Effective June 30, 2016, issuers will have to report prospectus-exempt distributions that settle on or after that date in any Canadian jurisdiction using a new, harmonized Form 45-106F1 (New Form), with significantly increased information requirements. Also effective June 30, 2016, annual exempt distribution trade reporting by investment funds will change from a financial year to a calendar year basis.
The New Form is the product of a two-year effort by the Canadian Securities Administrators (CSA) to reform the private placement reporting regime. Different CSA jurisdictions had previously published two differing proposals related to reporting prospectus-exempt distributions, in February and March 2014, and then another more harmonized proposal in August 2015. See our August 2015 Blakes Bulletin: Yet More Enhancements Proposed for Private Placement Reporting for more information. The New Form reflects comments received in response to, and informal consultations held in connection with, these three proposals. The CSA published on April 21, 2016, the related Multilateral CSA Staff Notice 13-323 – Frequently Asked Questions About Making Exempt Market Offering and Disclosure Filings on SEDAR.
PURPOSE AND APPLICATION OF NEW FORM
Currently, in all Canadian jurisdictions, most distributions under the accredited investor exemption and most other prospectus exemptions must be reported to the local securities regulator, using Form 45-106F1 – Report of Exempt Distribution (except in British Columbia, which may require Form 45-106F6 – British Columbia Report of Exempt Distribution in some cases). These two forms will be replaced by the New Form, which will apply in all Canadian jurisdictions to both investment fund issuers and non-investment fund issuers.
The stated purpose of the New Form is to reduce the compliance burden for issuers and underwriters, facilitate more effective regulatory oversight of the exempt market and improve analysis for policy development purposes. However, the New Report introduces significantly increased disclosure requirements. It may exempt some issuers from providing certain required information if that information is already available through the issuer’s continuous disclosure filings, the issuer’s profile on the System for Electronic Document Analysis and Retrieval (SEDAR) or for the dealer, from its firm profile on the National Registration Database (NRD).
FILING METHODS CHANGING MAY 24, 2016
While the content of the New Form will be harmonized, filing methods will still vary depending on where purchasers are resident. Issuers filing reports of exempt distribution (whether the existing form or subsequently the New Form) in Ontario must file by completing an electronic version on the Ontario Securities Commission’s (OSC) Electronic Filing Portal; British Columbia filings must be made through the British Columbia Securities Commission’s eServices portal; in the other Canadian jurisdictions, effective from May 24, 2016, reports of exempt distribution must be filed on SEDAR, except in the case of certain foreign issuers who will continue to use paper filing. In jurisdictions that require reports of exempt distribution to be filed on SEDAR, each report will be subject to a C$25 SEDAR system fee (applicable to both reporting and non-reporting issuers and in addition to the filing fees that issuers currently pay when filing a report of exempt distribution in each applicable jurisdiction).
REPORTING RESPONSIBILITY UNCHANGED
The New Form also does not change the responsibility for filing the trade report itself. In most cases where a dealer is underwriting securities as principal, the underwriter will be responsible for filing the trade report. In situations where dealers are distributing the securities as agent for the issuer, the trade report can be filed on behalf of the issuer either by the issuer itself or its dealer. Most commonly, the trade reports are filed by dealers since they have easy access to the purchaser information.
