It’s no surprise that the prospectus requirements of Canada’s securities laws – that is, the need to use a Canadian prospectus or rely on a prospectus exemption – apply when a Canadian issuer sells securities to investors in Canada. And it shouldn’t come as a surprise that Canada’s prospectus requirements also apply when a non-Canadian issuer sells securities to investors in Canada. What might be surprising, however, is that Canada’s prospectus requirements may apply if the issuer or a selling security holder is in Canada, even if the investors are not.
Canada’s Prospectus Requirements
Under Canadian securities laws, if no prospectus exemption is available, a distribution of securities may only be made by using a prospectus that complies with Canadian securities law requirements and has been filed with the Canadian securities regulators. A distribution includes sales of securities by an issuer or a control person (generally, a 20% or greater shareholder), whether the sales are being made directly or through a securities dealer acting as an underwriter or a placement agent. It also includes sales of securities that were previously distributed in Canada under a prospectus exemption, unless the issuer is subject to public company reporting obligations in Canada and the applicable Canadian hold period has elapsed. The most commonly used prospectus exemption is one that allows sales of securities only to investors who qualify as accredited investors as that term is defined in Canada. Typically, using the accredited investor exemption will require the preparation of a Canadian wrapper for the non-Canadian offering document as well as filing post-closing sales reports with the Canadian securities regulators.
Sales of Securities into Canada
The securities laws of a particular province of Canada will apply if securities are sold to purchasers resident in that province or if the purchaser has sufficient other factual connections to that province to trigger the application of its securities laws. Typically, the prospectus requirements under the laws of a province will apply if significant actions in furtherance of the trade are taking place there. Making the investment decision to acquire the securities is generally considered a significant act in furtherance of a trade. So, for example, assuming that no Canadian prospectus has been prepared,
a distribution of securities to an investor resident in British Columbia must comply with a Canadian prospectus exemption, even if the individual is temporarily travelling in the United States;
a distribution of securities to a person making the investment decision while physically present in Canada, or executing subscription documents or placing the purchase order while in Canada, typically must comply with a Canadian prospectus exemption, even if the purchaser is a U.S. resident who is temporarily travelling in Canada;
a distribution of securities to an investment manager in Ontario making a fully discretionary investment decision to acquire securities for an account it manages must comply with a Canadian prospectus exemption, even if the beneficial owner of the account is in the United States; and
a distribution of securities to an investment manager in the United States making a fully discretionary investment decision to acquire securities for an account it manages would not have to comply with a Canadian prospectus exemption, even if the beneficial owner of the account is in Canada, so long as the beneficial owner is not involved in any way in making the purchase of the securities and no acts in furtherance of the trade take place in Canada.
Sales of Securities from Canada
Some of the provinces of Canada – particularly, British Columbia, Alberta and Québec – take the position that their securities laws will apply, in certain circumstances, to distributions of securities made by an issuer (or selling security holder) located in that province, even if all of the purchasers are located in the United States or elsewhere outside Canada. For example, the British Columbia Securities Commission has stated that, assuming there is no Canadian prospectus, a distribution by an issuer will generally have to comply with the requirements of a British Columbia prospectus exemption in the following circumstances:
The issuer’s mind and management is primarily located within British Columbia – for example, if the issuer’s head office or the issuer’s key officers and directors are located in British Columbia;
The business of the issuer is administered from, and the operations of the issuer are conducted in, British Columbia; or
Actions, solicitations, conduct or negotiations in furtherance of the distribution take place in British Columbia.
What this means is that if an issuer headquartered in British Columbia plans to make an offering of securities to investors in the United States, it must either file a Canadian prospectus or take steps to make sure that all purchasers in the United States satisfy the requirements of an available Canadian prospectus exemption. It does not matter whether the issuer has filed or will be filing a registration statement under the U.S. Securities Act or is using Rule 144A or another exemption from the U.S. registration requirements, because compliance with U.S. federal securities laws is not sufficient to satisfy the Canadian requirements.
Any distribution of securities by an issuer or selling security holder located in Canada could be subject to Canada’s prospectus requirements, depending on the facts and circumstances, so the need for Canadian legal advice should be considered early in the process in any offering involving a Canadian issuer or selling security holder.
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.