Prospectus Exemption for Certain Distributions through an Investment Dealer |
January 14, 2016
Introduction
The securities regulatory authorities in British Columbia, Alberta, Saskatchewan, Manitoba and New Brunswick (the participating jurisdictions or we) are each adopting a prospectus exemption (exemption) that, subject to certain conditions, allows issuers listed on a Canadian exchange to raise money by distributing securities to investors who have obtained advice about the suitability of the investment from an investment dealer.
The participating jurisdictions have adopted the exemption by way of
- BC Instrument 45-536 Exemption from
prospectus requirement
for certain distributions through an investment dealer in British Columbia; - General Order 45-930 Exemption from
prospectus requirement
for certain distributions through an investment dealer in Saskatchewan; - Blanket Order 45-503 Exemption from
prospectus requirement
for certain distributions through an investment dealer in Manitoba; - Blanket Order 45-508 Exemption from the Prospectus Requirement for Certain Distributions through an Investment Dealer in New Brunswick; and
- Alberta Securities Commission Rule 45-516 Prospectus Exemptions for Retail Investors and Existing Security Holders in Alberta (Alberta rule).
The exemption will be effective in each participating jurisdiction concurrently with, or as soon as possible after, this notice. Each participating jurisdiction has attached their form of exemption as Annex A to this notice.
The Alberta rule also repeals ASC Rule 45-513 Exemption for Distribution to Existing Security Holders consolidating the existing security holder exemption (ESE) and the exemption in a single rule.
Substance and purpose
The purpose of the exemption is to facilitate capital raising for listed issuers and foster participation of retail investors in private placements, while maintaining appropriate investor protection.
The exemption permits listed issuers to issue listed securities to an investor that has obtained advice about the suitability of the investment from an investment dealer, subject to a number of conditions. The key conditions are:
- the issuer must be a reporting issuer in at least one jurisdiction of Canada and have a class of equity securities listed on the Toronto Stock Exchange, the TSX Venture Exchange, the Canadian Securities Exchange or Aequitas Neo Exchange Inc.;
- the issuer must have filed all timely and periodic disclosure documents as required under the continuous disclosure requirements in our securities legislation;
- the offering can consist only of a listed security, 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 security holder’s sole discretion;
- the news release announcing the offering must
- disclose, in reasonable detail, the distribution, including use of proceeds, and any material fact not yet generally disclosed, and
- include a statement that there is no material fact or material change about the issuer that has not been generally disclosed;
- the investor must obtain advice regarding the suitability of the investment from an investment dealer;
- 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. In Alberta, purchasers are afforded a statutory right of action under Part 17.01 of the Securities Act (Alberta); and
- although an offering document is not required, if an issuer voluntarily provides one, an investor will have certain rights of action in the event of a misrepresentation in it.
The first trade of securities issued under the exemption will be subject to resale restrictions under section 2.5 of National Instrument 45-102 Resale of Securities like most other capital raising prospectus exemptions. In addition, issuers will have to file a report of exempt distribution within 10 days after each distribution under the exemption.
This is only an exemption from the prospectus requirement. There is no corresponding exemption from the dealer registration requirement. In general, issuers with an active non-securities business do not have to register as a dealer because they are not in the business of trading. See the guidance in Companion Policy 31-103 CP Registration Requirements, Exemptions and Ongoing Registrant Obligations.
Background
The securities regulatory authorities in British Columbia, New Brunswick and Saskatchewan published the exemption for comment on April 16, 2015 (the April publication). For additional background on the exemption, please refer to the notice we published on April 16, 2015.
The Alberta Securities Commission published the exemption for comment on September 10, 2015 (the September publication). For additional background on the Alberta rule, please refer to the notice published on September 10, 2015.
Summary of written comments received by the participating jurisdictions
The comment period for the April publication ended June 15, 2015. Submissions from 231 commenters were received.
The comment period for the September publication ended November 9, 2015. Submissions from six commenters were received.
