Appendix B to CSA Notice of National Instrument 45-106
Summary of Comments and CSA Responses Summary of Comment CSA Response 1. General Six commenters commend the CSA for attempting to We acknowledge the comment. create a harmonized approach to registration and prospectus exemptions, and recognize that National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106) is a significant improvement over the current regime.
2. General Two commenters note that, while harmonization is We acknowledge the comment. an important and worthwhile goal, it is important to allow for regional differences. Regional markets differ in size and industry and we should not remove exemptions that support and promote capital raising in local markets for the sole purpose of achieving harmonization.
3. General Three commenters commend the Autorité de We acknowledge the comment. marchés financiers (AMF) for its efforts in rationalizing the exempt distributions regime in Québec through its support of Bill 72 and its participation in NI 45-106 and National Instrument 45-102 Resale of Securities (NI 45-102).
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4. General Several commenters are disappointed that NI 45-106 contains differences across jurisdictions and that local exemptions would continue after NI 45-106 was implemented. The differences and local exemptions will perpetuate inefficiencies and higher costs. Smaller markets will suffer because some issuers will avoid distributions in small markets with different requirements. Several commenters urge the CSA to eliminate local exemptions and develop a truly harmonized rule without carve-outs. One commenter states that carve-outs should only be allowed if a compelling case is made by a particular regulator for a different regime in their jurisdiction based on the characteristics of the market and of investors in that jurisdiction.
5. General One commenter notes that local exemptions will be retained in certain provinces and that it is very difficult to comment on NI 45-106 without understanding the complete picture of prospectus and were not identified as the subject of repeal will registration exemptions across Canada.
6. General One commenter suggests that the grouping of the exemptions could be improved in a way that would assist the ease of interpretation and use of the NI 45- 106. The commenter proposes grouping exemptions according to how subsequent trades are affected by
The mandate of this project was to consolidate existing prospectus and registration exemptions available in 13 jurisdictions into one instrument and to harmonize them to the extent possible within an ambitious time frame. We see the implementation of NI 45-106 as an important first step toward further harmonization of the prospectus and registration exemptions across Canada. We believe the carve-outs and differences that are contained in NI 45-106 are only present where jurisdictions have made compelling arguments to maintain those carve-outs and differences.
Although a few local exemptions will remain in some jurisdictions, NI 45-106 contains the vast majority of exemptions. Local exemptions that remain in place upon implementation of NI 45-106. In addition, upon implementation of NI 45-106 we will publish a Notice that lists all local exemptions that will remain in effect.
We acknowledge that there may be a variety of approaches that could be employed to organize the exemptions. However, we feel the approach we adopted is valid and we are not inclined to re-order the exemptions based on which resale Page 2 of 44
resale provisions so that those exemptions that are subject to a seasoning period are grouped together in a division separate from those that are subject to a restricted period on resale.
7. Definition of One commenter supports the OSC’s decision to We acknowledge the comment. “accredited amend the definition of “accredited investor” by investor” - removing clauses (p) to (s) of the definition in OSC general Rule 45-501 Exempt Distributions. 8. Definition of The scope of section 45 of the Québec Securities Act We believe that the scope of section 45 of Québec “accredited may not be fully maintained by the definition of Securities Act is fully maintained with paragraphs investor” - “accredited investor” under Regulation 45-106 (a), (d), (e), (p) and (q) of the definition of general (paragraphs (p) and (q) of the definition). “accredited investor”. 9. Definition of One commenter asks whether paragraph (c) of the We believe “securities” is the appropriate term as “accredited definition of “accredited investor” should refer to it is broader and has a clear meaning in securities investor” - voting “shares” instead of voting “securities”. law. The term “shares” is not defined in securities paragraph (c) law. 10. Definition of One commenter believes that paragraph (e) of the We are not inclined to make a change to this “accredited definition of “accredited investor” that allows definition. While we do not disagree with the investor” - individuals formerly registered as representatives to comment in principal, we are not inclined to make paragraph (e) qualify as accredited investors should not extend to this change because securities regulatory individuals whose registration was terminated as a authorities have the power to deny access to result of wrongdoing. exemptions in appropriate circumstances. 11. Definition of One commenter wants paragraph (i) of the definition Consideration of this comment will require further “accredited of “accredited investor” to include pension plans if policy analysis and will be addressed in future investor” - the sponsor or investment advisor makes the amendments to NI 45-106. Page 3 of 44
provisions apply. We believe that the text box at the beginning of each exemption explaining which resale provisions apply will greatly contribute to clarifying how resale provisions operate for the exemptions.
paragraph (i) investment decisions or the sponsor acts as an intermediary between the plan members and the issuer of the investment. The commenter submits that these types of pension plans should be deemed to be purchasing a principal for the purposes of the accredited investor exemption. In addition, the commenter states that, for the purposes of the accredited investor exemption, pension funds should be deemed to be purchasing as principal if the plan administrator or its investment adviser (and not the members) makes the investment decision.
The same commenter made a number of comments on the CAP exemption and amendments to OSC Rule 45-501 to incorporate the content of OSC Rule 32-503.
12. Definition of One commenter thinks that the financial criteria is “accredited too high for an individual but that the private investor” - investment club exemption provides an alternative. paragraph (j), (k), and (l)
13. Definition of Two commenters suggest that investment funds
We believe the current thresholds strike an appropriate balance between investor protection and allowing individuals access to the exemption to facilitate capital raising. Regarding the second part of the comment, we are unclear how the investment club exemption would provide an alternative to the accredited investor exemption. The investment club exemption only permits the issuance of securities in a private investment fund. It would not permit a number of non-accredited investors to pool their investments to collectively become an accredited investor.
In exceptional circumstances investment funds Page 4 of 44
“accredited should qualify under this paragraph of the definition investor” - without regard to the status of investors in the paragraph (n) investment fund who reside outside the jurisdiction.
14. Definition of One commenter states that an investment fund that We agree. Section 2.18 will be added to “accredited distributes, or has distributed, its securities to persons paragraph (n) by adding a subparagraph (iii) that investor” - in the circumstances referred to in section 2.18 states: “(iii) a person described in subparagraph (i) paragraph (n) [investment fund reinvestment] should also be or (ii) that acquires or acquired securities under considered to be an accredited investor and added to section 2.18 [investment fund reinvestment]”. We those listed in paragraph (n)(ii) and that there should would also add at the beginning of subparagraph not be a distinction between the distribution (ii) the following: “who acquire securities…”. circumstances in sections 2.10 and 2.19 and the distribution circumstances in section 2.18.
15. Definition of Several commenters are concerned that foreign The Ontario carve out in paragraph (q) of the “accredited registered portfolio managers are carved out (for definition of “accredited investor” relating to investor” - Ontario) of the accredited investor definition in foreign advisers has been removed. paragraph (q) paragraph (q). The commenters could not see a reason for carving out foreign portfolio managers who advise their foreign clients.
16. Definition of Seven commenters support the removal of the “accredited Ontario restriction that prohibits investments in investor” - securities of an investment fund by persons paragraph (q) managing fully managed accounts who rely on the “accredited investor” definition.
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that fall outside this provision may wish to seek designation as an accredited investor or, in Alberta or British Columbia seek recognition as an exempt purchaser.
Paragraph (x) of the definition of "accredited investor" in the current OSC Rule 45-501 Exempt Distributions contains a restriction that prohibits persons managing fully managed accounts from relying on the accredited investor exemption for investments in securities of a mutual fund or non-redeemable investment fund. In light of recent events concerning hedge funds and comments made by the Investment Dealers Association of
Canada in its report of May 18, 2005 entitled Regulatory Analysis of Hedge Funds, the OSC has decided to maintain this restriction in paragraph (q) of the definition of "accredited investor" in NI 45-106. We intend to study this issue further.
17. Definition of One commenter takes issue with the requirement in “accredited paragraph (r) of the definition of “accredited investor” - investor” that charities obtain advice in regard to a paragraph (r) trade. The commenter notes that the current regime in Ontario simply qualifies all registered charities as accredited investors. The commenter is unaware of general abuse under the current regime and submits that regulation should emphasize the responsibility of problem. The requirement is new to some charity trustees and other administrators to manage funds appropriately, rather than requiring issuers to inquire about the quality of advice given to the charity before accepting an investment from the charity.
