Canada: CSA Publishes Proposed Amendments To Prospectus Requirements

Copyright 2011, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Securities, July 2011

Highlights

• Proposed changes to clarify and streamline prospectus rules and codify certain previously granted prospectus relief
• Proposed changes to personal information forms of directors and officers and a proposed requirement that non-Canadian directors attorn to Canadian jurisdiction
• Additional disclosure regarding use of proceeds of best-efforts offering
• Additional disclosure requirements proposed for investment funds
• The proposed amendments are open for comment until October 14, 2011

The Canadian Securities Administrators (CSA) have proposed amendments to the prospectus requirements under Canadian securities laws, as well as certain consequential amendments to other rules. The proposed amendments largely clarify and streamline certain provisions of the current prospectus rules and codify certain types of prospectus relief that have been granted by the CSA in the past. The most significant proposed changes relate to the provision of personal information forms (PIF) by officers and directors and a proposed requirement that non-Canadian directors attorn to a Canadian jurisdiction in connection with a prospectus filing. The CSA are accepting comments on the proposed amendments until October 14, 2011.

This bulletin summarizes the significant proposed amendments.

PROPOSED AMENDMENTS GENERALLY APPLICABLE TO ISSUERS

Best-Efforts Offerings with No Minimum Offering Amount

The proposed amendments would require additional disclosure in a prospectus about the use of proceeds raised where the completion of a best-efforts offering is not subject to the issuer raising a minimum amount and the issuer faces significant short-term non-discretionary expenditures or significant short-term capital or contractual commitments and may not have other readily accessible resources to satisfy those expenditures or commitments.

In such circumstances, the prospectus would be required to disclose the use of proceeds with reference to thresholds of proceeds raised and identify priority uses if the issuer raises less than the maximum offering amount. The prospectus would also have to disclose the impact of raising threshold amounts on the issuer's liquidity, operations, capital resources and solvency.

In addition, issuers would be required to disclose that they may complete the offering even if only a small proportion of the offering amount set out in the prospectus is raised.

Proposed amendments to the Companion Policy to National Instrument 41-101, General Prospectus Requirements (NI 41-101), clarify the current CSA position that a regulator may require an issuer to specify a minimum offering amount in a prospectus where the regulator has concerns that a minimum amount of proceeds must be raised in order for the issuer to achieve its stated objectives or about an issuer's ability to continue as a going concern.

Personal Information Form Reforms
The proposed amendments would require issuers to file a PIF for each director, executive officer and promoter of an issuer at the time a preliminary prospectus is filed (subject to a limited exemption described below). The requirement to file PIFs would apply to all long form prospectus, short form prospectus, shelf prospectus and mutual fund prospectus filings. The proposed amendments differ from the existing PIF filing requirements in that a new PIF would have to be filed with securities regulators for each individual within three years prior to any prospectus filing. If the changes are implemented, individuals will no longer be able to satisfy PIF filing requirements by relying on PIFs or similar forms that are more than three years old and would have to complete new PIFs.

The proposed amendments would exempt issuers from the requirement to file a PIF for an individual if an issuer has filed a PIF of that individual with the regulator within the previous three years, provided that the issuer confirms that the responses to certain key questions in the PIF have not changed. This exemption would require issuers to obtain confirmation of these responses, or any changes, from the relevant individuals every time the issuer files a prospectus.

Contractual Rights of Rescission
Canadian securities laws provide statutory remedies to investors where a prospectus is found to have contained a misrepresentation. Typically, investors must commence an action for rescission of their purchase of a security under a prospectus within 180 days.

The CSA have proposed amending the Companion Policy to NI 41-101 to clarify that, in certain circumstances, where convertible securities are offered under a prospectus, they will expect issuers to provide purchasers with a contractual right to receive return of the purchase price for the convertible security where there is a misrepresentation in the prospectus, and the conversion, exchange or exercise of the original security for an underlying security occurred shortly after (generally within 180 days) the purchase of the original security under the prospectus. The CSA are concerned that, in the absence of such a contractual right, a conversion, exchange or exercise of a security issued under a prospectus, within the period when rescission could be available, will deprive the investor of the statutory rescission rights they would otherwise have. This is similar to the contractual right that the CSA require in relation to the issuance of underlying securities under a prospectus upon conversion of previously privately placed special warrants.

The proposed amendments indicate that the CSA would not normally have this concern for purchase warrants that are issued under a prospectus as part of a "unit" together with a common share. In most cases, the CSA would view such warrants as incidental "sweeteners," with the true investment decision being made in relation to the common share component of the unit.