INFORMATION REQUIREMENT CHANGES
The following new required items of identification information (if applicable) have been added to the New Form:
Issuer’s SEDAR profile number (see below under “SEDAR Filings”)
Issuer’s legal entity identifier assigned in accordance with the standards set by the Global Legal Entity Identifier System
North American Industry Classification System code that most closely corresponds to the issuer’s main business activity
Previous legal name of the issuer if the issuer’s name has changed in the last 12 months
NRD number for the underwriter, investment fund manager and any registrant being compensated
Committee on Uniform Security Identification Procedures (CUSIP) numbers for the securities being distributed
Website address of issuer, underwriter and investment fund manager
Email address of the individual certifying the report’s content
The New Form requires the following new information items in respect of non-investment fund issuers:
Number of employees of the issuer (whether 0-49, 50-99, 100-499, or 500 or more)
Issuers in the mining industry must disclose stage of operations
Issuers involved in certain investment activities must disclose the areas of their primary asset holdings
Issuers without a SEDAR profile must disclose the issuer’s date of formation (or if the issuer resulted from an amalgamation, arrangement, merger or reorganization, the date of the most recent amalgamation, arrangement, merger or reorganization), the issuer’s financial year-end, all exchanges on which the issuer’s securities are listed (where the issuer applied for the listing, e.g., not automated trading systems) and the size of the issuer’s assets (as at its last year-end, by certain brackets)
For an investment fund issuer, new items of information that will be required to be disclosed include the net asset value of the fund (as at its most recent net asset value calculation, by certain brackets), the date of formation of the fund, the fund’s financial year-end, jurisdictions where the fund is reporting and all exchanges on which the fund’s securities are listed. Investment funds are permitted to report private placement trades annually, but the reporting deadline will change from 30 days after the fund’s financial year-end to 30 days after the calendar year-end. For distributions that occur after June 30, 2016, and before January 1, 2017, investment funds will have the option to file either the current report or the New Report. For distributions that occur on or after January 1, 2017, the New Report must be used.
Confidential Director, Officer, Promoter and Control Person Information
The following types of issuers are referred to collectively as “exempted issuers”: an investment fund, a reporting issuer or a subsidiary of a reporting issuer, a foreign public issuer or its subsidiary, or issuers distributing eligible foreign securities only to permitted clients. For this purpose, “foreign public issuers” means issuers that (a) have a class of securities registered under section 12 of, or are required to file reports under section 15(d) of, the U.S. Securities Exchange Act of 1934, or (b) are required to provide public continuous disclosure in any of the designated jurisdictions of Australia, France, Germany, Hong Kong, Italy, Japan, Mexico, the Netherlands, New Zealand, Singapore, South Africa, Spain, Sweden, Switzerland or the United Kingdom. “Eligible foreign securities” means securities offered primarily outside of Canada that are either (a) issued or guaranteed by the government of a foreign jurisdiction or (b) are issued by an issuer that was incorporated, formed or created outside Canada, is not a reporting issuer in Canada, has its head office outside of Canada, and has a majority of the executive officers and a majority of the directors ordinarily resident outside of Canada.
An issuer eligible for the Canadian wrapper exemption will qualify as an exempted issuer. See our June 2015 Blakes Bulletin: Canadian Wrapper Exemptions Implemented as Rules for more information on wrapper relief available for foreign issuers.
The report in respect of a distribution by an issuer that is not an exempted issuer must provide the name, title, and province, state or country of residence of their directors, executive officers and promoters. This information will be public. Additionally, the report for an issuer that is not an exempted issuer must provide, on a confidential basis, the telephone number and email address of the chief executive officer as well as the full residential address of each director, executive officer, promoter and control person of the issuer. If a control person is not an individual, the New Report requires the name and location of the control person to be provided.
The New Form clarifies that where an issuer is located outside of Canada, the report need only cover distribution information for trades made to jurisdiction(s) in Canada where a purchaser resides.
For distributions of warrants, options or other rights, the exercise price and expiry date must be disclosed. For convertible or exchangeable securities, the conversion ratio must be disclosed as well as any other terms for each convertible or exchangeable security.
Finally, if a distribution has occurred in Ontario, Quebec, New Brunswick, Nova Scotia or Saskatchewan, the report must list the offering materials that are required to be filed or delivered in connection with a distribution under securities legislation in those jurisdictions, such as an offering memorandum.
With respect to compensation, the New Form requires that an issuer indicate whether the person compensated in connection with the distribution in Canada facilitated the distribution through a “funding portal” or an “internet-based portal” (an intermediary that provides an online platform for issuers to offer and sell securities to investors). The issuer must also indicate whether the person compensated in connection with the distribution is a registrant or an insider of the issuer (this was previously only required to be disclosed when a distribution was made in British Columbia requiring a Form 45-106F6 to be filed), an employee of the issuer or otherwise “connected” to the issuer (for purposes of this form, “connected” means if one of them is controlled by the other or each of them is controlled by the same person). The terms of any deferred compensation that may be paid to a person in connection with a distribution must also be disclosed.