18. Definition of The French version of paragraph (t) excludes a We agree. Paragraph (t) of the French version has “accredited significant element when compared with the English been changed to reflect the comment. investor” - version: The exception refers to the voting securities paragraph (t) in required by law to be owned by directors of that French version person. The French version of this paragraph should be based on the similar phraseology used in the French version of paragraph (c) of the definition.
19. Definition of One commenter suggests that the definition of AIF “AIF” should include information circulars prepared in the
This requirement addresses investor protection. Charities are not required to meet any sort of sophistication test to be registered as a charity and carry on charitable activities. When this requirement was added to Multilateral Instrument 45-103 Capital Raising Exemptions (MI 45-103) some charities commented that it did not pose a jurisdictions but given the above and in the interests of harmonization we are not willing to remove it.
We have not expanded the definition of “AIF” at this time. An expansion of this definition will Page 6 of 44
context of reverse takeovers and changes of business require policy review and analysis that is beyond undertaken by TSX Venture issuers. The commenter the scope of this project. notes that these types of information circulars are very similar to information circulars prepared for qualifying transactions, which are included in the definition of AIF.
20. Definition of One commenter submits that this definition should be We believe the current wording of the definition “Canadian revised to require that a financial institution must be is clear. A loan corporation, for example, must be financial authorized to carry on business as a specified form of authorized under the appropriate legislation to institution” entity in Canada in order to benefit from treatment as carry on business as a loan corporation. an “accredited investor”. For example, paragraph (c) of the definition should state that a trust company must be qualified to do business as a trust company rather than simply be authorized by an enactment to carry on business.
21. Definition of One commenter states that the term “eligibility The term is a defined term that was taken from MI “eligibility adviser” is an inappropriate term to describe the 45-103, which is in place in many jurisdictions in adviser” concept of an individual who advises eligible Canada. We are not aware of this term being investors. The use of “eligibility adviser” may lead to misunderstood or causing confusion. confusion and misunderstanding since the “adviser” is not providing advice on the eligibility of investments, but rather is advising on the suitability of investments for eligible investors. The commenter suggested that the term “eligibility consultant” would be more appropriate.
22. Definition of One commenter questioned why accountants and “eligibility lawyers are considered to be appropriate “eligibility adviser” advisers” in Saskatchewan and Manitoba, and not in
This provision is carried forward from MI 45-103. The commenters on the previous publication of MI 45-103 (summarized in the comment summary Page 7 of 44
other Canadian jurisdictions, and what the policy published June 2, 2003) actually supported the use reason is for this different treatment of accountants of lawyers and accountants in Manitoba and and lawyers. Saskatchewan. In Manitoba and Saskatchewan, this carries forward existing provisions under a local exemption. This also recognizes the fact that in Manitoba and Saskatchewan there is not a sufficient presence of registrants whose registration would allow them to act as an advisor in rural and northern parts of those provinces.
23. Definition of One commenter asks how a lawyer or accountant “eligibility will know if the person they have been retained by adviser” has ever acted for or been retained by the issuer, or its directors or officers without a great deal of time- consuming effort. The real concern is whether the lawyer or accountant has a direct or indirect relationship with the issuer. The commenter also questions why a lawyer or accountant who is bound by a code of professional conduct could not have an indirect relationship since it is open to an IDA member to have an indirect relationship.
24. Definition of One commenter states that the founder of an issuer This exemption is based on up-to-date knowledge “founder” should not have to be “actively involved in the of the business and affairs of the issuer. As a business of the issuer” in order to benefit from the matter of policy we have determined that current family, friends and business associates exemption. involvement with the issuer is a necessary and Because of their past involvement with the issuer, important condition for use of the exemption. this individual should be considered to have an appropriate level of in-depth knowledge about the issuer so as to warrant an exemption.
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This definition has been in place for some time in MI 45-103 and we have not had any complaints regarding how it works. Most law and accounting firms have systems in place to address the problem of determining whether the lawyer or accountant has acted for an issuer. We also note that, for indirect relationships, the relevant period of time is limited to the previous 12 months.
25. Definition - non- One commenter suggests that the CSA should We will consider the comment in future redeemable consider defining “non-redeemable investment fund” amendments to National Instrument 14-101 investment fund in National Instrument 14-101 Definitions since the Definitions. term “non-redeemable investment fund” is used in several national instruments and could thereby be harmonized.
26. Definition of One commenter submits that the definition of We have not changed the definition. We feel this “person” “person” should be broadened because the current definition encompasses all of the entities that we definition will lead to uncertainty as to the form of want to capture, including those entities corporate organizations that qualify as persons. The mentioned in the commenters’ comment. commenter recommends replacing paragraphs (b) and (c) with the following: “(b) a corporation, limited or unlimited company, other form of corporate organization, partnership, limited partnership, limited liability partnership, trust, fund, any organization, analogous to the foregoing, any association, syndicate, organization or other organized group of persons, whether incorporated or not, and”.
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27. Section 1.5 Three commenters question why a purchaser acting as an underwriter was restricted to the exemption in section 2.34, which restricted the underwriter by allowing it to re-sell only through a prospectus or exemption. The commenters believe underwriters should be subject to the same resale provisions as any other purchaser that acquires under an exemption. The commenters argue that different re- sale treatment for underwriters will adversely affect their willingness to participate in private placements, which will diminish financing opportunities for issuers. Underwriters will be less willing to acquire excess securities not taken up in an offering (either to the securities without a view to distribution. As keep for themselves or to sell to their clients) and any accredited investors they will be subject to a 4-compensation securities will be less attractive if they are deemed to be acquired while acting as underwriter.
28. Section 1.6 One commenter notes that a paragraph similar to Given that some derivatives fall within the scope Definition of paragraph (e) under the definition of “trade” exists in of security, we do not think it is necessary to have “trade” - certain western provinces. Where this is the case, a a specific exemption for derivatives. Where paragraph (e) prospectus and registration exemption is provided for applicable, other exemptions can be used to trade the purpose of allowing transactions involving derivatives. certain investors. We question the introduction of this concept in Québec in light of the lack of a clearly In regard to the second comment, paragraph (g) identified prospectus and registration exemption. has been removed. The same commenter points out that paragraph (g), as proposed, would be unique to the definition of “trade” in Québec. The commenter believes that the use of a new expression that is not defined, is drafted
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We have removed section 1.5 from NI 45-106 and in its place have provided guidance in the Companion Policy at section 1.8 on the proper use of the accredited investor exemption by a person acting as an underwriter. The guidance addresses our policy concerns with respect to underwriters purchasing securities under an exemption with a view to distribution. Deletion of section 1.5 will effectively allow underwriters to acquire securities by way of their status as accredited investors where they purchase month restricted period on resale.
in broad terms and whose scope is not determined in a policy statement will cause uncertainty. In order to maximize the harmonization of Québec rules with those of the other provinces, the commenter suggests deleting this paragraph.
29. Section 2.1 One commenter is concerned that the wording of the We agree. We added the words “that was granted Rights offering rights offering exemption in section 2.1 may be too by the issuer” in the opening paragraph of section broad. One possible interpretation of the language is 2.1(1) after the words “in a right”. that the exemption would extend to a trade by an issuer of any right to purchase securities of its own issue. This might include trading in puts, calls futures and other derivative rights relating to the purchase of the issuer’s securities. The current rights offering exemption only applies to a trade by an issuer in a right it has granted to purchase additional securities of its own issue. The commenter believes that a rights offering exemption is appropriately limited to trades in rights to purchase additional securities that are granted by the issuer. . 30. Section 2.2(3) One commenter states that the words “in Canada” We agree. We added “in Canada” to avoid Reinvestment should be added after “every security holder”. applications for exemptive relief for plans that do plan not permit distributions to foreign security holders. It is our understanding that some issuers have reinvestment plans that, while available to Canadian security holders, are not available to foreign security holders.
