Revised rule for securities distributions outside of Canada

Finance

Securities and Corporate Finance Alert

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On June 29, 2017, the Ontario Securities Commission published for comment a revised OSC Rule 72-503 Distributions Outside Canada and its proposed Companion Policy (collectively, the “Revised Rule”). The comment period for the Revised Rule expired on September 27, 2017. The Revised Rule has been published in response to comments received on the original proposed rule, published for comment on June 30, 2016 (the “Original Proposed Rule”), as well as proposed amendments to the resale provisions in National Instrument 45-102 Resale of Securities.

For further information on the Original Proposed Rule, please see the previous DLA Piper (Canada) LLP alert here.

Some of the proposed changes in the Revised Rule to the Original Proposed Rule are the following:

  • Removal of the resale rules. The Original Proposed Rule contained provisions clarifying that the first trade of a security made under a distribution to security holders outside of Canada, which distribution was made in compliance with the securities law requirements of the jurisdiction outside of Canada, would be a distribution unless (a) the trade was with a person or company outside of Canada or (b) the issuer was a reporting issuer in Canada for the four months preceding the trade and at least four months have elapsed from the distribution. However, the OSC removed these provisions in an effort to harmonize the Revised Rule with proposed amendments to National Instrument 45-102 Resale of Securities and its companion policy, which were published after the Original Proposed Rule.
  • Insertion of anti-avoidance provisions. The OSC has added an anti-avoidance provision in the Revised Rule clarifying that the prospectus exemptions are not available as part of a plan or scheme to circumvent the prospectus requirements in connection with a distribution to a person in Canada.
  • Insertion of materiality qualifier to compliance requirements. In the comments on the Original Proposed Rule received by the OSC, some commentators noted the condition requiring issuers to comply with foreign securities laws as part of the prospectus exemption for distributions outside of Ontario as being overly burdensome. While the OSC added a materiality qualifier to the compliance requirement in an effort to ensure minor and technical breaches would not result in the unavailability of the prospectus exemptions for such distributions, the OSC has indicated that material non-compliance with foreign securities laws undermines an important rationale for the prospectus exemptions – that the distribution will be exempt from prospectus requirements precisely because the OSC expects a purchaser outside of Canada to be relying on the protections of the securities laws of the foreign jurisdiction in which the purchaser is located, making compliance with the securities laws of Ontario duplicative. The guidance in the draft companion policy indicates that the materiality qualification will be met if reasonable steps have been taken to ensure the distribution is effected in accordance with the securities laws of the foreign jurisdiction. No further description of what steps may be reasonable is provided. The OSC will continue to assert its jurisdiction where it becomes aware of conduct in Ontario that may bring the reputation of Ontario’s capital markets into disrepute.
  • New exemption to dealer registration requirements for issuers. With respect to exemptions from the dealer registration requirements, the OSC has also added a dealer registration exemption for issuers in relation to distribution of securities outside of Canada if: (a) the trade is made through or to a person or company that is relying on the exemption from the dealer registration requirements in the Revised Rule or another exemption from registration under Ontario securities laws; or (b) the trade is made in accordance with the dealer and underwriter registration requirements of the investor’s jurisdiction and the issuer is not otherwise registered in any jurisdiction in Canada in the category of a dealer. This addition was made to address the concern that some activities, such as frequent offerings, which make it appear as though the issuer is in the business of trading, may cause issuers to become subject to the dealer registration requirements of Ontario securities laws.
  • Expansion of designated foreign jurisdiction concept. The concept of the designated foreign jurisdiction has been expanded to include any other member country in the European Union and has been re-named as “Specified Foreign Jurisdiction”. This is relevant for the exemption regarding distributions in a foreign jurisdiction with a foreign public offering document, as well as the exemption from the dealer and underwriter registration requirements.
  • Removal of requirement to be a reporting issuer for four months preceding the distribution. The requirement to be a reporting issuer for four months preceding the distribution of securities before being able to take advantage of the distribution by reporting issuers exemption has been removed. The requirement is now that the issuer be a reporting issuer in a jurisdiction of Canada immediately preceding such distribution.
  • Changes relating to obligations related to determining the location of the purchaser. In response to various concerns expressed by commentators about the issuer’s or other selling security holder’s obligation to determine that a distribution is in fact occurring outside of Canada, the OSC made the following changes:
    • Added a provision stating that for the purposes of using the prospectus exemption in the Revised Rule, a distribution made on or through the facilities of an exchange or market outside of Canada is a distribution to a person outside of Canada if neither the seller nor any person acting on its behalf has reason to believe that the distribution has been pre-arranged with a buyer.
    • Added guidance in the draft companion policy to the Revised Rule that a selling security holder will meet the requirement that the sale be to “a person or company outside of Canada” if the issuer or selling security holder has no knowledge, and no reason to believe, that the purchaser is a person or company resident in Canada.
    • Added a list of examples in the draft companion policy to the Revised Rule of reasonable steps an issuer or selling security holder should take to ensure that the securities “come to rest” outside of Canada.

Conclusion

As explained in our previous alert, the purpose of the Revised Rule is to replace the OSC’s longstanding Interpretation Note 1 Distributions of Securities Outside of Ontario, in order to provide greater certainty and improved and updated interpretive guidance in relation to cross-border securities distributions. In general, it appears the revisions in the Revised Rule have been made to further clarify the OSC’s views regarding such distributions.

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 have any questions about this bulletin or if you would like further information about these topics, please contact the authors.