Overview
On April 7, 2016, the Canadian Securities Administrators (the CSA) published final amendments to National Instrument 45-106 Prospectus Exemptions and its Companion Policy. The amendments harmonize the reporting requirements for prospectus exempt financings across Canada, and are scheduled to take effect on June 30, 2016.
The amendments implement most of the changes proposed by the CSA in September of 2015, which we described in a previous alert. They will result in a reporting regime that is, on balance, more onerous than the existing rules. Some key changes between the proposed and final versions, however, reduce or remove required disclosure of sensitive information relating to investors and to certain individuals associated with the issuer.
Background
Currently, issuers and underwriters are required to file a report on Form 45-106F1 following a prospectus exempt distribution of securities in any Canadian jurisdiction other than British Columbia. Since 2011, British Columbia has required reporting of exempt distributions on its own, more comprehensive, Form 45-106F6. As a result of the amendments there will once again be a single, national form of report (the New Form), which will replace the current version of Form 45-106F1, and Form 45-106F6 will be repealed.
Changes to reporting requirements
We set out below the key changes to the reporting requirements between the form of report that was proposed in September of 2015 (the Proposed Form) and the New Form. We also provide a detailed comparison among the requirements of the current Form 45-106F1, British Columbia's Form 45-106F6 and the New Form, in the table at the end of this alert.
Single report for multiple jurisdictions not mandatory
Under the current reporting rules, if an issuer distributes securities into multiple jurisdictions pursuant to certain prospectus exemptions, it must file a single report in each Canadian jurisdiction where a distribution occurred, listing all the purchasers. This provision, which was also included in the Proposed Form, is being removed by the amendments. The New Form provides that the report filed in a given jurisdiction need only reflect the distributions in that jurisdiction. Alternatively, the issuer or underwriter can include the full list of purchasers with each report filed.1
Determining where a distribution has occurred, however, is not always a simple matter. The positions vary among provinces as to whether an issuance of securities to purchasers outside the home jurisdiction of the issuer or underwriter also constitutes a distribution in the home jurisdiction. As the amended Companion Policy indicates, one should look to applicable "securities legislation and securities directions" to determine when a distribution has occurred in a jurisdiction of Canada.2
Reduced disclosure of information regarding key individuals for non-public issuers
As identified in our previous alert, one of the most contentious aspects of the Proposed Form was a requirement for most non-public issuers to report certain details regarding its directors, executive officers, promoters and control persons. Specifically, under the Proposed Form a report would have to include each such person's security holdings in the issuer and the amount paid for those securities, as well as the person's name, jurisdiction of residence and relationship to the issuer. All of this information would have been publicly available.
The CSA has removed the requirement to disclose the security holdings and amount paid for the securities of the applicable persons. The requirement to include the name, jurisdiction and relationship to the issuer for directors, executive officers and promoters will remain, but control person information will only be required in a schedule to the New Form which will not be made publicly available (subject to freedom of information legislation).3
No need to report beneficial owners of certain fully managed accounts
The final key change in respect of the New Form relates to the requirement to disclose beneficial owners of securities issued in an exempt distribution, and requires a bit of background.
The existing rules require the disclosure of beneficial owners of the securities that are distributed. This will continue to be the case under the New Form, other than in two particular circumstances relating to the prospectus exemption for "accredited investors".
To qualify as an accredited investor, a person must satisfy certain criteria relating to assets, income or financial sophistication. Among other categories of persons, the definition includes certain trust companies and registered advisors who are "acting on behalf of a fully managed account" managed by the trust company or advisor.4 We refer to these as the "fully managed account" categories.
A distribution of securities to an investor who satisfies any of the categories of accredited investor and is purchasing as principal is exempt from the prospectus requirement. In the fully managed account categories, however, the trust company or advisor would in reality purchase securities as agent for their client. To address that fact, the accredited investor exemption provides that the trust company or advisor is "deemed to be purchasing as principal".5
The existing reporting rules are incongruent with this provision of the accredited investor exemption, however. While the trust company or advisor is deemed to be purchasing as principal, there is no provision as to whether that person or the client should be named in the report as purchaser. The New Form clarifies this issue by requiring that the trust company or advisor, not the beneficial owner, be disclosed in the report when the purchaser satisfies the requirements of one of the fully managed account categories.
Conclusion
The CSA's amendments to the reporting obligations in respect of exempt financings create rules that are on balance more rigorous than the current regime. Changes between the Proposed Form and the New Form, however, lessen certain reporting obligations, which should ease the disclosure burden in respect of some exempt financings. In that sense, the changes are beneficial for issuers, underwriters and their advisors.
Comparison of disclosure requirements
The following table compares the disclosure requirements of the current Form 45-106F1, Form 45-106F6 and the New Form, to the extent of any significant differences.