31. Section 2.3(4) One commenter questions the rationale for Accredited subsection (4) of section 2.3.
Prince Edward Island does not have comparable provincial trust and loan corporation legislation. Page 11 of 44
investor 32. Section 2.3(6) Two commenters note that section 2.3(6) provides We have re-drafted the restriction in response to that the accredited investor exemption is not comments that the initial wording was too broad. available if the “accredited investor” is “created” or The re-drafted restriction will refer to persons “used primarily” to purchase securities under this created or used solely to purchase or hold exemption. securities as an accredited investor as described in paragraph (m) of the definition of “accredited One commenter notes that similar wording is used to investor” in section 1.1. The corresponding restrict the minimum amount exemption. The drafting changes will be made to section 2.9(5), commenter is concerned that this wording is 2.10(3) and to paragraph (b)(ii) of the definition extremely broad and has the potential to create of “private issuer”. uncertainty for investment vehicles seeking to rely on such exemptions in the future. Such wording is not currently contained in the accredited investor exemption. The commenter states that clear language needs to be adopted or guidance provided in the Companion Policy as to the intent of this language. The commenter suggests the condition be deleted, or in the alternative, be replaced with a condition that states that the exemptions are not available in respect of a person “created solely for the purpose of becoming eligible to purchase securities in reliance on an exemption…”.
One commenter also states that if the restrictions are not removed, the reference in section 2.3(6)(b) to “these exemptions” should be limited to the section 2.3 exemption.
33. Section 2.4 - Three commenters strongly support the reinstatement We acknowledge the comments. Private issuer of this exemption. Page 12 of 44
34. Section 2.4 - Two commenters note that the re-introduction of the We acknowledge the comments. Private issuer private issuer exemption in Ontario is an improvement because of the specified list of who are “non-public” purchasers, which will increase certainty.
35. Section 2.4 - One commenter objects to the requirement to include Private issuer shareholders, beneficiaries or partners of a company, trust or partnership in the calculation of the 50 shareholders. The commenter prefers the MI 45-103 definition.
36. Section 2.4 - Three commenters ask what will happen from a resale for closely- resale perspective to persons who acquired under the held issuers closely-held issuer exemption? Two of the commenters believe that issuers that are now closely-held issuers should be deemed to be private issuers as at the date the new rule comes into force. For Ontario the private issuer definition does not include a category for existing shareholders of closely held issuers. There will be many Ontario issuers who have used the closely held issuer exemption and issued securities to purchasers who do issuer who is currently a closely-held issuer will not fit into the categories listed in subsection 2.4 (1) (a) to (j) and who are arguably members of the public.
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The purpose of this restriction in the definition is to ensure that the private issuer exemption is not abused through the creation or use of a pyramid of entities.
A provision has been inserted into part 8 of NI 45-106 to facilitate the resale of securities previously acquired pursuant to the closely-held issuer exemption. Upon the coming into force of NI 45-106 a security holder who acquired its securities pursuant to the closely-held issuer exemption will be able to resell its securities in the same manner as a security holder who acquired its securities pursuant to the private issuer exemption. Upon the coming into force of NI 45-106, an be able to avail itself of the private issuer exemption provided that (i) the issuer’s security holders consist of only those persons set out in paragraphs 2.4(2)(a-k) (formerly 2.4(1)) of NI 45-106, and (ii) the issuer’s securities (other than non-convertible debt securities) are beneficially
owned by less than 50 security holders exclusive of employees and former employees of the issuer or its affiliates. We note that, upon the coming into force of NI 45-106, a number of closely-held issuers will not be able to use the private issuer exemption. The private issuer exemption facilitates capital raising from persons that (i) are familiar with the issuer and, as such, do not require the disclosure and protections provided under a prospectus, or (ii) are accredited investors. Having made the policy decision to adopt the private issuer exemption in Ontario, it would be incongruous to deem all closely-held issuers, including those closely-held issuers who have distributed securities to the public, to be private issuers. A closely-held issuer who cannot avail itself of the private issuer exemption will nonetheless be able to avail itself of a number of other exemptions including the accredited investor exemption, the minimum amount exemption and the founder, control person and family – Ontario exemption.
37. Section 2.4 - One commenter suggests that the private issuer restrictions in exemption be amended to remove the requirement constating that a private issuer have restrictions on the transfer documents for of its securities contained in its constating documents will not have access to the private issuer private issuers or a security holders’ agreement. While the restriction is common for Canadian private companies, many foreign private companies do not have similar restrictions in their constating
We are not prepared to make this change to accommodate foreign issuers as part of NI 45-106. While an issuer that is not a “private issuer” exemption, it will have other similar exemptions available to it to raise capital (sections. 2.3, 2.5 and 2.7). These exemptions are slightly different than the private issuer exemption in that they Page 14 of 44
documents as such restrictions may not be necessary require the filing of a report and payment of a fee. in their domicile. Foreign issuers may be required to include such a provision (which is unusual for their jurisdiction of incorporation) for the sole purpose of meeting the requirements of Canadian securities laws. To recognize the global nature of capital raising and to facilitate private placements by foreign issuers, the commenter suggests that this requirement be deleted or restricted to Canadian issuers.
38. Section 2.4 - One commenter proposes that the definition of In-laws are included in paragraphs (c) and (f). expansion of family members in paragraphs (b), (c) and (f) of family members section 2.4(1) be expanded to include in-laws. The to include in-laws commenter notes that this was the approach taken by the CSA in drafting the definition of immediate family member contained in Multilateral Instrument 51-110 Audit Committees..
39. Section 2.4 - Two commenters propose that in determining We are of the view that for the purpose of registered verses whether there are 50 shareholders or less of the accessing the private issuer exemption, private beneficial issuer, the references should be to registered rather issuers are responsible for knowing who their ownership than beneficial ownership. Determining beneficial beneficial owners are. ownership, especially in the case of a sale by a shareholder as opposed to a treasury issue, may be difficult. The commenter notes that the definition of private company contained in the Securities Act (Ontario) allows determination of the number of shareholders by reference to registered ownership.
40. Section 2.4(3) One commenter asks whether paragraphs (i) or (j) of [now 2.4(4)] section 2.4(1) as they relate to paragraph (h) should
An entity described in paragraphs (i) and (j) is covered by section 2.4(3) if it meets the definition Page 15 of 44
Private issuer also be covered in section 2.4(3). 41. Section 2.5 - Several commenters are concerned with the OSC’s Family, friends decision not to participate in the family, friends and and business business associates exemption in section 2.5. Some associates, of the commenters believe this is unfair to Ontario Section 2.7 - issuers and investors. Founder, control person and family Three commenters believe the exemptions in sections those differences must be accommodated. Each 2.5 and 2.7 should be reconciled to provide harmonization of the exemption. One of the commenters, while expressing a preference for the Ontario exemption in section 2.7, submits that in the interests of harmonization Ontario should consider adopting the broader exemption in section 2.5.
42. Section 2.5 - One commenter states that it may be useful to Jurisdictions that do not require a risk Family, friends highlight to the investor that the exemption in section acknowledgement have concluded that the costs and business 2.5 is premised solely on the relationship of the of such a requirement exceed the benefits. associates investor with the issuer’s principal. The commenter suggests requiring each investor to sign a certificate to the effect that the investor is a close personal friend or close business associate of the principal and has known the person for a sufficient period of time to assess the capabilities and trustworthiness. Such a certificate may help to focus the investors awareness that the exempt trade is reliant on the relationship between the parties.
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of “accredited investor”. The mandate of this project was to consolidate existing prospectus and registration exemptions available in 13 jurisdictions into one instrument and to harmonize them to the extent possible within an ambitious time frame. We recognize however, that regional differences do exist and jurisdiction has considered the merits of this exemption and made a decision on whether or not to adopt it based on what is appropriate for the capital markets in their jurisdiction.
43. Section 2.6(2) One commenter stated that the requirement to The FFSC does not believe maintaining a Family, friends maintain a signed risk acknowledgement for a period document for 8 years is unnecessarily and business of eight years after a distribution or trade is burdensome. associates - unnecessarily burdensome. Saskatchewan Section 2.9(14) Offering memorandum 44. Section 2.9 One commenter states that the minimum disclosure We acknowledge the comment. Offering requirements in the offering memorandum exemption memorandum should address any regulatory concerns in regard to ensuring that investors receive sufficient information on which to make their investment decision. At the same time the exemption allows the issuer to avoid the significant costs of filing a prospectus and becoming a reporting issuer.
