Category: Corporate Finance
On May 20, the Canadian Securities Administrators (CSA) issued substantially harmonized blanket orders giving investment funds and other issuers temporary relief from certain regulatory and filing obligations. The conditions of relief are similar to the blanket orders issued in late March, except that the relief applies only to issuers with filing deadlines as noted below:
- Investment fund issuers: The OSC’s blanket order for investment funds (Funds Blanket Order) provides a 60-day extension for certain filing, delivery and prospectus renewal requirements normally required to be made between June 2 and September 30, 2020. If an investment fund wishes to rely on the Funds Blanket Order, it must, as soon as reasonably practicable and in advance the relevant delivery, filing or renewal deadline: (a) notify its regulator by email that it is relying upon the Funds Blanket Order and each requirement for which it is relying upon that order; and (b) post a statement on its public website or public website of its investment fund manager indicating that it is relying upon the Funds Blanket Order and listing each requirement for which it is relying on upon that order.
- Non-investment fund issuers have a 45-day extension for certain filing, delivery and base shelf prospectus renewal obligations normally due or required to be made between June 2 and August 31, 2020.
- Issuers can’t further extend pre-June 2 deadlines: An issuer cannot rely on the blanket relief to further extend a deadline occurring before on or before June 1.
On May 29, the CSA issued substantially harmonized blanket orders giving registrants and certain unregistered capital markets participants relief from certain financial statement and information delivery deadlines. The blanket orders provide a 60-day extension for periodic filings normally required to be made between June 2, 2020 and September 30, 2020 by registrants and, in Ontario, unregistered capital markets participants that rely upon certain registration exemptions such as unregistered investment fund managers (IFMs) and unregistered exempt international firms. The extension applies automatically, without any terms and conditions. Registrants and unregistered capital markets participants that have already used the prior relief to extend their deadline for any financial statement or information delivery requirements occurring on or before June 1, 2020, cannot use this relief to further extend that deadline.
Please contact us if you have any questions about the blanket orders described above. We can help you assess your options and, if necessary, engage with regulators on your behalf.
May 29, 2020
On May 26, the Alberta Securities Commission (ASC) published undertakings (Undertakings) from two issuers who agreed to certain controls, training and other requirements to ensure the issuers’ compliance with National Instrument 45-106 Prospectus Exemptions (NI 45-106). The Undertakings are a useful reminder for issuers and their advisers of securities regulators’ continued focus on non-compliance with the terms and conditions of prospectus exemptions in the exempt market.
Pursuant to the Undertakings, the issuers agreed, among other things, to designate several directors, officers or employees (Designated Persons) as responsible for determining whether investors meet the terms and conditions of NI 45-106. The Designated Persons will:
- Attend training on how to determine whether an investor meets the terms and conditions of the accredited investor (AI) and/or friends, family and business associates (FFBA) prospectus exemptions;
- Take reasonable steps to confirm that every investor meets the terms and conditions of the applicable exemption being relied upon at the time of distribution; and
- Make detailed written notes outlining the steps taken to determine whether an investor meets the terms and conditions of the applicable exemption, including the date and time of all relevant communications and any documents reviewed or relied upon.
If they haven’t already done so, issuers that access (or plan to access) the exempt market may wish to consider training and controls similar to those described above. AUM Law has substantial experience helping clients navigate the exempt market and we can help you, too. Subscribe to our publications to obtain a copy of our Exempt Market Roadmap and contact us to discuss your financing plans.
In 2018, we wrote twice about the saga of Daniel Tiffin, who had appealed his conviction for trading in securities without registration, distributing securities without filing a prospectus, and trading in securities while subject to a cease-trade order. As we wrote in May 2018, the Ontario Superior Court of Justice (Superior Court) concluded that the promissory notes issued by Tiffin Financial (TFC) to Mr. Tiffin’s clients were securities. Then, in September 2018, we reported that Mr. Tiffin was sentenced to six months in jail. (The Court also ordered him to pay restitution and serve 24 months of probation.)
