Companion Policy 45-106 Prospectus Exemptions (collectively, the “Amendments”). The Amendments introduce a new harmonized report of exempt distribution (the “New Report”) and significantly expand the disclosure that is currently required to be included when reporting on certain prospectus exempt distributions that occur in all CSA jurisdictions, other than British Columbia where certain of the new disclosure requirements are already in place. The New Report will replace the current Form 45-106F1 Report of Exempt Distribution (“Form 45-106F1”) applicable in all CSA jurisdictions, and Form 45-106F6 British Columbia Report of Exempt Distribution (“Form 45-106F6”, and together with Form 45-106F1, collectively, the “Previous Reports”).The Amendments in their initial draft form were originally published for comment on August 13, 2015 (the “Proposed Amendments”). Concurrently with the publishing of the Amendments, the CSA published Staff Notice 45-308 (Revised) Guidance for Preparing and Filing Reports of Exempt Distribution under National Instrument 45-106 Prospectus Exemptions to provide guidance on how to complete and file the New Report in the various CSA jurisdictions. 

The Amendments will come into force on June 30, 2016 (the “Effective Date”). All issuers other than investment fund issuers that report annually must file a New Report for any distribution that occurs on or after the Effective Date. For investment fund issuers that file annually, the New Report must be filed for any distribution that occurs on or after January 1, 2017, and such issuers have the option to file either a Previous Report(s) or a New Report for distributions that occur prior to this date.

Under the current regime, following the completion of certain prospectus exempt distributions, underwriters and issuers must file a report of exempt distribution providing disclosure with respect to the distribution. In all CSA jurisdictions except British Columbia this report is currently completed on Form 45-106F1, and in British Columbia the report is completed on Form 45-106F6. The disclosure required to be included in the Previous Reports differs and two separate forms must be completed and filed by issuers or underwriters if an applicable exempt distribution occurs in British Columbia and another CSA jurisdiction, creating a somewhat cumbersome process.  

The stated purpose of the Amendments is twofold: (1) to reduce the compliance burden for issuers and underwriters by having a harmonized report; and (2) to provide securities regulators with increased information relating to the Canadian exempt market in order to assist them with regulatory oversight of the regime.

Notwithstanding the stated objective of reducing the compliance burden for issuers and underwriters, the additional and detailed information required in the New Report compared with the Previous Reports may have the effect of increasing the complexity of and time required to complete the New Report, which in turn could increase expenses for certain issuers accessing the exempt market in Canada. In addition, there will continue to be some fragmentation between CSA jurisdictions with respect to the filing of the New Report. In all CSA jurisdictions, with the exception of Ontario and Quebec, the New Report must be filed on the System for Electronic Document Analysis and Retrieval (“SEDAR”); while in Ontario and Quebec, the New Report must be filed on each jurisdiction’s respective filing portal.

Key Amendments

Removal of Single Report Requirement

Under the current reporting rules, if a distribution is made in multiple jurisdictions, a single report of exempt distribution must be filed in each such jurisdiction identifying all purchasers, and as noted above if the distribution takes place in both British Columbia and another CSA jurisdiction, two different reports containing different information must be completed and filed. The Amendments will provide issuers and underwriters with the option to not file a single report and instead, file a separate report in each jurisdiction identifying only those purchasers residing in that jurisdiction. 

Increased Disclosure

The following are some of the many increased disclosure requirements under the Amendments:

  • SEDAR Profile: Certain amendments to National Instrument 13-101 System for Electronic Document Analysis and Retrieval (SEDAR), which come into force on May 24, 2016, will require the electronic filing of a report of exempt distribution on SEDAR for issuers that distribute securities in any CSA jurisdiction, except for Ontario and British Columbia. To aid in the analysis of exempt market activity, the Amendments will require any issuer that does not have a SEDAR profile and all investment fund issuers to include the following information in the filing of a New Report: (i) date of formation, (ii) financial year-end, (iii) jurisdiction where reporting, (iv) stock exchange listings, and (v) size of assets (for issuers only).

  • Number of Employees: Issuers will be required to choose from a list of four broad ranges of employee numbers. This information is intended to serve as a proxy for the size of the issuer.

  • NAV and Type of Fund: Investment fund issuers will be required to identify the type of fund they are and the net asset value of their fund.

  • Summary of Distribution: In addition to the requirement under the Previous Reports that for each jurisdiction where a purchaser resides, a summary of the number of purchasers and dollar amounts raised be provided, the New Report will require a summary of each exemption relied on in each such jurisdiction (if in Canada) and the exemption relied on in Canada if the purchaser resides in a foreign jurisdiction. 
  • Information About Directors, Executive Officers and Promoters: The Amendments require the inclusion of the following information, currently already required under Form 45-106F6, pertaining to the directors, executive officers and promoters of certain issuers: (i) name, (ii) title, and (iii) province, state or country of residence. If the promoter is not an individual, then such information must be provided for each director and executive officer of the promoter. This information is intended to allow regulators to ascertain connections between issuers. Such information will not be required from investment fund issuers, reporting issuers and their wholly owned subsidiaries, foreign public issuers and their wholly owned subsidiaries, and issuers distributing eligible foreign securities only to permitted clients (collectively, “Exempt Issuers”). 

Schedules to the New Report

The CSA have also developed two spreedsheet templates which are required to be attached as separate schedules to the New Report. While these schedules will not be available to the public, the Amendments acknowledge that freedom of information legislation may require regulators to disclose the schedules if validly requested under such legislation. Schedule 1 requires confidential information relating to the purchasers in the distribution including the specific exemption relied on to acquire the securities and the specific person being compensated for the distribution made to each purchaser.

Schedule 2 requires confidential information relating to directors, executive officers, promoters and control persons of the issuer including full residential addresses and the name and location of control persons that are not individuals. This information will not be required for Exempt Issuers.

Conclusion

The additional information required to complete the New Report will materially increase the time and costs associated with filing reports for exempt distributions. The additional costs involved will be borne by issuers accessing the Canadian exempt market, some of which are start-up or early stage private companies who are least able to absorb additional financing costs.

The CSA received many comments in response to the Proposed Amendments regarding the difficulty many issuers will face in completing and filing the New Report, particularly small and early stage companies with fewer resources than large public companies. Having received and acknowledged such comments, the CSA published the Amendments with only minimal changes made to the initial Proposed Amendments. This suggests that, in the CSA’s view, the additional costs faced by issuers in complying with the expanded disclosure obligations under the New Report, are outweighed by the benefit the CSA will receive in being able to compile additional information relating to the Canadian exempt market industry as a whole, with a view to developing policy to better address their needs as well as to better monitor issuers and investors to ensure compliance with prospectus exempt distributions.

An additional area of concern noted by many stakeholders in response to the Proposed Amendments is that the disclosure of certain information required by the New Report (including the number of employees of an issuer and the size of its assets) is commercially sensitive information which as a result may deter some issuers from participating in the exempt market. Such disclosure may be of particular concern to start-up or early stage private companies which have limited, if any, operational and financial information published and available for public consumption.

As a practical note, legal counsel to issuers and underwriters will be well advised to understand what additional information will need to be gathered from investors, the issuer and its directors, officers, insiders and promoters in order to complete and file the New Report on time, given that the time frame within which the New Report must be filed following a distribution has not been extended (i.e., it is still within 10 days of the distribution date).

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us