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

lrose@bcsc.bc.ca

 

 

Larissa Streu

Senior Legal Counsel, Corporate Finance

British Columbia Securities Commission

Telephone: 604-899-6888

lstreu@bcsc.bc.ca

 

Elliott Mak

Senior Legal Counsel, Corporate Finance

British Columbia Securities Commission

Telephone: 604-899-6501

emak@bcsc.bc.ca

 

Christopher Peng

Legal Counsel, Corporate Finance

Alberta Securities Commission

Telephone: 403-297-4230

christopher.peng@asc.ca

 

Tony Herdzik

Deputy Director, Corporate Finance, Securities Division

Financial and Consumer Affairs Authority of Saskatchewan

Telephone: 306-787-5849

tony.herdzik@gov.sk.ca

 

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

Ella-jane.loomis@fcnb.ca

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

 

1. 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.

 

2. Harmonization across Canada

 

Four of the six submissions expressed strong support for harmonization of the proposed exemption across all jurisdictions in Canada.

 

3. 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.

 

4. 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.

 

5. 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.

 

6. 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.

 

7. 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.

 

8. 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.