He appealed the merits of the Superior Court’s decision and the sanctions. Earlier this month, the Ontario Court of Appeal ruled that the promissory notes were securities and that Mr. Tiffin’s conviction should be upheld, but that a jail sentence in these circumstances was disproportionate because the Court did not consider Mr. Tiffin’s conduct to be deceitful. The probation and restitution orders were upheld.
AUM Law has extensive experience in the interpretation of Ontario securities laws, as well as insight into how securities regulators have exercised their discretion to grant exemptive relief from broadly worded provisions such as the definition of “security”. Please do not hesitate to contact us if you wish to discuss how the laws apply to the activities you are contemplating.
March 31, 2020
Earlier this month, U.S. Securities and Exchange Commissioner Hester Pierce made a speech proposing a time-limited safe harbour for crypto asset token offerings to address what she sees as a regulatory “Catch 22” in the digital asset sector. We think Commissioner Pierce’s speech is interesting because of the way she leapt out in front of the SEC’s policymaking framework with her proposal and because of the potential for her approach to influence Canadian securities regulators and market participants as well. The Canadian securities regulatory framework isn’t exactly the same as the U.S. framework, but there are enough similarities to make these developments south of the border of interest in Canada, too.
In the U.S. and Canada, the term “security” is defined very broadly to include, among other things, an “investment contract”. In determining whether an investment contract exists, regulators and courts in both countries usually consider, among other things, whether investors are participating in a common enterprise and relying upon others to profit from that enterprise. (For more information on the Canadian regulators’ approach, see our June 2018 bulletin article “CSA Staff Publish Follow-up Guidance on Token Offerings.”)
Explaining the regulatory Catch-22 and why she sees a need for regulatory relief, Commissioner Pierce stated:
“Would-be networks cannot get their tokens out into people’s hands because their tokens are potentially subject to the securities laws. However, would-be networks cannot mature into a functional or decentralized network that is not dependent upon a single person or group to carry out the essential managerial or entrepreneurial efforts unless the tokens are distributed to and freely transferable among potential users, developers, and participants of the network.”
She then outlined a proposed safe harbour for “Initial Development Teams” to facilitate participation in, and the development of, a functional or decentralized network, exempt from the SEC’s registration requirements of U.S. federal securities laws for three years, so long as certain conditions are met and while remaining subject to federal securities anti-fraud laws. Among other requirements, the Initial Development Team would have to make certain information publicly available (e.g. regarding the source code, initial development team and certain other token holders, transaction history, token economics, plan of development, prior token sales, trading platforms, etc.)
The SEC has some leaping of its own to do if it wants to develop Commissioner Pierce’s proposal or take a different approach. AUM Law will monitor developments in this area and keep you informed. This changing regulatory landscape highlights the importance of obtaining legal advice if your business plans contemplate the use of crypto-currency. AUM Law has experience in this area, and we can help you navigate its regulatory challenges.
February 28, 2020
On February 13, the Canadian Securities Administrators (CSA) published a second notice and request for comments (Revised Proposal) on proposed National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure (NI 52-112) and a related companion policy. As we noted in our September 2018 article on the CSA’s first proposal, the regulators are concerned that many issuers disclose a range of non-GAAP financial measures that are not standardized, lack context when disclosed outside the issuer’s financial statements, lack transparency as to their calculation, and/or vary significantly by issuer or industry.
According to the Revised Proposal, many commenters supported the objectives underlying proposed NI 52-112. However, concerns were expressed about the scope and application of NI 52-112, the proposed definitions, and the increased regulatory burden associated with the new rule. The CSA has responded to those concerns by, among other things:
- Limiting NI 52-112’s application to certain issuers (g. investment funds, “SEC foreign issuers” and “designated foreign issuers” will be exempt from the rule);
- Exempting certain disclosure, financial measures and documents;
- Narrowing and clarifying various definitions;
- Limiting disclosures for capital management measures and total of segments measures;
- Simplifying the prescribed disclosures for non-GAAP financial measures that are forward-looking information and for non-GAAP ratios;
- Better aligning disclosure requirements with those adopted by other securities regulators; and
- Seeking to reduce uncertainty by clarifying disclosure requirements and providing significant guidance.
