Category: Corporate Finance
The Canadian Public Accountability Board (CPAB) is seeking comments on potential changes to the type of information it discloses about the results of its assessments of accountants that audit Canadian reporting issuers. Currently, the rules governing CPAB restrict the sharing of inspection findings for individual firms to limited circumstances or with the consent of all impacted parties. The current Protocol for Audit Firm Communication of CPAB Inspection Findings with Audit Committees (Protocol) is voluntary in nature.
CPAB is considering certain disclosure principles, against which any changes are to be evaluated. The principles include improvements in audit quality, timeliness of CPAB reporting and remediation of audit deficiencies, public accountability and cost vs benefit considerations. The consultation seeks input with respect to communication of findings to an issuer’s audit committee, how much information should be included in CPAB’s public reports and whether CPAB should publicly report on its enforcement actions.
With respect to communication with audit committees, the current Protocol allows audit firms to choose to share the results of individual file inspections with the audit committee, although not all audit firms participate in the Protocol. The consultation asks whether the rules should be amended to mandate the sharing of the results of individual audit file inspections with the audit committee, and if such a requirement should apply to all reporting issuers. For public disclosure, CPAB currently publishes two reports a year, which provide a summary of inspection themes and recurring issues, but does not publish its findings individually by firm, and is seeking input on whether and how to do so. Lastly, CPAB seeks comment on whether it should make its enforcement actions public – to date, they have not done so – and with respect to the nature and breadth of such disclosure. CPAB has created a short survey as a potential alternative to comment letters, which are due by the end of September.
September 30, 2021
Effective October 19, 2021, the Government of Ontario has indicated that the Ontario Business Registry will be launched and available for filing voluntary dissolutions under Part XVI of the Business Corporations Act (Ontario). Importantly, consent of the Ministry of Finance will no longer be required as part of the process. The change will reduce the time required for dissolving an entity, as in the past receipt of the Ministry of Finance’s consent often required 4-6 weeks. Other aspects of the voluntary dissolution process will remain the same. Specifically, the dissolution must be authorized by a special resolution passed at a meeting of the shareholders or with the consent in writing of all the shareholders entitled to vote at such meeting. Additionally, the debt, obligations, and liabilities of the corporation, including any tax liability, must be discharged and the Articles of Dissolution must be signed by a director or officer of the corporation. If you are considering dissolution for one of your entities or would like to discuss the dissolution process, please do not hesitate to contact us.
September 30, 2021
On August 18, the Financial Services Regulatory Authority of Ontario (FSRA) released a consultation paper on its draft interpretation relating to a license exemption for mortgage transactions between sophisticated entities. The draft provides FSRA’s interpretation of an exemption from licensing under the Mortgage Brokerages, Lenders and Administrators Act, 2006 that applies to non-individual permitted clients that deal or trade in mortgages with or lend exclusively to other non-individual permitted clients. The exemption is available on the premise that the risk of consumer harm is limited as such transactions do not involve individual consumers and non-individual permitted clients are presumed to have sufficient experience and knowledge, as well as the financial resources, to manage the risks of mortgage-related investment transactions. The interpretation guidance confirms that FSRA will generally look to the definition of a “permitted client” under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations for this purpose, and that a non-individual should also refer to that definition as to whether they satisfy the intent of what would qualify as a non-individual permitted client (which FSRA indicates is not exhaustive). The draft interpretation guidance also provides examples of the type of transactions that would fit within the ambit of the exemption.
September 30, 2021
On July 28, 2021, the Canadian Securities Administrators (CSA) announced a proposed new prospectus exemption for issuers listed on a Canadian stock exchange. The proposal is in response to comments received from CSA Consultation Paper 51-404 Considerations for Reducing Regulatory Burden for Non-Investment Fund Reporting Issuers, and reflects research on capital raising requirements in other countries as well as other stakeholder feedback about the prospectus system. The proposed Listed Issuer Financing Exemption is expected to reduce costs for issuers that would otherwise raise small amounts of capital through the public markets, usually through a short-form prospectus offering. The new exemption is expected to be used by such issuers as an alternative to the accredited investor and family, friends, and business associates prospectus exemption. The exemption would not be available to issuers that have been a reporting issuer for less than 12 months, nor to issuers that have not filed all continuous disclosure documents required under Canadian securities legislation. In addition, the exemption could not be used by an issuer whose principal assets are cash or its exchange listing, nor by an issuer that intends to use the proceeds for a significant transaction such as an acquisition that would require shareholder approval, on the basis that the issuer’s existing business should already be adequately described in its current disclosure documents.