| Issuer contact and other information | |||
| Current Form 45-106F1 | Form 45-106F6 | New Form | |
| Employees/SEDAR profile number | No requirement | No requirement | Size of issuer, by number of employees SEDAR profile number, if applicable |
| Identifying information | Address and telephone number of issuer's head office | Address, email address and telephone number of issuer's head office | Address and telephone number of issuer's head office, if
without SEDAR profile Legal entity identifier, if applicable |
| Industry information | Industry type from CSA-selected categories | Industry type from CSA-selected categories | North American Industry Classification Standard code |
| Other information | No requirement | No requirement | If without SEDAR profile: - date of formation - financial year-end - CUSIP number and listed exchange(s), if any - assets as at most recent financial year-end |
| Underwriter information | |||
| Current Form 45-106F1 | Form 45-106F6 | New Form | |
| General information | Name, address and telephone number | Name, address, telephone number, email address and website | Name and either Firm NRD number, if applicable, or address, telephone number and website |
| Directors, executive officers, control persons and promoters of the issuer | |||
| Current Form 45-106F1 | Form 45-106F6 | New Form | |
| Disclosure of directors, executive officers, control persons and promoters | No requirement | Disclosure requirement only if issuer is not a reporting issuer | Disclosure requirement only if issuer is not: (a) a reporting issuer or a subsidiary; (b) a foreign public issuer6 or a subsidiary; or (c) distributing eligible foreign securities only to permitted clients7 |
| Information required for individuals | No requirement | Name, municipality and country of principal residence |
Name and residential address |
| Positions held (director, officer, promoter, control person) | Positions held (director, officer, promoter, control person) | ||
| Number and type of securities of the issuer beneficially owned, or controlled, on the distribution date | No requirement | ||
| Total price paid for all securities beneficially owned, or controlled, on the distribution date | No requirement | ||
| No requirement | Business contact information of Chief Executive Officer | ||
| Information required for non-individual control persons or promoters | No requirement | Same information as above for all directors and officers of the control person or promoter | Same information as above for all directors and officers of the control person or promoter |
| Information about the distribution | |||
| Current Form 45-106F1 | Form 45-106F6 | New Form | |
| Type of securities distributed | Type of security | Type of security | Type of security, 3-letter code and CUSIP Total dollar amount per type of security |
| Summary of the distribution by jurisdiction | Number of purchasers, price per security and total amount raised, by jurisdiction | Number of purchasers, price per security and total amount raised, by jurisdiction | Number of purchasers and total amount raised, by jurisdiction and exemption |
| Distribution date | State the distribution date(s) | State the distribution date(s) | State the distribution start and end date(s) |
| Offering materials | No requirement | No requirement | List offering materials if distribution occurred in Saskatchewan, Ontario Quebec, New Brunswick or Nova Scotia |
| Currency | No requirement | No requirement | State foreign currency if distribution not in Canadian dollars |
| Information about the purchasers | |||
| Current Form 45-106F1 | Form 45-106F6 | New Form | |
| Who must be reported | All purchasers | Purchasers in respect of a distribution in British Columbia | Purchasers in respect of a distribution in the jurisdiction; option to report all purchasers |
| Exception from requirement to disclose beneficial owners | N/A | N/A | Purchasers under "fully managed account" category of accredited investor |
| General information | Name, address and telephone number | Name, address and telephone number | Name, address, telephone number and email address |
| Details of securities purchased | Number and type of securities purchased | Number and type of securities purchased | Number and type of securities purchased, using 3-letter code |
| Details of exemption relied on | Exemption relied on | Exemption relied on | Exemption relied on, with section and (if applicable) subsection. If relying on section 2.5 (family, friends or business associates), name and position of the individual claiming a relationship to the purchaser |
| Insider/Registrant | No requirement | Status as insider or registrant | Status as insider or registrant |
| Publicly available information about individual purchasers | N/A | Name Number and type of securities Status as insider or registrant Total purchase price |
N/A |
| Publicly available information about non-individual purchasers | N/A | As above, plus address and exemption relied on | N/A |
| Information about persons being compensated | |||
| Current Form 45-106F1 | Form 45-106F6 | New Form | |
| Information other than contact and compensation details | No requirement | Status as insider or registrant | Status as insider or registrant Relationship to the issuer Purchaser(s) with whom person is associated NRD number, if applicable Deferred compensation details, if applicable |
| Investment fund issuer information | |||
| Current Form 45-106F1 | Form 45-106F6 | New Form | |
| Investment fund manager information | Contact information | Contact information | Firm NRD number, if applicable; otherwise contact information and website |
| Type of investment fund | No requirement | No requirement | Type of investment fund and whether fund primarily invests in other investment funds or is a UCITs Fund |
| Offering proceeds, in addition to disclosure required by all issuers | No requirement | No requirement | Net proceeds by jurisdiction |
| Other information | No requirement | No requirement | Date of formation Financial year-end Reporting issuer status CUSIP number Listed exchange(s), if any Net asset value as of the most recent NAV calculation |
This article was co-authored by Daniel McElroy, Knowledge Management Lawyer in Dentons' Vancouver office.
Footnotes
1 Item 1 of the Instructions to the New Form.
2 Section 5.1(1)(a) of the amended Companion Policy to National Instrument 45-106. See also Annex 3 of CSA Staff Notice 45-308 Guidance for Preparing and Filing Reports of Exempt Distribution under National Instrument 45-106 Prospectus Exemptions (as revised on April 7, 2016) and the Background section of OSC Staff Notice 45-709 Tips for Filing Reports of Exempt Distribution
3 See Item 9 and Schedule 2 of the New Form. Note also that when a promoter or control person is not an individual (e.g. a corporation) then the individual directors and executive officers of the promoter or control person will also have to be reported. This is consistent between the Proposed Form and the New Form
4 Section 1.1 of National Instrument 45-106, paragraphs (p) and (q) of the definition of "accredited investor".
5 Subsections 2.3(2) and 2.3(4) of National Instrument 45-106.
6 Foreign public issuer" is a new term being introduced by the amendments. Broadly speaking, it means a public company in the United States, the United Kingdom, Australia, France, Germany, Hong Kong, Italy, Japan, Mexico, the Netherlands, New Zealand, Singapore, South Africa, Spain, Sweden or Switzerland. Wholly-owned subsidiaries of such companies are also exempt from the additional reporting requirements.
7 The term "permitted client" is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. It includes institutions, registrants, individuals with greater than $5 million in financial assets and non-individuals with at least $25 million in net assets. An "eligible foreign security" is defined in the amendments. Broadly, it means a security issued by a non-Canadian company or issued or guaranteed by a non-Canadian government.
About Dentons
Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Specific Questions relating to this article should be addressed directly to the author.