We considered the comments received and thank all of the commenters for their input. The list of commenters for the April publication is in Annex B to this notice and a summary of comments for the April publication is contained in Annex C to this notice. The list of commenters and a summary of comments for the September publication is contained in Annex D to this notice.
The comment letters on the September publication can be viewed on the Alberta Securities Commission website at www.albertasecurities.com. They are attached to the notice of the September publication.
Summary of changes to the proposal
After considering the comments, we did not make any material changes to the exemption.
Annexes
A. Form of exemption in local jurisdiction
B. List of commenters on the April publication
C. Summary of comments received on the April publication
D. List of commenters and summary of comments received on the September publication
Questions
Please refer your questions to any of the following:
Leslie Rose
Senior, Legal Counsel, Corporate Finance
British Columbia Securities Commission
Telephone: 604-899-6654
Larissa Streu
Senior Legal Counsel, Corporate Finance
British Columbia Securities Commission
Telephone: 604-899-6888
Elliott Mak
Senior Legal Counsel, Corporate Finance
British Columbia Securities Commission
Telephone: 604-899-6501
Christopher Peng
Legal Counsel, Corporate Finance
Alberta Securities Commission
Telephone: 403-297-4230
Tony Herdzik
Deputy Director, Corporate Finance, Securities Division
Financial and Consumer Affairs Authority of Saskatchewan
Telephone: 306-787-5849
Chris Besko
Director, General Counsel
The Manitoba Securities Commission
Telephone: 204-945-2561
Chris.Besko@gov.mb.ca
Ella-Jane Loomis
Legal Counsel, Securities
Financial and Consumer Services Commission (New Brunswick)
Telephone: 506-658-2602
Annex A
THE SECURITIES ACT |
) |
Order No. 7274 |
|
) |
|
Section 20(1) |
) |
January 14, 2016 |
Blanket Order 45-503
Exemption from prospectus requirement
for certain trades through an investment dealer
WHEREAS:
(A) Staff has applied to The Manitoba Securities Commission (the “Commission”) for and order under subsection 20(1) of The Securities Act, R.S.M. 1988 c. S50 (the “Act”) to exempt from the prospectus requirements certain trades in listed securities where the purchaser makes the trade through an investment dealer registered under the Act on certain terms and conditions as set out below;
(B) Terms defined in National Instrument 14‑101 Definitions have the same meaning in this order.
(C) In this order
“investment dealer” has the same meaning as in section 1.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations;
“listed security” means a class of equity security of an
issuer listed on the TSX Venture Exchange, the Toronto Stock Exchange, the
Canadian Securities Exchange, or Aequitas Neo Exchange Inc.;
“offering material” means a document purporting to describe the business and
affairs of an issuer that has been prepared primarily for delivery to and
review by a prospective purchaser so as to assist the prospective purchaser to
make an investment decision in respect of securities being sold in a
distribution under this Instrument;
“offering news release” means the news release of an issuer announcing its intention to conduct a distribution under this Instrument.;
(D) The Commission is of the opinion that it is in the public interest to make this order.
IT IS ORDERED:
1.
THAT, pursuant to subsection
20(1) of the Act, a trade by an issuer of a security of its own issue that
would be a primary distribution to the public is exempt from the prospectus
requirement if all of the following conditions are met:
(a)
the
issuer is a reporting issuer in at least one jurisdiction of Canada;
(b)
the
issuer’s equity securities are listed for trading on the TSX Venture Exchange,
the Toronto Stock Exchange, the Canadian Securities Exchange or Aequitas Neo
Exchange Inc.;
(c)
the
issuer has filed in each jurisdiction of Canada in which it is a reporting
issuer all periodic and timely disclosure documents that it is required to have
filed in that jurisdiction as required by each of the following:
(i)
applicable
securities legislation,
(ii)
an
order issued by the regulator or securities regulatory authority,
(iii)
an
undertaking to the regulator or securities regulatory authority;
(d) the issuer has issued and filed the offering news release as set out in section 2;
(e)
the
distribution is of a listed security, a unit consisting of a listed security
and a warrant, or a security convertible into a listed security at the security
holder’s sole discretion;
(f)
the
purchaser purchases the security as principal;
(g) the purchaser has obtained advice regarding the suitability of the investment and, if the person is resident in a jurisdiction of Canada, that advice has been obtained from a person that is registered as an investment dealer in the jurisdiction;
(h) the purchaser and the issuer enter into a subscription agreement that contains the conditions set out in sections 3 and 4; and
(i) the issuer complies with sections 5 and 7.
