Written by Conrad Druzeta, David Phillips, Christian Gauthier, Jeffrey Kerbel, Bruce Hibbard, Eden Oliver
Securities regulation in Canada is a matter of provincial jurisdiction and each of the ten Canadian provinces and three territories1 has its own securities regulatory body, that enforces the relevant local legislation and generally has the power to promulgate rules, regulations and policies with respect to securities trading. Although the legal requirements with respect to securities offerings are substantially similar in each province and territory, there are some unique features to each regime.
A common principle among all of the Canadian securities regulatory regimes is that, absent an exemption, a distribution of securities cannot be effected in Canada without preparing and qualifying a prospectus with the relevant regulator describing the issuer and the offering in some detail. In the case of a Canada-wide offering, a single prospectus is typically qualified and cleared by the regulator in the province with the closest connection to the issuer. A prospectus so qualified by the principal regulator can become effective in each of the other provinces as opted by the issuer or selling securities holder through a Passport System implemented co-operatively among all of the provinces.
A popular alternate way of distributing securities in Canada is by way of private placement to specified potential purchasers through prospectus exemptions available to issuers, selling securities holders and dealers. The process of selling securities on a private placement basis tends to be simpler and in most cases significantly less expensive than a prospectus offering. Private placement offering materials are normally not reviewed by provincial regulators. There is also normally no obligation to translate offering materials into French and financial information (if provided) is not required to be audited or presented in compliance with International Financial Reporting Standards. If the issuer is not already a reporting issuer in Canada, no ongoing compliance and disclosure obligations in Canada will typically become applicable in connection with a Canadian private placement other than a potential filing of a report of exempt distribution.
Although a significant audience of high-net-worth individuals and institutional investors can be addressed with a private placement, the potential market is more circumscribed than with a prospectus offering, and the liquidity of privately placed securities is limited.
The discussion below regarding private placements of securities in Canada addresses four variables:
- whether the issuer is a “reporting issuer” or not; and
- whether the issuer and/or dealer is a Canadian resident or not.
A reporting issuer is generally a public entity in Canada with ongoing compliance and disclosure obligations, while a non-reporting issuer is a private entity with few compliance and disclosure obligations. An issuer may become a reporting issuer by qualifying a prospectus in one or more of the provinces, although there are other ways of becoming a reporting issuer in Canada which are beyond the scope of this discussion, such as exchanging securities with shareholders of a reporting issuer or listing the securities of an issuer on the Toronto Stock Exchange. Distributing securities in Canada by way of private placement will generally itself not cause an issuer to become a reporting issuer in Canada.
The discussion below also addresses two distinct legal requirements:
- prospectus exemptions allowing the sale of securities without a prospectus; and
- exemptions allowing the trading of securities without being registered as a dealer.
The private placement regime is available under all of the potential combinations of the variables above although with different features.
Some mention of the requirements associated with investment funds and advising Canadian clients with respect to investing in securities will be made, although these are topics unto themselves and will not be discussed in detail.
1 The regulatory regime in the Canadian territories is substantially similar to the securities regimes in the provinces. The discussion below will focus on the specific rules in the provinces as purchasers and issuers resident in the territories or material sales of securities in the territories are relatively rare.