45. Section 2.9 Two commenters want the CSA to develop a form of We will consider developing a form of offering Offering offering memorandum specific to investment funds, memorandum specific to investment funds in the memorandum as there are considerable differences between what is future. relevant to an investor in an investment fund and what is relevant to an investor in other types of issuers.
46. Section 2.9 Four commenters expressed disappointment that the Offering OSC chose not to adopt the offering memorandum memorandum exemption that is otherwise available in the other Canadian provinces. One commenter seeks clarification from the OSC on why investors in Ontario are being treated differently than investors in the other CSA jurisdictions.
The mandate of this project was to consolidate existing prospectus and registration exemptions available in 13 jurisdictions into one instrument and to harmonize them to the extent possible within an ambitious time frame. We recognize however, that regional differences do exist and those differences must be accommodated. Each Page 17 of 44
jurisdiction has considered the merits of this One commenter agrees with the OSCs decision not to exemption and made a decision on whether or not adopt the offering memorandum exemption in to adopt it based on what is appropriate for the Ontario. The commenter believes that the extensive capital markets in their jurisdiction. prescribed disclosure for the offering memorandum merely serves to create a simplified prospectus regime alongside the existing prospectus regime. The exemption introduces additional unnecessary complexity and, given the differences in application between the participating jurisdictions, confusion into the securities laws of Canada. This is inconsistent with the goal of creating a harmonized securities regime.
47. Section 2.9 Three commenters expressed disappointment over Offering the continuation of two different offering memorandum memorandum exemptions and urged the CSA to uniformly adopt the exemption in section 2.9(1). One commenter notes that the liberal approach is so wide open that it would be attractive for many significant issuers to use the exemption and bypass the prospectus regulatory process in circumstances where they would be perfectly able to comply. The commenter also notes that it may also be an avenue for unscrupulous issuers to raise money from unsuspecting investors. The commenter recommends that the CSA uniformly adopt the less liberal approach for two reasons: (i) the amount that an investor could lose would be limited; and (ii) investors would have to have significant assets in
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The CSA worked diligently to achieve a single harmonized offering memorandum exemption, however, after considerable discussion and debate differences remain. The differences between the two versions of the exemption and the different treatment of investment funds reflect fundamental policy concerns regarding the availability and use of this exemption across the jurisdictions. Participating jurisdictions will monitor the use of this exemption and continue to work toward harmonization.
order to qualify as an “eligible investor”. One commenter questions why the OM exemption is not available in some jurisdictions and what type of mutual funds qualify under the current wording of section 2.9(2)(d).
One commenter seeks clarification why clause 2.9(2)(d)(ii)(B) only provides the exemption for mutual funds in Manitoba, Saskatchewan and Quebec that are listed for trading on an exchange or quoted on an over-the-counter market. The commenter notes that very few mutual funds are traded in the secondary market, and therefore, it is unclear why this restriction was imposed in these three provinces.
48. Section 2.9 One commenter notes that Yukon is not included in Section 1.2 of the Companion Policy provides Offering the list of jurisdictions in which the exemption guidance for the availability of exemption in memorandum applies and queried if and when issuers and dealers Yukon. would be able to rely on the exemption in Yukon.
49. Section 2.9(13) One commenter objects to the requirement for the We do not think that re-signing the subscription Offering subscriber to re-sign the subscription agreement each agreement is overly burdensome in the context of memorandum time there is an amendment to the offering the offering memorandum exemption, which is memorandum. The process should be amended to significantly different than a prospectus offering. conform with the prospectus requirement to send a copy of the amendment to subscribers and have a 2-day right of rescission.
50. Section 2.9 One commenter suggests that the reference in the
The term “promoter” is a broader than “founder” Page 19 of 44
Offering form to “promoter” be changed to “founder”. The memorandum - certificate should be signed by a person “actively Forms F3 and F4 engaged in the issuer’s business.” 51. Section 2.10 One commenter notes that the exemption in section Minimum amount 2.10 is less flexible than the previous minimum investment amount exemption available in Ontario because section 2.10 requires the purchase price to be paid in cash. The commenter states that the exemption in Ontario allows securities to be issued for a bona fide future obligation, for example a promissory note. The commenter recommends maintaining this flexibility in section 2.10.
52. Section 2.10 One commenter supports the reintroduction in Minimum amount Ontario of the prescribed minimum amount investment exemption. However, the commenter submits that it would be prudent to clarify the exemption by incorporating the concept of “aggregate acquisition cost” rather than rely on the explanation in the companion policy. 53. Section 2.10 Two commenters request that the CSA expand the Minimum amount minimum amount exemption to include in specie investment contributions that have a fair value of $150,000. The commenters note that if there is a concern about the valuation of an in specie payment, delivery and settlement conditions similar to those found in section 9.4 of National Instrument 81-102 Mutual
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and for the purposes of the Forms, we require the signature of a “promoter”. After considerable discussion among the jurisdictions it was decided to require payment in cash to address potential abuses of the exemption. In particular, we are aware of pooled funds that were being sold to retail investors without a prospectus based on this exemption for as little as an initial investment of $5,000 coupled with the acceptance by the investor of a future obligation to the fund of $145,000. We do not believe that exempt products should be sold to retail investors under this type of arrangement.
In harmonizing this exemption we determined that the best approach was to require payment in cash at the time of the trade and provide some guidance in the Companion Policy. While we realize that some jurisdictions had the concept of “aggregate acquisition cost”, we specifically declined to use that approach for NI 45-106. We have included an asset acquisition exemption that is available to issuers in section 2.12. We are not prepared to expand the minimum amount investment exemption to anything other than cash for the reasons stated above.
Funds could be included. One commenter notes that requiring the cash requirement may cause unnecessary transaction costs by requiring the liquidation of securities.
54. Section 2.10 Three commenters applaud the CSA for harmonizing We acknowledge the comment. Minimum amount the minimum amount exemption across Canada, investment along with making it available to mutual funds and non-redeemable investment funds.
55. Section 2.10 Two commenters ask that the CSA consider allowing We believe it is inaccurate to suggest that two Minimum amount the $150,000 minimum amount to be contributed investment among all of the investment funds managed by the same entity. They believed that the same rationale which deems a person who has $150,000 to invest in a single investment to be sophisticated enough to not require a prospectus and not require a registered dealer, should also be applied to an investor who invests in two or more funds managed by the same manager.
56. Section 2.10 One commenter notes that the requirement to pay the Minimum amount minimum amount “in cash at the time of the trade” investment does not appear to permit any time for settlement. 57. Section 2.10 One commenter suggests that the CSA make it Minimum amount permissible for related accounts to invest $150,000. investment For example, if two spouses invested $150,000 between them that should be sufficient to entitle them to use this exemption. Similarly, an individual and his or her RRSP, a parent or parents and children
funds are the same because they have the same manager. Each fund is different, has differing risk profiles and may be managed by sub-managers with different management styles. It is no different than buying securities of two different issuers and being allowed to pool, which is something we do not allow.
We expect issuers to deal with this issue based on the usual terms for settling private placements. We have not expanded this exemption in the manner suggested by the commenter. We do not think that association with an accredited investor should make a person an accredited investor. Paragraph (k) of the definition of accredited investor does permit spousal incomes to be Page 21 of 44
who share the same residence and/or “in trust for” accounts should be permitted to be considered as one investor for this purpose. 58. Section 2.10 One commenter believes it is advisable to insert an Minimum amount additional investment mechanism in section 2.10 investment similar to that provided for investment funds in section 2.19.
59. Section 2.10(3) One commenter states that paragraph (b) of section Minimum amount 2.10(3) should be deleted and that paragraph (a), if it investment should remain, should refer to section 2.10 (see argument raised above re section 2.3(6)). 60. Section 2.10(3) One commenter believes that the requirement in Minimum amount section 2.10 for a cash payment to use the $150,000 investment exemption should not require any more than $150,000 cash to be paid, at the time of usage. An investor should be able to invest $400,000 represented by $150,000 in cash and $250,000 via a commitment.
