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Update

Friday, February 19, 2021

Introduction

In January 2021, the Province of Ontario’s Capital Markets Modernization Taskforce (the “Taskforce”) published its final report (the “Final Report”) with a main objective of amplifying growth and competitiveness in Ontario’s capital markets. The Final Report was published after receiving over 130 written submissions and speaking with multiple industry stakeholders. In late 2019, the Ontario government announced a review of Ontario’s capital markets regulatory framework, noting the 17-year absence since a similar review had been undertaken (i.e., the 2003 Crawford Committee Report) and established the Taskforce in February 2020. On July 9, 2020, the Taskforce delivered 47 “high impact” policy proposals in its consultation report (the “Consultation Report”). Please refer to our previous update for a summary of the Consultation Report.

Expanding on the Consultation Report, the Final Report contains over 70 “consequential recommendations” in six categories related to capital markets:

  1. Improving Regulatory Structure
  2. Regulation as a Competitive Advantage
  3. Ensuring a Level Playing Field
  4. Proxy System, Corporate Governance and Mergers and Acquisitions
  5. Fostering Innovation
  6. Modernizing Enforcement

In keeping with the business law services that Wildeboer Dellelce LLP delivers to its clients, this legal update focuses on the most consequential recommendations proposed in the Final Report in the following categories:

  1. Regulation as a Competitive Advantage
  2. Ensuring a Level Playing Field
  3. Proxy System, Corporate Governance and Mergers and Acquisitions
  4. Fostering Innovation

Background

As an introduction to the recommendations in the Final Report, the Taskforce provided high-level background information concerning:

  • the importance of the public markets;
  • the decline of the primary markets;
  • the rise of the private markets;
  • the explosion in Exempt Market activities;
  • the decline in active independent investment dealers;
  • the need for non-financial institution sponsored investment products;
  • the role of competition and innovation;
  • increased investor interest in Environmental, Social and Governance (“ESG”) factors;
  • progress (or the lack thereof) in achieving diversity;
  • the increase in shareholder activism;
  • the need for enhanced enforcement and investor protection;
  • COVID-19 pandemic impacts on the markets; and
  • the interrelationship between the Final Report and the Capital Markets Regulatory System (CCMR) initiative.

Regulation as a Competitive Advantage

The most consequential proposals under this category are:

  • Reduced hold period of 30 days (currently 120 days) on securities distributed under the accredited investor prospectus exemption by any reporting issuer with a continuous disclosure record of at least 12 months after filing a final prospectus or a filing statement. This recommendation applies to issuers that developed an adequate disclosure record after their initial prospectus disclosure.
  • Option to file semi-annual financial statement to reporting issuers who meet the following requirements: (i) developed a disclosure record of at least 12 months after obtaining a receipt for a final prospectus or filing a filing statement; (ii) have annual revenue below $10 million; and (iii) have not been in default of their continuous disclosure obligation.
  • A deal registration “safe harbour” should be created to exempt issuers and associated persons, allowing issuers to engage in certain permitted investor relations activities without requiring registration.
  • An alternative offering model prospectus exemption should be created for issuers to raise capital based on their continuous disclosure record and a short offering document. The exemption would include conditions such as: (i) requiring the issuer to have a continuous disclosure record of 12 months; (ii) having the offering subject to an annual maximum; and (iii) requiring the filing of a short disclosure document updating the issuer’s public record.
  • A finder registration category should be introduced to lessen the burden on capital finders who, under current securities law, must register as exempt market dealers. Additionally, the Securities Act (Ontario) should be amended to update the definition of a “promoter” to resolve uncertainty for market participants during prospectus reviews.
  • Changes to the pre-marketing prohibitions to allow reporting issuers to pre-market transactions to institutional accredited investors in order to gauge demand for a public offering prior to filing a preliminary prospectus.
  • Electronic or digital delivery should be adopted in relation to documents mandated under securities laws and for all other documents received by investors.
  • Reporting and regulatory requirements should be consolidated, for example: (i) the form requirements for the annual information form, management’s discussion and analysis (MD&A) and financial statements should be combined; (ii) streamlining material change reporting by allowing the issuer to file a news release containing the required information about the material change; and (iii) combining the simplified prospectus and annual information form into one disclosure document.
  • The Ontario Securities Commission (“OSC”) and the TMX Group should allow exempt market dealers to act as “selling group members” in the distribution of securities made under a prospectus offering, including initial public offerings and prospectus offerings in connection with a qualifying transaction.
  • The accredited investor definition should be expanded to include individuals who have passed relevant investment proficiency requirements, including the Canadian Securities Course Exam, the Exempt Market Products Exam, or the CFA Charter.
  • The OSC should adopt a rule prohibiting market participants and investors who have previously sold short securities of the same type as offered under a prospectus or private placement from acquiring securities under the prospectus or private placement.
  • The OSC should work with the Investment Industry Regulatory Organization of Canada (“IIROC”) to review sections of the standard uniform subordinated loan agreement to assess if removing the prioritization of claims by banks is warranted or if other lenders should also receive this prioritization when they lend.
  • Statutory liability of a misrepresentation in an offering memorandum should also apply to key actors who are responsible for the issuer’s disclosure, such as directors, promoters, influential persons and experts.
  • The OSC should receive powers to designate novel products as securities or derivatives, including various forms of innovative arrangements and agreements including crypto assets.