2. The offering news release must include
(a) reasonable detail of the proposed distribution and proposed use of gross proceeds including:
(i) the minimum and maximum number of securities proposed to be distributed and the minimum and maximum aggregate gross proceeds of the distribution; and
(ii) a description of the principal purposes, with approximate amounts, for which the issuer will use the gross proceeds, assuming both the minimum and maximum offering;
(b) disclosure of any material fact about the issuer that has not been generally disclosed; and
(c) a statement that there is no material fact or material change about the issuer that has not been generally disclosed.
3.
The
subscription agreement between the issuer and purchaser must contain a
contractual right of action against the issuer for rescission or damages that
(a)
is
available to the purchaser if a document or core document, each as defined in
section 174 of the Act, contains a misrepresentation that was not corrected
before the purchaser acquires a security under this exemption, without regard
to whether the purchaser relied on the misrepresentation;
(b)
is
enforceable by the purchaser delivering a notice to the issuer
(i)
in the
case of an action for rescission, within 180 days after the purchaser signs the
agreement to purchase the security, or
(ii)
in the
case of an action for damages, before the earlier of
(A)
180
days after the purchaser first has knowledge of the facts giving rise to the
cause of action, or
(B)
3 years
after the date the purchaser signs the agreement to purchase the security;
(c)
is
subject to the defence that the purchaser had knowledge of the
misrepresentation;
(d)
in the
case of an action for damages, provides that the amount recoverable
(i)
must
not exceed the price at which the security was offered, and
(ii)
does
not include all or any part of the damages that the issuer proves does not
represent the depreciation in value of the security resulting from the misrepresentation;
and
(e) is in addition to, and does not detract from, any other right of the purchaser.
4.
The issuer must represent each of the following to the purchaser in
the subscription agreement:
(a)
the
issuer’s “documents” and “core documents”, each as defined in section 174 of
the Act, do not contain a misrepresentation;
(b)
there
is no material fact or material change related to the issuer that has not been
generally disclosed.
5. Other than the subscription agreement, any offering material provided to a purchaser in connection with a distribution under this Instrument must be filed with the regulator or securities regulatory authority no later than the day that the material was first provided to a purchaser.
Resale restrictions
6. The first trade of a security acquired under this Instrument is subject to section 2.5 of National instrument 45-102 Resale of Securities.
Report of exempt distribution
7. An issuer that distributes a security under this Instrument must file a report with the Commission in Form 45-106F1 no later than the 10th day after the distribution.