To avail themselves of the proposed exemption, eligible issuers would need to file a short offering document (not expected to be longer than 5 pages) updating the existing public disclosure, including with respect to any new developments in the issuer’s business, and confirming that the issuer will have sufficient funds for at least 12 months after completion of the offering. Issuers could raise up to the greater of $5 million or 10% of the issuer’s market capitalization, to a maximum of $10 million, annually. In addition, the offering can not result in more than 100% dilution for existing shareholders. Purchasers under the exemption would have rights under the secondary market civil liability regime, and would also have a contractual right of rescission against the issuer for a period of 180 days in the event of a misrepresentation. As with many prospectus exemptions, the issuer would be required to report sales by filing a Form 45-106F1 Report of Exempt Distribution, but would not be required to complete the schedule that contains the names of the purchasers. If you have any questions about the availability of the proposed exemption or would like to comment on the consultation, please contact us.
August 31, 2021
On August 12, the Canadian Securities Administrators (CSA) released proposed amendments to the Companion Policy to National Instrument 41-101 General Prospectus Requirements that provides an interpretation of the financial statements that are required to be included in a long form prospectus where the issuer has or proposes to acquire a business that would be the primary business of the issuer. The existing requirements are intended to provide investors with information on the financial history of the issuer, even if the issuer’s history included multiple legal entities. In practice, many issuers have pre-filing consultation discussions with the regulators to determine exactly which financial statements are required to be included in the prospectus, which is a time consuming and costly exercise. The clarifications are intended to reduce the need for such consultations, including by explaining the regulators’ interpretation of a “primary business” and “predecessor entity”, and the time periods for which financial statements would be required. Helpfully, the proposed amendments include a number of examples of when a reasonable investor would consider an acquisition to be the “primary business” of the issuer and runs through the resulting expectations for inclusion of various financial statements. Comments on the proposed guidance are due by October 11.
August 31, 2021
The Canadian Derivatives Clearing Corporation (CDCC) has proposed amendments to its Rules, Operations Manual, Risk Manual and Default Manual to introduce the Gross Client Margin Model (GCM). The changes being proposed by the CDCC are intended to align with international standards on segregation and portability for futures accounts, namely Principle 14 of the Principles for Financial Market Infrastructures. Portability of client positions and collateral is the alternative to closing out the positions upon the insolvency of a clearing participant. The GCM model is a method of calculating the margin a clearing participant must post where the amount is the sum of the margin requirements for each client (i.e., its not a net calculation).Each clearing member would need to report client positions on a daily basis to determine the initial margin requirement. The purpose of the amendments is to allow each client equal protection from the CCDC, regardless of the credit quality of the respective clearing members. The GCM model is to be undertaken in phases and implemented in the second quarter of 2022.CDCC does not initially expect a large impact on stakeholders, as the GCM model is already used for the U.S. market.
The Investment Industry Regulatory Organization of Canada (IIROC) has proposed changes to its own rules and Form 1 relating to the futures segregation and portability protection regime, relating to the CDCC proposal. IIROC’s changes are also intended to make it easier to port client positions and the value of posted collateral in the event of a default of a clearing participant. The changes to IIROC’s rules are required because the CDCC model is separate from the existing IIROC-CIPF model, and the purpose of the amendments is to reduce “funding drain” on dealers and reduce linkages between a dealer’s futures business and securities business – i.e., the possibility that dealers would have to utilize margin from other accounts in order to post the higher requirements for futures that will be required under the CDCC model. The rules include additional client disclosure and daily reporting to IIROC to identify gross customer margin futures positions. The CGM model allows CDCC to port positions more quickly, but may result in higher margin requirements and restrictions on cross-product hedges involving futures for some institutional participants. To mitigate this impact, the proposals allow one business day grace period to collect margin calls. Comments on the CDCC proposal are due by September 3, and IIROC is accepting comments until shortly thereafter on September 7.
August 31, 2021
Answer: As of July 1, 2021, the OSC will have regulatory oversight over the distribution of NQSMIs to persons that are not permitted clients. Firms distributing NQSMIs to investors that are not permitted clients will need to rely on another available prospectus exemption and will need to be registered as an exempt market dealer (EMD) or engage the services of a third-party EMD (or rely on an available exemption). FSRA will retain regulatory oversight over the distribution of NQSMIs to permitted clients (although there is no prohibition on EMDs distributing NQSMIs to permitted clients under the OSC’s regime).