Exemption from Incorporation by Reference of Opinions in Proxy Circulars
The CSA have proposed an exemption that would allow an issuer to exclude from a short form prospectus any reports, valuations, statements or opinions of experts, other than audit reports, that would otherwise be incorporated by reference because they are included in a management information circular for a special meeting, if they were prepared for a specific transaction that is unrelated to the prospectus financing and has been completed or abandoned. Often, expert reports or opinions in an information circular, such as a fairness opinion or tax opinion, are of limited use to prospective investors in a subsequent financing. Currently, these reports and opinions are required to be incorporated by reference in a prospectus, although the CSA have often granted exemptions permitting their exclusion, particularly in the last two years for corporate issuers that became successors to income trusts following a conversion transaction that was approved by security holders at a special meeting. This amendment will codify this type of exemption in the short form prospectus rules.

Directors' and Others' Submission to Jurisdiction and Agent for Service
Under Canadian prospectus rules, all individuals who are directors of an issuer at the time the issuer files a prospectus are liable for misrepresentations contained in the prospectus. Under the proposed amendments, all non-Canadian directors of an issuer would be required to submit to a Canadian regulator's jurisdiction and appoint an agent for service in Canada by filing with the regulator a non-issuer's submission to jurisdiction and appointment of an agent for service whenever the issuer files a prospectus. Currently, non-resident issuers and promoters are required to file a submission and appointment of agent form, but non-resident directors are not.

CSA staff are also considering whether to further extend the requirement to file a submission and appointment form to all foreign experts (such as "qualified persons" or auditors) who have consented to the disclosure in a prospectus of information from a report, opinion or statement made by them. The CSA are seeking public comment on the implications of such a requirement.

Primary Business Oil and Gas Exemption for Operating Statements
The proposed amendments extend the exemption available to oil and gas issuers carrying out acquisitions that would be considered acquisitions of a primary business or predecessor entity to rely on operating statements (in lieu of financial statements) when providing financial statement disclosure about the acquisition. In addition, the proposed amendments reflect the existing CSA practice of providing regulatory relief by exempting an oil and gas issuer from having to provide an audited operating statement for the third year preceding the date of the prospectus filing if a recent independent reserves evaluation (in specified form) has been prepared (and included in the prospectus) with an effective date within six months of the preliminary prospectus receipt date.

Notice of Intention to File a Short Form Prospectus – Exemption for Certain Issuers
The CSA have proposed amendments to the short form prospectus rules that would exempt successor issuers and issuers proposing to issue debt securities or preferred shares guaranteed by a reporting issuer parent (credit support issuers) from having to wait 10 business days after filing a notice of intention to file a short form prospectus until being able to file their preliminary prospectus. The successor issuer or credit support issuer will still have to file a notice of intention prior to or concurrently with its preliminary short form prospectus. This refinement of the rule will simplify access to the short form prospectus regime for these types of issuers.

PROPOSED AMENDMENTS APPLICABLE TO INVESTMENT FUNDS

The proposal includes a number of amendments to the prospectus disclosure requirements applicable to investment funds, including the following.

Leverage Disclosure for Investment Funds
The CSA propose to require an investment fund to include in its prospectus disclosure concerning the use of leverage used as an investment strategy by the fund. A fund will be required to disclose:

• the maximum amount of leverage it may use as a ratio of its maximum total assets divided by its net asset value, if the leverage is created through borrowing or the issuance of preferred securities; and
• the maximum amount of leverage it may use as a multiple of net assets and explain how the investment fund uses the term "leverage" and the significance of the maximum and minimum amounts of leverage to the fund; this disclosure is required for funds that create leverage through the use of specified derivatives (i.e., options, forwards and swaps) or similar instruments.

The CSA have been requiring leverage disclosure for some time, and this amendment will codify that requirement.

Trading Expense Ratio Disclosure
A new requirement will be that investment funds disclose their "trading expense ratio" for the five years for which annual return and management expense ratio is currently required to be provided. Trading expense ratio is described as the total trading commissions and costs of the investment fund as a percentage of its net assets, and the disclosure is designed to enable investors to determine the full costs of owning an investment fund or to compare the historical costs of different investment funds.

Organization and Management Details of the Investment Fund
Among the proposals are requirements for investment funds to include more detailed background concerning certain key persons involved in the management of the fund, including requirements for greater detail as to the background of directors or executive officers of an investment fund or its investment fund manager, and enhanced disclosure of ownership interests in the fund and its manager for directors and executive officers of the fund and manager and members of the fund's independent review committee.

Principal Distributor for Mutual Funds
Principal distributors of mutual funds will be required to sign a certificate for a mutual fund in the same form as the manager, effectively removing from a principal distributor the right to qualify the contents of the certificate "to the best of its knowledge, information and belief." This change recognizes that principal distributors are often (although not always) affiliated with a fund's manager and would impose greater potential liability on a principal distributor than is currently the case.

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