Effective date
8. This order comes into effect on January 14, 2016.
BY ORDER OF THE COMMISSION
"Chris Besko"
Director
Annex B
List of Commenters
Peter Bacsalmasi |
David Kearnes |
Ian Frame |
Lyle McLellan |
Darrin Hopkins |
Alan Tam |
PI Financial Corp. |
Payton Nyguvest |
W. Brent Walker |
C. Michael O’Brian |
Young Xiao |
Mark Redcliffe |
Shane Parhar |
Fiore Financial Corporation |
Edward Bodnarkchuk |
Randy Hildebrandt |
Brodie Dunlop |
Andrew MacGillivray |
Mike Dunlop |
Shawn Rutledge |
Donna McPherson |
Bill Whitehead |
Todd Eymann |
Elsie Emes |
Anthony Fierro |
Gerry Thompson |
Arlene Barkun Cain |
Bryan Henry |
Mark DeCotiis |
Michael A. Cochran |
Paul Vining |
John Eymann |
Mike Marosits |
Justin Hayek |
Steve Wright |
Gary Winters |
Bruce Winfield |
Jordan Trimble |
John R. Nelson |
Devinder Randhawa |
Norman Epp |
Tupper Jonsson & Yeadon |
David Garnett |
Erica Tso |
Ivano Veschini |
Tom Cunningham |
Trish Hodgson |
Kevin Guichon |
Jim Pettit |
Don Mosher |
Donald C. Huston |
Brian E. Sims |
Robert A. Sim |
The Canadian Advocacy Council for Canadian CFA Institute Societies |
Wayne Workun |
Catherine McLeod-Seltzer |
Roy Fong |
Aaron Plaxton |
Kyle Welder |
Jeff Willis |
Thomas Relling |
Bernard Leroux |
Gary Bogdanovich |
Michael Bebek |
Investment Industry Association of Canada |
Lee S. Tupper P.L .C. |
Aaron Pauliuk |
Adam Garvin |
Wolverton Securities Ltd. |
FAIR (Canadian Foundation for Advancement of Investor Rights) |
Carlo Aiello |
Marion L. Andrus |
Alex Balfour |
Delia Barbosa |
Chan Buckland |
Robert Caie |
John Coletta |
Len Cuthbert |
Robert Disbrow |
Enrico Giustra |
John K. Jarvis |
Jonathan Jones |
C. Keefer Pitfield |
John Kirk |
Alison Lam |
Kyla Lucey |
Jack Masciangelo |
Stephen Meyer |
Lorna Mountford |
Gary McDonald |
Chris O’Connor |
Michelle Parker |
Madeleine Radford |
Carlo K. Rahal |
Paul Saks |
Robert J. Sheppard |
Eric Savics |
Tor Schmidt |
Tammy Tang |
Martin Tielker |
Randal Van Eijnsbergen |
Frank Zargar |
Danny Ochoa |
Ardem Keshishian |
Caleb Chan |
Kai-Chen Yang |
Richard Forsely |
E. (Rick) Paolone |
Riley Skinner |
Robert Bryce |
Stephanie Weterings |
John Wheeler |
Tara Hassan |
Todd Gibson |
Antonio Misliarese |
Andrew Schneitzer |
Mark T. McGinnis |
Ted Parker |
Andrew Grimett |
Cale Balfour |
Colette Wood |
Getz Prince Wells LLP |
William Trimble |
Duncan W. Boggs |
Erroll Wong |
John MacPhaul |
Brock Daem |
Ian Worobetz |
Boughton Law Corporation |
David Taylor |
Jennifer Taylor |
Christy de Cilloniz |
Dundee Goodman Private Wealth/Dundee Securities Ltd. |
Brian Fast |
Sean O’Neill |
Candace Mordy |
Shayne Nyguvest |
Fran Amato |
Elaine Anderson |
Brock Bradford |
Bruce Buckland |
Robert Blanchard |
Stephen Bell |
Donny Crodick |
Sue Derakhshan |
Corinne Elliott |
David Elliott |
Dale Eckert |
Nelson Forward |
Shalini Fowler |
Tim Ferrit |
Kevin Gould |
Fred Hofman |
Lorinda Hoyen |
Peter Irvine |
Pauline Alison Kemp |
Jason Knoblauch |
David Lyall |
Alan Manzie |
Daniel Matwell |
J. McDermid |
Murray McInnes |
Grant McDonald |
Steve McKee |
Kyle McLean |
Richard Newbury |
Tim O’Neill |
Chris Owen |
Peter J. Ross |
A. Rugyin |
Ryan Steuart |
Kerry Smith |
Sonia F. Sheehan |
David Sangster |
Cindy Shoenhaar |
William Smith |
Sandra Todd |
John Tognetti |
John Van Stekelenburg |
Rob Watts |
Haywood Securities Inc. |
Prospectors & Developers Association |
Marcelin O’Neill |
Michael Pound |
TMX |
Otto Folplement |
Manfred Kurschner |
Danny L. Yea |
Hari Varshney |
Mervyn Pinto |
Reid Anderson |
Nasm Siu |
Tony Frakel |
Alex Wong |
Joseph Bonvillain |
V.A. Tanaka |
Paul Reinhart |
Larry Timlick |
Eric Sloan |
Chris McKenzie |
Ioanna Tsitos |
Jeremy Poirier |
Roy McLaughlin |
Sean Kelly |
Taylor Duncan-Barr |
Tim Fennback |
P. Walsh |
Larry Martin |
GB Minerals |
Mark A. Smith |
Thomas Schuster |
Collin Kris |
Sukh Athwal |
Geoff Balderson |
Ryan Johnson |
Michael Lum |
Alden Aumann |
Santo Sidhu |
R. Shore |
Joseph Ng |
Peter Dickie |
Roy Trivett |
Casey Trivett |
David Goertz |
Brian Ashton |
Harley Sinclair |
Mani Sanghera |
Bruce Maranda |
Brian G. Ko |
GJ |