Although investment funds and certain other issuers got their wish to be exempt from NI 52-112, non-reporting issuers that raise funds in reliance upon the offering memorandum (OM) exemption will be subject to the new rule.
Comments are due on the proposal by May 13, 2020. If you would like to discuss NI 52-112, please reach out to your usual AUM lawyer.
February 28, 2020
On February 27, the Canadian Securities Administrators (CSA) published for comment proposed National Instrument 45-110 Start-up Crowdfunding Registration and Prospectus Exemptions (NI 45-110), as well as proposed start-up crowdfunding guides for businesses and funding portals (Guides). If adopted, NI 45-110 will replace the patchwork of local instruments and blanket orders that provide for prospectus and/or registration exemptions for start-up crowdfunding activities. The CSA is also considering whether to repeal Multilateral Instrument MI 45-108 Crowdfunding (described below), which is currently available in Ontario and a number of other provinces. In our first look at the proposed new regime, we describe below its key features and share our initial impressions.
Existing Framework: Start-ups and early stage issuers have raised capital under local crowdfunding blanket orders (Blanket Orders) that grant prospectus and registration exemptions in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia. By contrast, to date no fundings have been completed under the prospectus and registration exemptions in Multilateral Instrument 45-108 Crowdfunding (MI 45-108), which is available in Alberta, Saskatchewan, Manitoba, Ontario, Québec, New Brunswick and Nova Scotia. There has been some fundraising under Alberta Securities Commission Rule 45-517 Prospectus Exemption for Start-up Businesses, which is similar to the Blanket Orders except that it doesn’t require use of a funding portal and doesn’t provide a registration exemption.
The Canadian securities regulatory framework for crowdfunding has been criticized for its complexity, lack of harmonization, low caps on fundraising, and regulatory costs. The CSA hopes that MI 45-110 will address these concerns while still providing adequate investor protection.
Proposed NI 45-110 differs from the existing regulatory framework in a number of ways, including the following:
- Maximum aggregate proceeds: NI 45-110 will permit an issuer group to raise up to $1,000,000 every twelve months (on a rolling basis measured from the date the new offering closes). The existing Blanket Orders permit an issuer group to raise up to $250,000 up to two times per calendar year. MI 45-108 has a 12-month, rolling $1,500,000 cap. We expect that some issuers and portal operators will view the $1,000,000 limit as too low to make these exemptions attractive. The CSA has asked if investor protection concerns can be adequately addressed if the cap is raised to $1,500,000.
- Maximum investment per purchaser: NI 45-110 will permit an investor to make an investment of up to $2,500 in an offering (or $5,000 if the investor obtains advice from a registered dealer that the investment is suitable for the purchaser). The existing Blanket Orders have a $1,500 limit (with BC, Alberta and Saskatchewan permitting $5,000 if the purchaser receives advice from a registered dealer that the investment is suitable). Existing MI 45-108 sets limits on how much a purchaser can invest in a given distribution and in all distributions made in reliance upon MI 45-108’s prospectus exemption in calendar year. The limits vary depending on the jurisdiction (e.g., Ontario has much higher limits) and the type of investor. We expect that some issuers and portal operators will view these investor-level caps as too low as well. The CSA has asked if caps at $5,000 (or $10,000 if the investor obtains suitability advice from a registered dealer) would be more appropriate.
- Funding Portals Not Required to Register: NI 45-110, like the Blanket Orders but unlike MI 45-108, will not require funding portals to be registered. If NI 45-110 is adopted, the existing, exempt funding portals operating in some Canadian jurisdictions will be able to access Ontario investors and facilitate crowdfunding nationally.
- Annual Working Capital Certification for Funding Portals: NI 45-110 introduces a new requirement for funding portals to provide regulators with a certificate that they have sufficient working capital to continue operations for at least the next twelve months.