Ensuring a Level Playing Field

The most consequential proposals under this category are:

  • Legislative amendments be made to prohibit registrants from providing capital market services under certain circumstances because of an exclusivity arrangement. The goal is to restrict the ability of commercial lenders to require their clients to retain the services of affiliated investment dealers for their capital raising and advisory needs as a condition of commercial lending transactions. The recommendation includes: (i) enhancing the requirements of National Instrument 31-13; (ii) attestation by a senior officer of the registrant; (iii) amendments to National Instrument 33-105; and (iv) a ban on restrictive clauses in engagement letters.
  • Measures be taken to help ensure that conflicts of interest relating to product shelf development are addressed in the best interest of a client. Particularly, the Taskforce supports the OSC’s Conflicts of Interest Requirements initiative ensuring dealers offer independent products in addition to products sponsored by related financial institutions.
  • Ontario securities legislation be amended to require reporting issuers to set their own board and management diversity targets and timelines, annually provide data in relation to representation and adopt written policies regarding the director nomination process. The Taskforce further recommends that diversity should be similarly represented at the board and executive level of the OSC.
  • The OSC establish a “retail private equity investment fund proposal” for public input to incorporate best practices in private equity investing and advantages of the retail investment fund model to provide retail investors with access to private equity type investments.

Proxy System, Corporate Governance and Mergers & Acquisitions

The most consequential proposals under this category are:

  • A securities regulatory framework for proxy advisory firms (“PAFs”) be introduced to ensure institutional clients are provided with both the issuer’s perspective and the PAF’s recommendation report. The Taskforce recommends that this regulatory framework include: (i) a statutory right for the issuer to rebut a PAF’s recommendation; (ii) a mechanism to address conflicts of interest between PAFs, their clients and issuers; and (iii) a requirement that issuers intending to rebut a PAF recommendation file a management information circular at least 30 days before the date of a meeting.
  • Decreasing the shareholder reporting (“early warning”) threshold in Ontario from 10% to 5% for non-passive investors.
  • Mandating the disclosure of material ESG information for issuers through regulatory filing requirements of the OSC.
  • Adoption of universal proxy ballots that would list the director nominees of the company or any dissidents and allow shareholders to vote for a combination of nominees in contested meetings.
  • The OSC be granted new remedies in relation to control contests and similar transactions. The Taskforce further recommends that the private issuer take-over bid exemption be modernized by increasing the restriction on the maximum number of arm’s-length security holders of the target to 300.
  • The OSC provide guidance on its intention to use its public interest authority regarding empty voting at public company shareholder meetings, especially in connection with securities lending arrangements.
  • Reporting issuers be able to obtain the identities and holdings of all beneficial owners of their securities as of September 1, 2022.
  • Amendments should be proposed regarding Form 51-102F6 – Statement of Executive Compensation to standardize disclosure of securities-based compensation in a reporting issuer’s information circular, including share-based share and option awards and the value that officers or directors receive through exercising options.
  • Adding requirements to securities law regarding (i) annual director elections, (ii) individual director voting, and (iii) majority voting of directors. The proposed majority voting requirement would only apply in cases of uncontested director elections and be subject to certain exemptions.

Fostering Innovation

Finally, the most consequential proposals under this category are:

  • An “Ontario Regulatory Sandbox” be created to allow companies with innovative business models to test new financial services, products and delivery mechanisms in the real market with consumers.
  • The OSC’s Office of Economic Growth and Innovation (“Innovation Office”) place a primary focus on facilitating economic growth and innovation. The Taskforce suggests that this may be achieved by expanding the Innovation Office’s services to include in-depth engagement with certain market participants, developing educational resources for early-stage companies and considering how automated compliance tools may be implemented.
  • The OSC work with market participants and federal regulators to consider developing an open data framework to assist businesses in providing new products and services.
  • The OSC modernize certain rules to support early-stage financing of start-ups that can be undertaken by angel groups. The Taskforce suggests that this can be achieved by amending current registration requirements to allow angel groups to work with their accredited investor members to facilitate investments in early-stage companies.
  • The Canadian Securities Administrators (“CSA”) undertake a formal public consultation regarding the distribution of, and access to, equities market data focusing on: (i) a model of market data availability that promotes fair and cost-effective access to individual marketplaces and consolidated information; (ii) availability of timely and reasonably priced consolidated data; and (iii) promoting fair competition among marketplaces and users to reduce barriers to competition among exchanges.
  • The OSC review the impacts of marketplace outages with emphasis being placed on the impact to retail investors resulting from such market outages.

Conclusions

In those areas entirely within the Province of Ontario’s control, it can be expected that steps will be taken quickly to implement recommendations in the Final Report. In other areas where cooperation with the federal government or the CSA is required, it can be expected that slower progress will be made.

If you have any questions with respect to the matters discussed above, please contact Ron Schwass (rschwass@wildlaw.ca), Brendan Wu (bwu@wildlaw.ca), Nick Robelek (nrobelek@wildlaw.ca) or any other member of Wildeboer Dellelce LLP.

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.