FSRA requires the filing of a quarterly report containing certain data about each NQSMI with permitted clients. Firms that distribute NQSMIs in reliance on the “accredited investor” prospectus exemption or the “offering memorandum” prospectus exemption will need to file a report of exempt distribution with the OSC (and any other applicable securities regulators) within 10 days of the distribution. Issuers relying on the “offering memorandum” prospectus exemption will need to comply with certain supplemental disclosure obligations and will also need to prepare audited financial statements. Although there are no prescribed disclosure requirements for issuers relying on the “accredited investor” prospectus exemption, be aware that presentations and marketing materials could fall within the broad definition of “offering memorandum” which exposes the issuer to potential liability for misrepresentation and triggers the need to include a summary of applicable damages and rescission rights and to file a copy of the materials with the OSC within 10 days of the distribution.
EMDs distributing NQSMIs must comply with know-your-client, know-your-product and suitability obligations as well as conflicts of interest and client relationship disclosure. While the OSC does not require prescribed forms, the OSC expects registrants to perform a meaningful suitability assessment and to appropriately document that assessment. If you have any questions about the changes to the treatment of NQSMIs, please contact your usual lawyer at AUM Law.
June 30, 2021
On June 23, the CSA announced the final publication of National Instrument 45-110 Start-Up Crowdfunding Registration and Prospectus Exemptions (NI 45-110), along with CSA Staff Notice 45-329 Guidance for using the start-up crowdfunding registration and prospectus exemptions. As previously noted in our February 2020 bulletin, NI 45-110 sets up a national framework to permit securities crowdfunding for start-up and early stage issuers and will replace the blanket orders that had been issued in a number of jurisdictions. A dealer registration exemption will be available for funding portals that facilitate online distributions by issuers that use the prospectus exemption set out in the National Instrument. The prospectus exemption will allow an issuer to distribute eligible securities through an online portal, and both the dealer and prospectus exemptions require the portal (even if already registered as an investment dealer or EMD) and the issuer to satisfy numerous conditions.
NI 45-110 was first published for comment in February 2020, and the final rule has been responsive to comments indicating that the individual investment limits were too low by increasing the limit from $5,000 to $10,000 for a purchaser who has obtained suitability advice from a registered dealer, and also increased the limit on aggregate proceeds raised by the issuer group in the last 12 months from $1 million to $1.5 million. While the CSA noted that numerous commentators had asked for further increases for issuers, in their view it is more appropriate for issuers to utilize the offering memorandum exemption in order to crowdfund larger amounts. The annual working capital certification (renamed to the financial resources certification) has become a semi-annual certification, and the prospectus exemption will not be available for issuers whose only operations are to identify and evaluate assets or a business with a view to completing an investment in, merger with, amalgamation with or acquisition of a business, or purchasing the securities of one or more other issuers. Some local amendments will also be made; for example, in Ontario, OSC Rule 13-502 Fees will be amended to classify an unregistered portal relying on the new exemption as an ‘unregistered capital markets participant’ (the same category as unregistered investment fund managers) and pay fees as such. NI 45-110, the related guides, and consequential amendments to other rules is expected to come into force September 21, 2021.
June 30, 2021
The British Columbia Securities Commission has released for comment Proposed BCI 51-519 Promotional Activity Disclosure Requirements which sets out a framework for required disclosure relating to promotional activities. The proposals stem from problematic promotional activities by certain issuers that were identified by the CSA back in 2018, including campaigns that provided unbalanced or unsubstantiated material claims about reporting issuers. Other concerns expressed related to the lack of disclosure about compensation paid to others for promotional activities, the absence of conflict of interest disclosure, as well as inadequate oversight of promotional activities on behalf of issuers. The proposals would require issuers to include specified information about promotional activities when they are undertaken, such as a description of the compensation paid to third parties, any interest in any security or derivative that is the subject of the promotional activity, and each platform or medium through which the activity is being conducted. Certain of such information must also be provided in response to an inquiry relating to promotional activities when a third party is retained or compensated to conduct promotions. Venture issuers would have additional obligations, such as a requirement to include specific information about promotional expenses in their MD&A if total expenditures on promotional activities exceed 10% of the issuer’s total operating expenses in any annual or interim period. Venture issuers would also have to issue and file a news release that includes specified information if they retain or compensate a person to engage in promotional activity. Certain activities would be excluded from the application of the instrument, including promotional activity conducted by directors, officers and employees (who identify themselves as such), registrants when conducting registerable activities, and activities of investment funds or persons engaged in promotional activity in respect of such funds. If you wish to comment on the proposals, please contact your usual lawyer at AUM Law prior to the deadline of July 26.