61. Section One commenter advises that section 2.11(1)(b)(i) 2.11(1)(b)(i) needs to reflect the possibility of an accidental failure British Columbia and problems of the nature Business to deliver to every security holder, for whatever combination and reason. Also, no particular security holders’ reorganization approval is typically required, just the class, so the wording may be inaccurate.
combined, but it requires the combined income to be $100,000 more than the individual income threshold. Consideration of an expansion as suggested by the commenter will require significant policy analysis. Accordingly, at this time, we do not believe that an additional investment mechanism is appropriate for securities other than investment funds.
We have changed the wording of this restriction so that it applies to persons created or used “solely” (rather than “primarily”) to access the exemption. If a minimum of $150,000 in cash is invested, we believe that the current exemption would permit a commitment as in the example provided by the commenter, provided the commitment is part of the same transaction.
This exemption has been in place for some time in mentioned by the commenter have not arisen. The onus is on the issuer, when proceeding outside of a statutory procedure, to determine when shareholder approval has been obtained. Page 22 of 44
Most Canadian jurisdictions, through securities legislation or Interpretations Acts, have provisions that deal with delivery of documents. Most of these provisions make it clear that “actual” delivery is not required, but rather, reasonable steps such as posting by mail must be taken. We do not believe that accidental failure to deliver to one shareholder would prevent the use of the exemption.
62. Section 2.11 - One commenter states that the requirement to have We do not believe the shareholder approval Business disclosure and shareholder approval is too restrictive. requirement is too restrictive. Shareholder combination and Corporate requirements are often not as strict and approval is a reasonable requirement in exchange reorganization cost of compliance may be too great for smaller for allowing securities to be traded in private companies. Also, section (1)(b)(ii) suggests circumstances where issuers are being reorganized that unanimous shareholder approval is required and by way of a non-statutory merger, arrangement or it is not clear whether all shareholders have to vote, amalgamation. Subsection (1)(b)(ii) does not even shareholders with non-voting shares. mandate unanimous shareholder approval. The preferred form of this exemption is found in AB, MB, SK, and ON -it’s less restrictive.
63. Section 2.12(1) One commenter asks whether section 2.12(1) should Asset acquisition also refer to securities or other property, including cash. 64. Sections 2.12 One commenter notes that the technology sector Asset Acquisition should have an exemption for asset acquisition that 2.13 Petroleum, does not tie issuers to the $150 000 asset value natural gas and minimum or require them to use the “shares for debt” type of exemption to other industries would mining properties exemption. The commenter notes that the junior mining exploration industry has a special regime for
As noted in section 4.3 of the Companion Policy, assets may include cash in the form of working capital. We have not expanded the “special” capital raising exemptions available to junior mining companies to other industries. Expansion of this require further consultation and study and is beyond the scope of this project. Page 23 of 44
raising capital. 65. Section 2.14 One commenter supports the introduction of this new We acknowledge the comment. Securities for exemption and the guidance included in the debt Companion Policy. 66. Section 2.16 Two commenters are concerned that the language in We have substituted “in connection with” for Take-over bid section 2.16, “…a trade in a security under a take- “under”. and issuer bid over bid…”, may be interpreted as being limited to trades by shareholders of the offeree issuer to the offeror. To clarify that the exemption is available in connection with share consideration provided by an offeror, the commenter proposes amending the language to read, “…a trade in a security in connection with a take-over bid…”.
67. Section 2.16 One commenter suggests adding the phrase “by or to We have used the broader language of “in Take-over bid the bidder” after the word security in section 2.16(1). connection with” to cover all trades. and issuer bid The commenter notes that the exemption is meant to provide exemptions for both the trade by a security holder to a bidder and securities issued by the bidder.
68. Section 2.16 One commenter notes that Section 2.16 does not Take-over bid clearly apply to both the tender to a take-over bid by and issuer bid a target shareholder, and the issuance of securities by a bidder in exchange in securities exchange bids. The to a take-over bid by target shareholders, and the commenter believes that the wording of section 2.16 suggests that the tender process is not covered for a take-over bid (i.e. issuer bids are treated differently for some reason).
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We changed the word “under” in section 2.16 to “in connection with” to make it clear that we intend for section 2.16 to apply to both the tender issuance of securities by a bidder in the context of an securities exchange bid. The tender process is covered for both take-over bids and issuer bids. A trade to an issuer of its own securities is also covered in section 2.15 because not all trades to
an issuer of its own securities is an issuer bid. 69. Section 2.17 Three commenters point out that the wording of We have not expanded the exemption at this time Offer to acquire section 2.17 may or does not apply to the trade by a to accommodate distributions outside the local to security holder bidder of its securities to target shareholders. jurisdiction. To the extent that these trades are outside local distributions, issuers will have to look to local jurisdiction One commenter notes that the wording of this section provisions dealing with distributions out of the provides for an exemption in one jurisdiction to jurisdiction, find another exemption or seek permit a security holder in another jurisdiction to discretionary relief. trade its securities to a bidder in the first jurisdiction, but it does not provide an exemption for the issuance of securities from a bidder in the second jurisdiction to a security holder in the first jurisdiction. The commenter suggests the following alternative wording for 2.17(1) “The dealer registration requirement does not apply to a trade in a security by or to the bidder in connection with a transaction that would have been a take-over bid or an issuer bid in the local jurisdiction if the security holder were in such jurisdiction.”
One commenter suggests that section 2.17 should be expanded to also include trades currently covered in sections 72(1)(j) and (k) of the Securities Act (Ontario).
70. Sections 2.18 and Five commenters suggest that the proposed 2.19 Investment investment fund reinvestment exemptions are too fund restrictive. The commenters request that the CSA reinvestments consider expanding the exemptions in sections 2.18 and 2.19 to permit an investment fund which has more than one class and series of units, where the
The rationale behind the exemption is that the investor is “getting more of the same” so there is no new investment decision and therefore no need for a prospectus or a registrant. Any change to the investment, including a change in the fee structure would be inconsistent with the rationale for the Page 25 of 44
value of the units of each is based on the same pool exemption. of portfolio assets, the flexibility to permit re-investment and additional investment in classes or series of the same investment fund other than the class or series originally purchased by the investor. The linkage would provide flexibility to investors, without requiring them to reinvest or make additional investments in another investment portfolio of the same fund. It would also permit investor to switch between classes/series without being required to satisfy the minimum investment amount at the time of the switch and permit investors to direct reinvestments of distributions into a different series/class of the same fund.
One commenter suggests that the expansion to other series and classes be extended to the exemption in section 2.19 (additional investment in investment funds).
71. Section 2.18 - Two commenters recommend changing the language We agree. The language will be changed to Investment fund of this exemption. Many mutual funds provide that accommodate plans that require reinvestments. reinvestment distributions are automatically reinvested unless unit holders request to be paid in cash. The language “where the security holder directs that dividends or distributions ..” should be changed to the plan “permitting or requiring that dividends or distributions … be reinvested …”
72. Section 2.18 One commenter suggests that subsection 2.18(5) Investment fund should be expanded to include the option of
We believe that it is sufficient if investors receive, at minimum, the required disclosure at the time of Page 26 of 44
reinvestment including the required disclosure in a fund’s financial purchase. For that reason, we required that the statements as well as its prospectus, since an investor is only required to receive a fund’s prospectus when the fund is purchased, but will generally receive the financial statements each time they are filed.
73. Section 2.19 One commenter suggested deleting the words “that Additional initially acquired securities as principal for an investment in acquisition cost of not less than $150,000 paid in investment funds cash at the time of the trade”. The commenter suggested that it should not matter how the security holder acquired the securities of the investment fund that have the value of $150,000 as required in clause (b).
74. Section 2.22 use One commenter notes that for the exemption in of “executive section 2.22 the concept of “executive officer” is officer” definition introduced and is broader than the concept of “senior in division 4 officer”, which is used in Multilateral Instrument 45- 105 Trades to Employees, Senior Officers, Directors and Consultants. The commenter suggests that in
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disclosure be contained in the prospectus of the investment fund if one is prepared. An issuer can choose to also provide the information on an on-going basis in the financial statements if it wishes to provide regular reminders to investors. However, under the new approach in National Instrument 81-106 Investment Fund Continuous Disclosure that requires investors to request that financial statements be sent to them, we expect that most investors will not choose to receive the financial statements each time they are filed.
