Written by Brent Kraus, Matthew Olson and Eric Chernin
An issuer that distributes securities to the public must either file a prospectus with securities regulatory authorities and deliver such prospectus to prospective purchasers, or rely upon a prospectus exemption available under securities legislation. Issuers who rely on certain prospectus exemptions to distribute securities are required to file a report of exempt distribution with securities regulatory authorities within a prescribed time frame following each such distribution.
On April 7, 2016, in an effort to adapt to the growing exempt market, provide securities regulators with the necessary information to facilitate more effective regulatory oversight of the exempt market and improve analysis for policy development purposes, the Canadian Securities Administrators (CSA) published amendments to National Instrument 45-106 – Prospectus Exemptions to create a harmonized report of exempt distribution and make amendments to related policies. As a result, issuers will no longer be required to prepare one form of report for sales of its securities to a resident of British Columbia, and another form of report for purchasers resident in other Canadian jurisdictions.
A New Harmonized Approach and Implications
The amendments apply throughout Canada to both investment fund issuers and non-investment fund issuers that distribute securities under certain prospectus exemptions and, subject to certain carve-outs, introduce robust new information requirements, including additional disclosure about the issuer and its insiders, securities distributed, prospectus exemptions relied on and persons compensated for the distribution. In particular, the amendments include required disclosure in respect of the following:
- the issuer's size and primary business activity;
- the identities of the directors, executive officers and promoters of certain issuers;
- the identities of control persons of certain issuers in a non-public schedule;
- details about the securities distributed and, for certain jurisdictions, details about the documents provided in connection with the distribution;
- specific details about the prospectus exemptions relied on, both on an aggregate and per investor basis (including, when the accredited investor exemption is utilized, the subcategory of accredited investor that is applicable); and
- details about compensation (including the terms of deferred compensation, if any) paid to registrants, connected persons, insiders and employees of the issuer or the investment fund manager involved in the distribution.
As a practical matter, issuers and dealers will need to update their systems and procedures and allocate additional time and expense to obtain the requisite reporting information from potential investors. In appropriate circumstances, one potential way of sourcing the required information is to work with legal counsel to revise the issuer's form of subscription agreement to be completed by purchasers in connection with most exempt distributions. In addition, notwithstanding the CSA's efforts to mitigate or eliminate privacy and confidentiality concerns regarding commercially sensitive information of issuers and personal information of investors, such concerns may discourage issuers and certain investors from participating in exempt market transactions.
The amendments do not eliminate the current patchwork of filing procedures across Canada. There is currently, and will continue to be following implementation of the amendments, a different filing procedure required for distributions in Ontario, British Columbia and the remaining provinces and territories of Canada, thereby diminishing the benefits of harmonization resulting from these amendments. The CSA is currently in the midst of a longer-term project to create a single integrated filing system for reports of exempt distribution, and until such time as this project is concluded full harmonization of exempt market distribution reporting requirements will not be achieved.
Subject to Ministerial approval, all issuers (other than investment fund issuers that file reports annually) will be required to use the new report for distributions that occur on or after June 30, 2016.