May 31, 2021
Answer: Registrants are often asked by their clients, as trusted advisors, to act as their trustee under family trusts, executors under their will or as powers of attorney. The potential issue with accepting any of these roles for a registrant is that they may present a material conflict of interest. For instance, if a client is deceased and the advisor takes on the role of the executor of the estate, he or she will be required to review the registrant’s work and decide if the investments are still appropriate, and potentially whether the executor should even keep the assets with the advisor or the advisor’s firm. The conflict becomes most obvious if the registrant is responsible for reviewing his or her own work.
While the CSA chose not to explicitly prohibit such relationships in the Client Focused Reforms, personal financial dealings are referenced in certain IIROC and MFDA rules. For example, in IIROC rule 3115. Personal financial dealings, there is a prohibition on acting as a power of attorney, trustee, executor or otherwise having full or partial control or authority over the financial affairs of a client except in limited circumstances, such as when the client is a related person as defined in the Income Tax Act (Canada) and control is exercised in accordance with firm policies and procedures, or in the case of certain control granted in a discretionary account. The CSA is also of the view that a registrant having full control or authority over the financial affairs of a client may create a material conflict of interest. So, if a firm is not going to avoid this conflict, it should create a specific procedure to ensure that these conflicts are identified and are addressed in the client’s best interest. For example, specific pre-approval from the CCO could be obtained, based on a justification of why such activity would be in the best interests of the client in the specific instance, and procedures to manage the potential conflict such as having the individual advisor recuse himself or herself on matters involving the appointment of an investment manager could be implemented, where possible.
We understand that simply being appointed an executor in a will does not currently amount to a disclosable OBA in Form 31-103F4, and will only become disclosable once a registrant steps into that role and is vested with the powers of the office of an executor. We believe the same logic could apply to other powers of attorney as well, depending on the type of powers granted.
May 31, 2021
On May 20, the CSA proposed amendments to NI 51-102 Continuous Disclosure Obligations in order to streamline and clarify continuous disclosure requirements for reporting issuers other than investment funds. The proposed amendments would include consolidating the MD&A form with the AIF form and financial statements into new annual and interim disclosure statements. The proposed amendments would eliminate some disclosure requirements found to be duplicative or redundant, such as the current MD&A requirement to disclosure summary information for the last 8 quarters, as that information can be located in previous filings. A few new requirements are proposed to be added to address perceived gaps in disclosure as well. The final amendments are expected to be effective December 15, 2023 and various transition provisions have been proposed. The CSA expects the amendments will streamline reporting and increase reporting efficiency for reporting issuers while increasing the quality of the disclosure for investors. Of particular interest, at the same time the CSA has proposed a framework for future consideration that would allow venture issuers (on a voluntary basis) to report semi-annually instead of quarterly, if they are not SEC issuers and provide alternative disclosure for interim periods where financial statements and MD&A are not being filed. The comment period on the proposals close on September 17, and we expect that market participants will want to review the extensive changes closely.
May 31, 2021
The CSA has proposed certain amendments to the National Instrument which sets out definitions that apply across various other national instruments, including the definition of “Canadian financial institution”, and consequential amendments resulting from the change. The revised definition would exclude foreign banks listed in Schedule III to the Bank Act (Canada), and adds a reference to a central credit union, financial services cooperative, credit union league or federation that is incorporated or authorized to carry on business under an Act of the legislature of a jurisdiction. The change will ensure that the definition is uniform across the relevant national instruments. In addition, a change is proposed to the definition of “Handbook” only to reflect that CPAC has different publications for accounting and assurance. Comments on the proposal are due on July 21.
