Multilateral Instrument 51-105 (MI 51-105) was adopted in 2012 by most of the provinces in Canada. It can cause an issuer that makes private placements into Canada to become subject to ongoing Canadian public company reporting obligations. In other words, the consequences of making a Canadian private placement can potentially be the same as if the issuer had completed an initial public offering in Canada by filing a prospectus with the Canadian securities regulators. Ontario was the only province that did not adopt MI 51-105, and Québec has created some very generous exemptions; however, the need for caution about private placements into other provinces remains.
What Problem Was MI 51-105 Supposed to Solve?
The Canadian securities regulators wanted to protect Canadians from investing in securities that trade publicly in U.S. over-the-counter (OTC) trading markets without being subject to the regulatory oversight of a Canadian or U.S. stock exchange. To close this gap in oversight, MI 51-105 will in certain circumstances deem the issuer to be a Canadian public company so that investors will have the benefit of ongoing Canadian public company disclosure documents.
When Does MI 51-105 Apply?
MI 51-105 applies only to an issuer that is an OTC issuer, meaning that it has a class of OTC-quoted securities, but does not have any class of securities listed on a Canadian or U.S. stock exchange. OTC-quoted securities include any class of securities that has been assigned a ticker symbol for OTC trading in the United States, including on the OTC Bulletin Board (OTC BB), the pink sheets or grey market trading.
The Three Triggers
Three triggers can result in an OTC issuer becoming a reporting issuer in Canada under MI 51-105. The first trigger applies if the OTC issuer’s business is directed or administered in or from a province that has adopted MI 51-105. The second trigger applies if an OTC issuer carries on any promotional activities in or from a province that has adopted MI 51-105. Promotional activities include any activities or communications by or on behalf of an issuer that promote the purchase or sale of its securities. The third trigger is potentially the most troubling because it can apply with retroactive effect. Under this trigger, an issuer can become a reporting issuer in some circumstances if it distributes securities in a province that has adopted MI 51-105 and then subsequently the same class of securities is assigned a ticker symbol for OTC trading in the United States. However, the third trigger will not apply if the issuer already had a ticker symbol for any class of its securities, on any stock exchange or market anywhere in the world, before the Canadian private placement took place.
Ontario and Québec
MI 51-105 was not adopted in Ontario, so none of the three triggers can apply to actions taking place only in Ontario. Québec has adopted a very generous exemption order, which effectively eliminates any concern about MI 51-105 applying so long as any securities distributed in Québec are distributed only to purchasers who qualify as permitted clients under Canadian securities laws, and the distribution is made by dealers who qualify as international dealers or are registered in Canada as securities dealers.
Exemptions in Other Provinces
Other provinces have adopted less generous exemption orders than the one adopted in Québec. In Alberta, British Columbia, Manitoba and several other provinces, an exemption will be available if the issuer has a “primary listing” (that is, its first-ever listing) of securities on one of the stock exchanges named in the exemption order. Those provinces have also adopted an exemption for non-convertible debt securities.
When MI 51-105 was first adopted, dealers were very concerned about potentially subjecting their issuer clients to the risk of becoming subject to Canadian public company reporting obligations. To address that risk, many dealers adopted very conservative internal restrictions on Canadian private placement sales, often by limiting Canadian sales only to Ontario and Québec more often than actually necessary. However, despite the continuing need to proceed with caution, in many cases an offering can be extended to other provinces because it will not create any risk of tripping one of the three triggers – or, even if it does, it can be sheltered by one of the available exemptions.
Canada and the United States have a lot in common, including the general principles behind their securities laws. But there are some differences you might find surprising. This newsletter will provide answers to some of the most commonly asked questions about Canada’s securities laws. While we hope you find it interesting, we also hope you understand that it is intended only to provide general information and should not be considered legal advice.