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24 May 2005
Canadian securities regulators are proposing to create a national instrument (NI 45-106)(1) that would impose a uniform set of prospectus and registration exemptions across all Canadian jurisdictions. At present, issuers that conduct private placements must comply with a separate prospectus and registration regime in each province and territory of Canada. While the existing regimes are broadly similar, issuers must familiarize themselves with the individual requirements of each jurisdiction in which they wish to carry out a trade.
If the new instrument is implemented, there will still be local prospectus and registration exemptions that are applicable only in the specified jurisdiction, but issuers will be able to rely on one set of rules for the most commonly used exemptions in private placement transactions across any and all Canadian jurisdictions. This, in turn, should reduce the time, effort and cost for issuers wishing to effect multi-jurisdictional trades by:
This update looks at some of the key prospectus and registration exemptions proposed under the new instrument.
The following exemptions would apply in every province and territory in Canada. The various jurisdictions will continue to retain several prospectus and registration exemptions with only local application, but most of these represent relatively minor exemptions.
Accredited investor exemption
Under NI 45-106 issuers will be permitted to sell securities by private placement to 'accredited investors'. The proposed instrument includes an extensive definition of those persons that qualify as accredited investors, which is generally based on the ability to meet certain financial threshold tests and/or the sophistication needed to assess the merits of a potential investment. Currently the various Canadian provinces and territories each have an accredited investor exemption, but do not necessarily use the same standard for determining which persons or entities qualify under the definition. The proposed instrument creates a single definition so that the exemption can be used consistently across the country. This definition will include governments, financial institutions, pension funds, wealthy individuals, companies with significant net assets, investment funds and fully managed accounts.
Private issuer exemption
NI 45-106 includes a private issuer exemption. A 'private issuer' is defined as an issuer that:
Each province currently has an exemption available for private issuers, but the form of exemption is different between the provinces, particularly between Ontario and the rest of the provinces. The proposed instrument is modelled on the non-Ontario form. It permits private issuers to distribute securities to a prescribed group of individuals, including persons closely connected to the principals of the issuer (ie, family, close friends, close business associates) and to accredited investors. Issuers relying on this exemption are not required to complete any filings with the applicable securities authorities.
This exemption represents a somewhat dramatic change to the private issuer regime in Ontario. Ontario currently has a closely held issuer exemption that effectively permits sales by an issuer provided that there are no more than 35 persons (exclusive of insiders and accredited investors) holding securities and that the aggregate subscription proceeds made in reliance on the exemption are no more than C$3 million.
Currently most jurisdictions have an exemption based on a minimum investment amount, meaning that any person can purchase securities as long as the value of the acquisition meets a minimum dollar threshold and the person purchases as principal. This threshold varies as between the different jurisdictions in Canada, but under the proposed instrument a consistent minimum of C$150,000 would apply across all jurisdictions.
The proposed instrument includes an exemption for a rights offering. The exemption is available subject to some caveats, including delivery of prior notice to securities regulators and compliance with the requirements set out in the national instrument dealing explicitly with rights offerings (NI 45-101).
Similar to the prescribed minimum exemption, most jurisdictions provide an exemption for the acquisition of assets where the purchase price meets a certain minimum value threshold. Under the proposed instrument, the exemption would be harmonized and the prescribed minimum threshold would be C$150,000.
Currently most jurisdictions provide a prospectus and registration exemption for the transactions associated with a merger, arrangement, amalgamation or related business combination. The proposed instrument harmonizes these exemptions and expands their application to include the winding-up or dissolution of an issuer.
Securities for debt
NI 45-106 includes an exemption under which issuers may issue securities in settlement of a genuine debt of that issuer. The debt must have become due and have been subject to collection activity such as a demand letter. In addition, in order to use this exemption the parties must have originally intended that the debt would be repaid in cash when it became due.
NI 45-106 also includes two important exemptions that will not apply in Ontario,
but are nonetheless important capital-raising exemptions for other Canadian
Family, friends and associates exemption
This exemption is widely used by private issuers in many Canadian jurisdictions for trades to those persons considered sufficiently close to the issuer (eg, directors, officers, founders of the issuer) and to certain close relatives, personal friends and business associates. Ontario will not participate in this exemption, but rather will retain its own exemption that is similarly focused on a close connection to the issuer. The Ontario rule has a more restrictive interpretation of who is considered sufficiently close to the issuer - for example, Ontario does not allow business associates of the directors and officers of the issuer to use the exemption.
Offering memorandum exemption
NI 45-106 also includes an offering memorandum exemption that will apply in all jurisdictions except Ontario. This exemption is available to an issuer when the issuance of securities is supported by an offering memorandum that follows a prescribed form. There are some differences in the accompanying requirements for the exemption in the various provinces. In Alberta, Saskatchewan, Manitoba, Quebec, Prince Edward Island, Northwest Territories and Nunavut an investor wishing to purchase more than C$10,000 of securities must first be considered an eligible investor (which is based on consideration of the investor's financial means and business acumen, but at a lower standard than an accredited investor). However, in the provinces of British Columbia, Nova Scotia, New Brunswick and Newfoundland and Labrador an issuer may sell any amount of securities to a purchaser under the offering memorandum exemption without a maximum purchase amount qualifier.
NI 45-106 also includes, in order to consolidate the exemption regime into one instrument, several prospectus exemptions that are already consistent or largely consistent on a national level. These include exemptions for:
There are also several other less commonly used exemptions that are harmonized by NI 45-106, including investment funds, reinvestment and investment club trades, reinvestment plan trades, trades that occur in connection with the realization on a security interest and certain control block distributions.
The comment period for the instrument expired in March 2005. The securities regulatory authorities are now reviewing and addressing those comments. Provided there are no delays, for example due to substantive matters raised in the review process that require further consideration, the instrument will be implemented within a reasonably short time following this review period, possibly as early as Autumn 2005.
For further information on this topic please contact Paul L Goldman or David Redford at Goodmans LLP by telephone (+1 604 682 7737) or by fax (+1 604 682 7131) or by email (firstname.lastname@example.org or email@example.com).
(1) Available on the British Columbia Securities Commission website at http://www.bcsc.bc.ca/uploadedFiles/NI45-106.pdf.
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Paul L Goldman