- Bad Actor Disqualification: NI 45-110 introduces a prohibition on a funding portal relying upon the start-up crowdfunding registration exemption if it or any of its principals is or has been the subject of certain proceedings in the last ten years related to a claim based in whole or in part on conduct involving fraud, theft, breach of trust or allegations of similar conduct.
- Statutory Civil Liability: Under NI 45-110, issuers and, in some jurisdictions, the directors and executives signing the offering document, will be subject to statutory liability if the offering document contains a misrepresentation.
It will be interesting to see if market participants find the package of reforms in NI 45-110, in a naturally harmonized instrument, a more attractive mechanism for start-up crowdfunding. The comment period on proposed NI 45-110 will close on May 27, 2020. The CSA Members that have adopted the Blanket Orders will extend them so that they remain available until NI 45-110 is available. If you would like to discuss how proposed NI 45-110 might affect your business, please contact your usual lawyer at AUM Law.
February 28, 2020
On January 16, the Alberta Securities Commission (ASC) published Staff Notice 45-705 Compliance with Investment Limits under the Offering Memorandum Prospectus Exemption (the Notice). It outlines the results of staff’s recent review of over 80,000 (!) recent distributions, purportedly in reliance upon the offering memorandum (OM) exemption from the prospectus requirements. From our perspective, the most interesting feature of the Notice was its reminder to issuers, as well as to managers of fully managed accounts, that the prospective beneficial owners of the securities themselves must complete Form 45-106F4 Risk Acknowledgment Form (RAF) where the issuer is relying on the OM exemption to distribute the securities. Managers cannot complete the form on their clients’ behalf. This contrasts with situations where securities are distributed to the beneficial owner of a fully managed account in reliance upon the accredited investor (AI) exemption, which contains a provision deeming the manager of a fully managed account to be purchasing as principal.
AUM Law helps issuers, registrants and investors navigate Canada’s exempt capital markets and avoid potholes like these. Please contact us if you have questions about how the rules apply to transactions that you are contemplating.
January 31, 2020
On January 16, the Canadian Securities Administrators (CSA) published Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets (Crypto Guidance). The Crypto Guidance is the latest in a series of publications intended to help the emerging crypto industry understand when securities legislation applies to their business models. (See, for example, our March 2019 article on regulatory approaches to crypto-asset trading platforms and our June 2018 article covering the CSA’s guidance on token offerings.)
The major takeaways from this new publication are as follows:
- Most forms of tokenized crypto assets that carry voting rights and/or rights to receive dividends will almost always be considered a security and subject to applicable securities laws.
- One of the key determinations of whether a crypto platform is subject to securities laws is whether crypto assets traded on the platform are immediately delivered to the purchaser, with “ownership, possession and control” resting with that purchaser upon that purchaser. This means that services that provide custody functions on their crypto platform likely have to comply with applicable securities laws.
If you would like to further understand the implications of the Crypto Guidance, please contact your usual lawyer at AUM Law.
January 31, 2020
On January 9, the Canadian Securities Administrators (CSA) published Consultation Paper 51-405 Consideration of an Access Equals Delivery Model for Non-Investment Fund Reporting Issuers (CP 51-405). They noted that electronic access is a more cost-efficient, timely and environmentally friendly way of communicating to investors than physical delivery. Under an “access equals delivery” model, issuers would effect delivery by issuing a news release to alert investors that the document is available on the System for Electronic Document Analysis and Retrieval (SEDAR) and the issuer’s website. Initially, the focus would be on delivery of prospectuses, financial statements and MD&A but the CSA is also seeking feedback on whether the model should be extended to documents that require immediate investor attention, such as rights offering documents, proxy materials and takeover bid circulars.
CP 51-405 is more of a concept release than a rule proposal, with the CSA seeking feedback on questions such as whether such an initiative should be prioritized as a burden reduction measure, which documents should be covered, how withdrawal rights would be calculated, and whether issuers should be required to have websites where investor materials could be access under this model. The comment period expires on March 9. AUM Law will monitor this initiative and report back on further developments.
January 31, 2020