This exemption is an extension of the minimum amount exemption. Access to this exemption is permitted only if securities in the investment fund have been acquired under the minimum amount exemption, which is a proxy for sophistication. In addition, the investor must continue to hold securities of the investment fund that were originally acquired for the minimum amount (regardless of their current value) or securities that have a net asset value in excess of the minimum amount.
The language chosen parallels the language used in National Instrument 51-102 Continuous Disclosure Obligations. Section 2.2 of the Companion Policy provides clarification of the meaning of this term.
order to avoid confusion, it may be prudent to clarify that the portion of the definition of “executive officer” that includes an individual who performs a policy-making function in respect of the issuer should be limited to performing a policy-making function for the principal or core business of the issuer.
75. Section 2.22 - One commenter noted that the CNQ should be definition of included in the list in the definition of “listed issuer”. “listed issuer”
76. Section 2.23 One commenter asks if the wording of section 2.23 The question of whether a single trustee controls a Interpretation - suggests that a single trustee of an income trust or trust will depend on whether such trustee has the control other similar issuer, which has several trustees, “power to direct the management and policies of controls the trust. If so, the commenter states that the the trust”. This is a question of fact and we do not provision should be adjusted. see that the provision requires adjusting. 77. Section 2.24(4) One commenter asks whether subsection (4) of Subsection (2) is, by virtue of its wording, caught Employee, section 2.24 should also refer to subsections (2) and by subsection (4). Subsection (3) does not refer to executive officer, (3) of section 2.24. a distribution so a reference in subsection (4) is director and not necessary. consultant
78. Section 2.30 Five commenters gave their opinion on whether of Incorporation or not this exemption should be retained. organization Three commenters agree that, due to the availability of other exemptions, the exemption contemplated by section 2.30 is unnecessary and need not be included
We have not expanded the list to include CNQ. We will consider including the CNQ in the list after we have had sufficient time to examine its applicable rules and policies.
We have deleted this exemption given the availability of the exemptions in sections 2.4 [Private issuer exemption], 2.5 [Family, friends and business associates exemptions], 2.7 [Control person, founder and family exemption] and 2.24 [Employee exemption]. Page 28 of 44
in the final instrument. One commenter suggests that this is only a useful exemption if the cap on five investors is removed.
One commenter requests that the exemption be retained. The commenter points out that much time and expense has been wasted in determining available exemptions in intra-corporate family situations over the past few years in Ontario, and this exemption is used frequently in the formation stage of companies. The commenter believes it would be a shame to lose another exemption that has no investor protection effects.
79. Section 2.31(2) One commenter questions whether the word Dividends “dividend” in section 2.31(2) should say “dividend or to permit non-corporate entities to make dividend-distribution”, to cover non-corporate issuers and to be consistent with paragraph (1).
80. Section 2.33 Two commenters noted that underwriters acquiring Acting as securities under this exemption could not sell their underwriter securities without a prospectus or exemption. One commenter presumes that this is intended because securities being sold by an underwriter should be sold under a prospectus or an available exemption. The other commenter submits that that there is no
we have added “distributions” to this exemption like distributions. We also clarified in subsection (2) that the distribution must “out of earnings or surplus”.
We have removed section 1.5 from NI 45-106 and in its place have provided guidance in the Companion Policy at section 1.8 on the proper use of the accredited investor exemption by a person acting as an underwriter. The guidance addresses our policy concerns with respect to underwriters purchasing securities under an exemption with a view to distribution. Deletion of section 1.5 will effectively allow Page 29 of 44
harm to the marketplace and no abuse of the resale provisions as long as the underwriters are required to hold as principal for the 4-month period and meet the the securities without a view to distribution. As other requirements of Multilateral Instrument 45- 102. 81. Section 2.34 One commenter questions whether it is appropriate Guaranteed debt from either an investor protection or foreign relations government debt to be free-trading and at the perspective (including international treaty obligations) to require foreign government debt, but not Canadian government debt, to be rated.
82. Section 2.34(2) The Ontario Strategic Infrastructure Financing Guaranteed debt Authority requests a registration and prospectus exemption for debt securities issued by it. They are not included in the exemptions in s. 2.34(2)(c) and (e).
83. Section 2.36 Several commenters involved in the business of Mortgages originating, funding, purchasing, selling and servicing mortgage investments expressed concern that syndicated mortgages were not included in the exemption in section 2.36 [mortgage exemption]. The commenters make the following points:
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underwriters to acquire securities by way of their status as accredited investors where they purchase accredited investors they will be subject to a 4-month restricted period on resale. We are comfortable allowing Canadian same time requiring that foreign debt be rated. We understand Canadian government debt and recognize that foreign debt may vary widely in terms of quality and risk. We note that in some jurisdictions the current version of this exemption requires that the foreign government issuer be recognized by the regulatory authority.
The OSC has an exemption for the Ontario Strategic Infrastructure Financing Authority entity’s securities in its regulations. The other jurisdictions are not prepared, at this time, to add this entity to the list of entities whose securities can be traded without a prospectus or registrant.
We have amended section 2.36(2) in order to maintain the status quo regarding syndicated mortgages while we study this issue further. As a result, the exemption for syndicated mortgages will be available in all jurisdictions except British Columbia, Manitoba, Quebec and Saskatchewan.
1) Mortgage broker legislation should regulate all aspects of the mortgage industry, including syndicated mortgages.
2) Any attempt to improve the protection of investors should be achieved in consultation with the mortgage brokerage industry and should allow time for further study.
3) If syndicated mortgages are governed by securities legislation, a dual registration regime would be created resulting in increased costs.
4) A syndicated mortgage is no more complex than a mortgage held by a single private individual as the underlying investment is the same.
5) Investors in syndicated mortgages often hold a significant portion of their assets in such instruments as this is where their area of expertise lies. Such investors should not be excluded from investing in syndicated mortgages because they do not qualify as “accredited investors”.
6) Carving out syndicated mortgages will decrease the ability of investors to diversify their portfolios and will decrease capital available to borrowers.
One commenter submits that if the exclusion of syndicated mortgages from the mortgage exemption is maintained, the following changes should be made
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to accommodate syndicated mortgages: 1) Rather than an offering memorandum, mortgage brokers should be allowed to use existing disclosure documents such as the Form 1(under the Mortgage Brokers Act) in Ontario, which do not carry statutory rights of action.
2) Reports of exempt distribution should not be required for syndicated mortgages.
3) In Ontario and Newfoundland, there should be a grace period of 4 months for registration as a limited market dealer.
4) Exemptions similar to the private issuer exemption in section 2.4 and the family, founder control person exemption in section 2.7 should be created for syndicated mortgages. In each case the term “mortgage broker” could be substituted for the term “issuer”. There may be other exemptions that could be adapted in this way to provide exemptions that are better tailored to meet the requirements of syndicated mortgages.
84. Section 2.39 One commenter requested that the CSA consider We have not changed the wording as suggested by Variable whether it should exempt trades in variable insurance the commenter. In our view, the exemption does insurance contract contracts issued by insurance companies rather than not restrict trades by agents of an insurance trades in variable insurance contracts by insurance company. companies. The commenter noted that this change would facilitate the trade of variable insurance
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contracts by licensed insurance agents. 85. Section 2.41 - One commenter suggests that the exemptions for Schedule III evidences of deposit should be extended to all Banks “Canadian financial institutions” as defined in NI 45- 106.
86. Section 2.42 One commenter advises that the wording of section We agree. We have added additional wording to Conversion, 2.42(1)(b) in conjunction with section 2.42(2) could clarify. exchange, or be misconstrued as requiring an issuer to provide exercise notice to regulators in the case of trades of both securities of another issuer that is a reporting issuer and securities of its own issue where the issuer is, itself, a reporting issuer. The commenter recommends clarifying the wording in section 2.42(1)(b) to read as follows, “subject to subsection (2), the issuer trades a security of a reporting issuer held by it to an existing security holder in accordance with the terms and conditions of a security previously issued by that issuer”.