William Ying |
Annex C
Summary of comments received on Multilateral CSA Notice 45-315
Proposed Prospectus Exemption for Certain Distributions through an Investment Dealer
General support
We received 231 comment letters from a variety of market participants, including registrants, professional service providers, industry advocacy groups, issuers and investors.
Almost all commenters supported the proposed exemption. Most of the commenters agreed that the existing prospectus exemption regime results in the majority of private financings being limited to accredited investors. In addition, the vast majority of commenters suggested that the proposed exemption be made available in all Canadian jurisdictions.
1. Use of proposed exemption
224 commenters (97%) indicated that they, their clients, or their members would use the proposed exemption. The most common reason given was that the proposed exemption was one solution to the current regime that effectively precludes most retail investors from participating in private placements.
2. Expansion of exemption to registered exempt market dealers
One of the conditions of the proposed exemption is that the investor must receive suitability advice from a registered investment dealer. We invited comment on whether we should expand the proposed exemption so that investors could also receive suitability advice from a registered exempt market dealer (EMD).
We received 15 comments in response to this question. Only two of the commenters supported expanding the proposed exemption to permit use by EMDs, but neither provided substantive reasons. The 13 commenters that did not support use by EMDs cited a number of reasons. The most common reason given was that the investor protection underlying the proposed exemption is premised on the rigorous IIROC requirements applicable to registered investment dealers.
3. Appropriateness of hold period
Securities issued under the proposed exemption would be subject to resale restrictions (that is, a four-month hold period). We sought comment on whether the four-month hold period is appropriate.
We received 104 responses to this question. Of those, 68 suggested that securities distributed at or above market price should not be subject to resale restrictions. The most common reason given was that investors are already fully informed about the issuer through its continuous disclosure record and the requirement for the investment dealer to provide KYP and KYC advice. Since a potential investor would rely on exactly the same information to purchase on the secondary market without resale restrictions, these commenters argued that there should not be a resale restriction imposed on a purchase using the proposed exemption.
Sixteen commenters indicated that the current four-month hold period was appropriate. An additional 20 commenters suggested various shortened hold periods between one and three months.
As a general comment, 55 commenters submitted that the four-month hold period is obsolete and that the CSA should reconsider its application to all prospectus exemptions.
4. Sufficient Investor Protection
We sought comment on whether the proposed exemption contains sufficient alternative protections such that the prospectus requirement is not necessary. Almost all of the commenters (227) agreed that it is appropriate to remove the prospectus requirement for offerings under the proposed exemption. Their reasons included:
- the standard of care applicable to a suitability review provides investors with a high degree of protection and is consistent with or higher than that provided by other exemptions that are based on the investor’s relationship with an issuer or an income and asset threshold
- the considerable compliance effort and expense associated with the current investment dealer regime are not worthwhile if its benefits are not realized by exemptions which acknowledge the value of investment dealer suitability advice
- the cause of action for misrepresentation in an issuer’s disclosure under the proposed exemption provides the investor with an avenue for recourse.