Confidential Purchaser Information
The New Form requires increased disclosure related to the purchasers of the distribution. The New Form indicates that in each case, the “purchaser” means the beneficial owner of the securities, however, if a registered adviser, registered investment dealer, trust company or trust corporation has purchased securities on behalf of a fully managed account, then the purchaser information relates to that registered adviser, registered investment dealer, trust company or trust corporation, not the beneficial owner of the fully managed account. (Earlier versions of the proposed form had suggested looking through those managed accounts to require information about the ultimate beneficial owner, but that proposed requirement was not carried through in the final version).
This purchaser information will not be made publicly available. It also includes the email address of the purchaser and whether the purchaser is an insider of the issuer or registrant. The purchaser detail for accredited investors now also requires the specific details of the exemption relied on, e.g., which specific subsection or paragraph of the definition of “accredited investor” applies to the purchaser). Reporting dealers will need to consider how they will determine or verify such information.
Issuers that are required to file the New Form on SEDAR must do so whether they are reporting issuers or not. If they are not already reporting issuers, they must first create a SEDAR profile, using the “Other Issuer” profile template (this will not make such issuers into reporting issuers). The simpler “Other Filer” profile should not be used by an issuer who is making an electronic filing in the exempt market offerings and disclosure category. That “Other Issuer” profile will require items of information such as date of formation, jurisdiction of formation, size of issuer, financial year-end date, auditor particulars including name, address and telephone number, and stock exchanges where its securities are traded.
However, under the existing rules governing SEDAR, National Instrument 13-101, foreign issuers are exempt from using SEDAR for filings if they are incorporated or organized under the laws of a foreign jurisdiction outside Canada, unless either:
(a) Voting securities carry more than 50 per cent of the votes for the election of directors are held by persons or companies whose last address as shown on the books of the issuer is in Canada, and either:
(i) The majority of the senior officers or directors of the issuer are citizens or residents of Canada, or
(ii) Assets of the issuer representing more than 50 per cent of the total of all assets of the issuer are located in Canada, or
(iii) The business of the issuer is administered principally in Canada; or
(b) The issuer has a class of its equity securities listed for trading on a Canadian stock exchange and does not have any of its equity securities listed for trading on any foreign stock exchange or foreign published market.
A foreign issuer that is thus exempt from using SEDAR would file its New Form by paper filing with the relevant Canadian jurisdiction(s). However, any foreign issuer that is exempt from using SEDAR may elect to become an electronic filer, in which case it would be required to use SEDAR thereafter for a minimum two-year period.
ADOPTION OF NEW FORM AND AMENDMENTS IN ONTARIO
Although the New Report and associated amendments have been approved by the provincial securities commissions, the amendments remain subject to all necessary ministerial approvals. In Ontario, the Minister of Finance has until June 5, 2016, to approve or reject the rule, or return it to the OSC for further consideration. If the Minister does not take any action, the amendments will come into force on June 30, 2016.
QUEBEC PROPOSES TO SCRAP SEPARATE REQUIREMENT TO FILE PRIVATE PLACEMENT DISCLOSURE DOCUMENT
The Québec Autorité des marchés financiers (AMF) has published for comment a draft regulation that would eliminate the requirement currently existing under the regulation respecting securities (Quebec) that an issuer file with the AMF any disclosure document delivered to purchasers in connection with a prospectus-exempt distribution. The AMF is of the view that this requirement is no longer relevant given the additional disclosure provided for in the New Form. By doing away with the separate filing requirement, the change harmonizes Quebec law with the filing requirements under National Instrument 45-106 – Prospectus Exemptions and Multilateral Instrument 45-108 – Crowdfunding, and has the practical effect of no longer requiring the filing with the AMF of offering memoranda voluntarily provided to accredited investors. The deadline for comments is May 7, 2016. To date, no other Canadian securities regulator has proposed a similar change.