87. Section 2.42 One commenter recommends adding the words “of Conversion, the issuer” after “existing security holder” in section exchange, or 2.42(1)(b). exercise The same commenter also requests that the companion policy give some guidance as to what is required under section 2.42(2)(b) to satisfy a
It is not necessary to provide an exemption for evidences of deposit issued by all Canadian financial institutions because in most jurisdictions such evidences of deposit are excluded from the definition of “security” under securities legislation. Jurisdictions that do not have the exclusion provide a local exemption.
We agree. Additional wording has been added. Regarding the second comment, this wording has been in place for some time in provincial securities laws and we are not inclined to add guidance in the Companion Policy because the information that is required will depend on the Page 33 of 44
regulator. nature of the particular offering. 88. Section 2.43 One commenter questions the connection between We have added Newfoundland and Labrador to Removal of section 2.43(1) of the instrument with section 3.2 of section 2.43(1). exemptions - the companion policy. Subsection 2.43(1) of the market instrument lists the exemptions that are unavailable intermediaries in Ontario to Market Intermediaries and section 3.2 of the companion policy states that the exemption listed in subsection 2.44(1) are unavailable to market intermediaries in Newfoundland and Labrador, as well as Ontario.
89. Section 3.6(1) One commenter observes that CNQ and other Small security marketplaces are not included in section 3.6(1). The holder commenter also questions the need for an exchange’s rules to be “substantially similar”. The commenter argues that the rules could be different and still be acceptable.
90. Section 3.7 One commenter believes section 3.7(b) is too Adviser limiting and does not accord with what occurs in practice. Many commentators, including representatives of registered dealers or advisers, comment in newspapers without falling into these narrow exemptions. They may not give advise solely expand this exemption to include other forms of through such media, they may give advise through radio or TV or the emerging free newspapers, or in books, etc. The legitimate investor protection issue
We have not expanded the list to include the CNQ (see comment # 75). We believe “substantively similar” is an adequate test. If an exchange’s rules are different but the exchange believes they are acceptable, then the appropriate course of action would be for the exchange to apply for designation for the purposes of NI 45-106.
This exemption has been deliberately limited to written publications that are subscribed for. These publications may, under the current wording of the exemption, be delivered electronically. We are not prepared at this time to media such as television because that would require policy analysis that is beyond the scope of this project. We note that section 3.7(a)(v) Page 34 of 44
is presumably unqualified and unregistered people pushing securities for compensation from the issuer (or a broker), and that should be addressed without unduly restricting freedom of expression and without discouraging educational an informative discussions.
91. Section 4.1 One commenter suggests replacing the language of We agree. We have made the suggested changes. Control block section 4.1(3)(a)(i) with “has filed the reports distributions required under the early warning requirements or files the reports required under Part 4 of NI 62-103”, in order to clarify that an eligible institutional investor can avail itself of the exemption even if it does not participate in the alternative monthly reporting regime.
The commenter also points out a typo in section 4.1(4), which should be corrected by deleting “of” and replacing it with “in”.
92. Section 4.2 Trade One commenter notes that the exemption applies to a by control person “take-over bid” as opposed to the current exemption after take-over in OSC Rule 45-501 that applies to a “formal bid”. bid
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provides an exemption for registered dealers while registered advisers do not require an exemption.
The exemption has its roots in Ontario securities legislation and was originally restricted to “formal bids”, i.e., bids for which, among other things, a take-over bid circular is issued and filed. However, Quebec does not have the concept of a “formal bid”. As a result, the exemption refers to a “take-over bid”. We have clarified in the introductory sentence of subsection 4.2(1) that the exemption is only available if the take-over bid or the competing take-over bid, as the case may be, was a bid for which a take-over bid circular was issued and filed.
93. Section 4.2 Trade One commenter advises that section 4.2(2) should by control person also exclude the need to comply with section after take-over 4.2(1)(c). bid 94. Part 5 - Offerings Two commenters were disappointed that the OSC by TSX Venture chose not to adopt this exemption. One commenter Exchange raised the concern that if the exemption is unavailable in Ontario it will result in a significant subset of TSX Venture Exchange issuers being disadvantaged in their ability to raise funds in Ontario. The other commenter noted that, as with the omission of the offering memorandum exemption, this will actually reduce disclosure and director liability as issuers use exemptions requiring no disclosure document or certification of disclosure.
95. Section 5.2 TSX One Commenter agrees that the exemption in section We acknowledge the comment. Venture 5.2 is not necessary for the Ontario market. Exchange Offering
96. Part 6: Reporting One commenter questioned the need for filing reports We have not removed any filing requirements as Page 36 of 44
Exclusion of the need to comply with section 4.2(1)(c) would make the exemption available for an indeterminate period whereas a 20-day period of availability is appropriate. The mandate of this project was to consolidate existing prospectus and registration exemptions available in 13 jurisdictions into one instrument and to harmonize them to the extent possible within an ambitious time frame. We see the implementation of NI 45-106 as an important first step toward further harmonization of the prospectus and registration exemptions across Canada. We believe the carve-outs and differences that are contained in NI 45-106 are only present where jurisdictions have made compelling arguments to maintain those carve-outs and differences. In particular, the OSC is of the view that proposed changes to NI 44-101 Alternative Forms of Prospectus will make this exemption unnecessary for market participants in Ontario.
Requirements s. in connection with private placements. The we consider this information necessary for the 6.1 Report of commenter noted that securities issued pursuant to proper regulation of the capital markets. exempt other exemptions do not require reports to be filed distribution and was uncertain why there was a distinction. The commenter suggested that in lieu of filing a report of exempt distribution issuers of exempt securities could be required to maintain records of such issuance including evidence of compliance for a specified period of time.
97. Part 6: Reporting One commenter urged the CSA to reconsider the Requirements requirement to provide names and personal information of purchaser of securities issued under exemptions. With the advent of privacy laws, the commenter did not see a continued regulatory need for publicly naming purchasers of exempt securities. As an alternative issuers could be required to maintain this information on their own books and records only.
98. Part 6: Reporting One commenter suggests that the CSA does not need Requirements to continue to publish summaries of the reports of exempt distributions. The commenter questions the need for giving notice to the public of any private placement and especially private placements in non- reporting issuers. For reporting issuers the disclosure should be dealt with under the timely and continuous disclosure obligations. 99. Part 6: Reporting One commenter states that there is a discrepancy Requirements between the requirement in section 6.1 to file a report have added guidance in section 5.1 of the
The information provided in Schedule I of Form 45-106 F1 Report of Exempt Distribution requires disclosure of personal information regarding purchasers. However, this information is not made available to the public and this is indicated on the form.
Not all jurisdictions publish summaries of reports of exempt distributions. But those that do believe notice to the public regarding certain private placements is beneficial while not harming issuers who are able to take advantage of a wide variety of available exemptions. We note that private issuers using the private issuer exemption are not required to file reports of trades. We do not believe there is a discrepancy. We Page 37 of 44
in the local jurisdiction in which the distribution takes place and section 1.4 of the companion policy which states that a distribution can occur in more than one jurisdiction. The commenter requests that the CSA clarify the situation and state that a report need only be filed in the jurisdiction where the purchaser resides.
100. Section 8.1 One commenter asks whether section 8.1(1)(a) We agree. We have made the suggested change. Transitional should be clarified to state that the securities referred to are the initially acquired securities.
101. Form 45-106F1 One commenter asks whether additional industries need to be specified in this form, such as retail sales businesses and food service businesses. Also, the commenter asks whether explicit privacy consent is necessary if disclosure is required by law.
102. Form 45-106F1 One commenter noted that the Form requires disclosure of purchasers in all foreign jurisdictions in a new requirement for most jurisdictions. If a addition to each local jurisdiction, and that this requirement will be new in Ontario. The commenter also submitted that there is no need for issuers to file these details (identity, address and phone number for non-Canadian purchasers).
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Companion Policy to clarify when a report of exempt distribution must be filed. Harmonization across jurisdictions on the question of where trades and distributions occur is beyond the scope of this project.