One commenter indicated that investor protection was insufficient under the proposed exemption and suggested that suitability is too low a standard to adequately protect retail investors. The commenter was of the view that, in order to meet KYP obligations, the only investment dealers providing advice would be the same dealers participating in the underwriting of the private placement and performing due diligence on the issuer. The result is that the investment dealer would have a conflict of interest. The commenter suggested that the proposed exemption would only be acceptable if the recommendation provided to the retail investor was a result of the investment being in the best interest of the investor, and not simply that it is suitable for the investor. Another commenter supported the proposed exemption but also stressed the importance of implementing a statutory best interest standard on all registrants providing advice.
Another commenter stated that the proposed exemption should not be conditional on investors receiving a positive suitability analysis from a registered dealer to be consistent with the existing KYC rules. A client is able to proceed with a trade on the secondary market even if the dealer determines it is not suitable.
Annex D
List of commenters and summary of comments received on proposed ASC Rule 45-516
Prospectus Exemptions for Retail Investors and Existing Security Holders
List of Commenters
- James Price, CFA, Director Capital Markets Products, Richardson GMP Limited;
- Darrin Hopkins, BA, MBA, Director Co-Head Public Venture Capital Division, Richardson GMP Limited;
- Richard Pong, CFA, Chair, Canadian Advocacy Council for Canadian CFA Institute Societies;
- Susan Copland, B. Comm., LLB, Managing Director on behalf of Investment Industry Association of Canada (IIAC);
- Gordon Keep, Fiore Financial Corporation;
- Ungad Chadda, Senior Vice President, Toronto Stock Exchange and John McCoach, President, TSX Venture Exchange.
Summary of Comments
- General Support
Commenters expressed strong support for the proposed exemption. Submissions generally said that the exemption would be beneficial to the public venture capital market by helping issuers access capital in a cost-efficient manner, while balancing investor protection interests.
- Harmonization across Canada
Four of the six submissions expressed strong support for harmonization of the proposed exemption across all jurisdictions in Canada.
- Making exemption available to issuers listed on other Canadian markets
One commenter expressed concern about the exchanges included in the proposed exemption and two of the commenters expressed support for expanding to other markets. We have not made any changes to the proposed exemption but will monitor use of the exemption for possible future changes.
- Expanding beyond registered investment dealers
Most submissions expressed a lack of support to expanding the exemption beyond registered investment dealers, citing concerns about investor protection.
- Investment dealer due diligence
Submissions expressed a lack of support for confirmation from an investment dealer respecting the issuer’s statement of no undisclosed material facts. This confirmation would require due diligence on behalf of the investment dealer. One commenter suggested that the issuer is in the proper position to provide such a confirmation and indicated that not providing such a confirmation would be more consistent with similar existing exemptions. Another commenter was concerned about the additional cost and delays associated with such a confirmation.
- Additional investor protection
One commenter suggested that an issuer be required to provide to subscribers a copy of its most recent annual and quarterly financial statements and management discussion and analysis. As this information would be readily available in the issuer’s public disclosure record on SEDAR, we did not make this change.
One commenter suggested implementing a statutory best interest standard for all registrants. This is outside the scope of this exemption but we will consider this comment for future projects.
- Limit on size of offering
Most submissions did not support specifying a limit on the size of offerings and one commenter suggested that a limit relating to the market capitalization of the issuer be implemented. We have not changed the proposed exemption to include such a limit but will monitor use of the exemption for possible future changes.
- Limit on Investor’s Investment
Most submissions did not support specifying a limit on an investor’s investment. One commenter suggested a limit of $25,000. We have not changed the proposed exemption to include such a limit but will monitor use of the exemption for possible future changes. Several commenters noted that investment dealers are required to provide advice based on suitability and that this should address concerns on this issue.