We have not added more categories because we have general categories and an “other” category. Privacy legislation in Ontario requires the OSC to obtain consent when it is indirectly collecting personal information. In this case, the OSC is requiring an issuer to collect the personal information of purchasers on behalf of the OSC.
Disclosure of purchasers in all jurisdictions is not distribution occurs in a jurisdiction of Canada under these exemptions disclosure of this information is required. We believe that disclosure of this information is necessary to protect the integrity of our markets. We also note that information disclosed in Schedule 1 is not publicly available.
103. Companion Two commenters seek clarification on the issue of Harmonization across jurisdictions on the Policy 1.4 where trades or distributions occur. question of where trades and distributions occur is beyond the scope of this project. One commenter believes that the effect of section 1.4 is to unnecessarily restrict Ontario-based issuers from using exemptions. The provision will hurt capital-raising competitiveness vis-à-vis non-Ontario competitors without in any way being relevant to investor protection. The commenter cannot see why, as a policy or constitutional matter any jurisdiction should seek to regulate the raising of capital by companies in its territory from investors in other Canadian jurisdictions. A better approach than section 1.4 would be for each jurisdiction to either confirm the interpretation that the place of residence of the investor determines the exemptions available, or alternatively if they are worried about capital-raising outside Canada, to grant an exemption to issuers based in their jurisdiction in respect of capital-raising in other Canadian jurisdictions. In any event, the “coming to rest” analysis in Interpretation Note 1 should be referred to for Ontario purposes. This applies to other provinces that diverge from the national approach. See also section 3.2 in CP 45-501 in Ontario.
One commenter notes that this section is inconsistent with OSC Interpretation Note 1 and asks that the CSA clarify that a distribution only occurs in the jurisdiction where the purchaser resides. The
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commenter noted that they do not believe that there is any policy reason to take the position that there must be compliance with the legislation of both the jurisdiction of the issuer and that of the purchaser. As the purpose of the legislation is to protect investors, the commenter suggested that there should be dealer registration and prospectus exemptions in the jurisdiction of the seller, if the trade is compliance with the laws of the purchaser.
104. Companion One commenter notes that section 1.7 of the The CSA, along with the IDA, the MFDA and Policy s. 1.7 Companion Policy has historically (Companion industry participants, is working on a registration Policy 45-103CP Capital Raising Exemptions) had reform project and intends to harmonize, the effect of preventing a seller or its agent in modernize and streamline the registration regime connection with a trade that is exempt from the on a national basis. The suggestion is properly dealer registration requirements from giving advice dealt with under the registration reform project that would be incidental to a trade. The commenter and is not within the scope of NI 45-106. states that this provision should not be interpreted to prevent an unregistered dealer from providing the same type of advice with respect to an exempt trade that a registered dealer could give in connection with a trade. The commenter suggests adding an exemption: “The adviser registration requirement does not apply to a person if the advice given is incidental to a trade that is exempt from the dealer registration requirement”.
105. Companion One commenter believes that section 1.8 should be Policy Section 1.8 restricted to the $150,000 exemption.
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We believe syndication is a concern in other contexts as well (for example the private issuer exemption).
106. Companion One commenter suggests that the wording of section Policy s. 1.9 1.9 be changed to read: “An issuer should request that the purchaser indicate within which branch of the accredited investor definition the purchaser fits.” The change would make it clear that it is adequate to follow the current practice of requiring the investor to initial or check a box opposite one of the clauses that make up the definition.
107. Companion The conditions applicable to the use of the offering We have clarified the wording in the Companion Policy Section memorandum exemption by investment funds as set Policy. 3.9(2) out in section 3.9(2) of the Companion Policy do not seem to fully reflect the conditions stipulated in subsection 2.9(2) of NI 45-106.
108. Companion One commenter advises that section 4.2 should refer Policy Section 4.2 to the Bankruptcy and Insolvency Act.
109. National Policy One commenter states that the NP 48 should be NP 48 is currently being reformulated and this 48 clarified, hopefully by confirming that it is of no matter will be dealt with in a separate initiative. force and effect with respect to any of the exemptions in NI 45-106.
110. Limited Market Six commenters noted that despite the attempt by the Dealers CSA to develop a harmonized prospectus and
Generally, we believe that anyone relying on an exemption is responsible for determining that a particular exemption is available for the trade they intend to conduct. There may be a range of methods available to make such a determination and it is not appropriate for us to limit those methods. For accredited investors, we believe sellers should determine the appropriate mechanism for satisfying themselves that purchasers are accredited investors. We have added guidance to section 1.10 of the Companion Policy to help issuers ensure that they are using the accredited investor exemption appropriately.
The reference in section 4.2 provides an example and we do not believe that the example requires expansion.
The CSA, along with the IDA, the MFDA and industry participants, is working on a registration Page 41 of 44
registration exemption regime, both Ontario and reform project and intends to harmonize, Newfoundland and Labrador continue to require modernize and streamline the registration regime certain market intermediaries who participate in a on a national basis. The limited market dealer private placement of securities to be registered as category will be considered and public comment limited market dealers. The commenters questioned will be requested in the context of that project. the policy, or regulatory, goal of such registration in light of the lack of proficiency, capital and insurance requirements, which are imposed on such market intermediaries. These commenters also suggested that Ontario and Newfoundland and Labrador revisit whether universal registration is appropriate.
One of the commenters also noted that this category of registration creates additional confusion in the marketplace and makes it difficult for an issuer to have a unified marketing and distribution plan for all of Canada.
111. Sale of pooled One commenter states that it is unreasonable that The CSA, along with the IDA, the MFDA and funds and other mutual fund dealers can sell pooled funds and other industry participants, is working on a registration exempt products exempt products in some jurisdictions and yet are reform project and intends to harmonize, prohibited from selling them in others. The modernize and streamline the registration regime commenter also noted that it is imperative that a on a national basis. uniform Canadian standard be established regarding what mutual fund dealers can and cannot sell.
112. Trades in mutual One commenter strongly urges the CSA to consider We do not currently intend to incorporate OSC fund securities to including mutual fund exemptions similar to those Rule 32-503 into NI 45-106. corporate found in OSC Rule 32-503 in NI 45-106, so that they sponsored plans are available for the benefit of participants in capital accumulation plans established in all jurisdictions of
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Canada. The commenter notes that the concerns regarding availability of these exemptions outside of Ontario are not addressed by the proposed exemptions for trades of mutual fund securities to capital accumulation plans set out in CSA Notice 81-405 Proposed Exemptions for Certain Capital Accumulation Plans.
113. Capital Two commenters suggest that the Capital We intend to incorporate the Capital accumulation Accumulation Plan exemption should have also been Accumulation Plan exemption into NI 45-106 at a plan integrated into NI 45-106, as this instrument should later date. harmonize all exemptions in one instrument.
114. British One commenter notes that NI 45-106 does not Columbia’s incorporate the British Columbia exemption for Bonus and bonuses and finder’s fees. The B.C. exemption is Finder’s fee useful for TSX Venture issuers to issue securities to exemption non-insiders for services performed in connection with arranging a loan, acquiring or disposing of an asset, or making various other distributions. The commenter suggests that the CSA should adopt this exemption, but without any residency requirements.
115. Foreign Advisers One commenter suggests that a registration exemption should be added for foreign advisers similar to OSC Rule 35-502 Non-Resident Advisers. The commenter notes that the OSC is the only commission with a rule on this point, the other CSA jurisdictions routinely grant foreign advisers exemptive relief from the registration requirements.
Jurisdictions outside B.C. are not prepared to adopt this exemption at this time, but will consider adopting it in the future. We note that many of those who might use this exemption may be able to use the “consultant” exemption in section 2.24 of NI 45-106. The BCSC intends to continue to offer this exemption and will consider deleting the residency restrictions that currently exist.
The CSA, along with the IDA, the MFDA and industry participants, is working on a registration reform project and intends to harmonize, modernize and streamline the registration regime on a national basis. The issue of non-resident advisers will be discussed in the context of that project. Page 43 of 44
The commenter recommends the CSA adopt this nationally in the interests of uniformity and in order to provide for greater clarity of the regime as it applies to advisers wishing to do business in the other provinces and territories.
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