May 31, 2021
On March 29, the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC, and together with the CSA, Regulators) jointly published Staff Notice 21-329 Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements (Staff Notice). The Staff Notice is intended to provide regulatory guidance on how securities legislation, as it currently stands, applies to platforms (Crypto Asset Trading Platforms, or CTPs) that facilitate or propose to facilitate the trading of crypto assets that are securities (Security Tokens) or instruments or contracts involving crypto assets (Crypto Contracts) in the interim period while the Regulators continue working on establishing a long-term regulatory framework for CTPs. The Regulators’ work in this area began with the publication of Consultation Paper 21-402 Proposed Framework for Crypto-Asset Trading Platforms back in March 2019 (Consultation Paper), which we reported on in a previous issue of our bulletin.
In providing their guidance, the Regulators divide the CTPs into two broad categories: The Marketplace Platforms, which operate in a manner similar to marketplaces as currently defined in securities legislation and the Dealer Platforms, which are CTPs that are not marketplaces.
Dealer Platforms: The two most common characteristics of a CTP that is a Dealer Platform are that:
- It only facilitates the primary distribution of Security Tokens; and
- Clients do not interact with one another on the CTP.
The Regulators indicate that for a Dealer Platform that only facilitates distributions or the trading of Security Tokens in reliance on prospectus exemptions and does not offer margin or leverage, registration as an exempt market dealer or, in some circumstances, restricted dealer may be required.
A Dealer Platform that trades Crypto Contracts, on the other hand, would be expected to be registered in an appropriate dealer category, and where it trades or solicits trades for retail investors that are individuals, it will generally be expected to be registered as an investment dealer and be an IIROC member.
Marketplace Platforms: Generally, a CTP would be a Marketplace Platform if it:
- Constitutes, maintains or provides a market or facility for bringing together multiple buyers and sellers and their orders for trading in Security Tokens and/or Crypto Contracts; and
- Uses established, non-discretionary methods under which such orders will be executed and processed.
Marketplace Platforms will generally be subject to the requirements applicable to alternative trading systems, such as those set out in National Instrument 21-101 Marketplace Operations.
Additionally, it is contemplated that activities on Marketplace Platforms will be subject to market integrity requirements, such as IIROC’s Universal Market Integrity Rules or similar provisions.
Where a Marketplace Platform also conducts activities similar to those performed by Dealer Platforms, it would also be subject to the appropriate dealer requirements, including dealer registration requirements, discussed above.
The Regulators acknowledge the continued evolution of fintech businesses and the emergence of a wide variety of CTP models, and note in all cases that exemptive relief may be available and terms and conditions that are tailored to their businesses may be appropriate.
The Staff Notice also contains in an appendix the Regulators’ responses to the comments received from industry stakeholders on the Consultation Paper, but does not give much indication on what the long-term regulatory framework may look like (other than, perhaps, the taxonomy of CTPs that is used in the Staff Notice) or an expected timeline.
They encourage CTPs to consult with their legal counsel and to contact staff of their local securities regulatory authority on the appropriate steps to comply with securities legislation and IIROC rules. If you have any questions on the implications of this guidance, please contact us.
April 30, 2021
On March 29, 2021, Bill 22, Red Tape Reduction Implementation Act, 2020, was proclaimed into force in Alberta. As a result, an Alberta corporation will no longer be required to have any Canadian citizens on its board of directors. In addition, director residency information will no longer be collected.
Previously, businesses incorporated under the Business Corporations Act (Alberta) were required to have a minimum of 25% of their directors be Canadian residents. The move is part of a larger Government of Alberta mandate to attract businesses by reducing costs and regulatory burden for Alberta businesses. We previously reported similar proposed changes for corporations incorporated under the Business Corporations Act (Ontario) pursuant to Bill 213. Bill 213 has received royal assent on December 8, 2020 but has not yet been proclaimed into force.
April 30, 2021
The Alberta Securities Commission and the Financial and Consumer Affairs Authority of Saskatchewan have proposed a new prospectus exemption to assist small businesses in Alberta and Saskatchewan to raise up to $5 million from investors in those provinces, based on a simple offering document (which would be considered an offering memorandum under securities legislation).
There are many proposed conditions to the use of the exemption, which vary depending on whether or not financial statements are provided to an investor. For example, if the statements are not provided, the maximum an issuer group could raise from investors that would not qualify to invest under other specified prospectus exemptions over a 12 month period would be $1.5 million, subject to a lifetime limit of $5 million. The maximum any one investor could invest would be $2,500, or a higher limit of $10,000 if they qualify as a “minimum income investor” (which would have lower thresholds than those required of an “accredited investor”). The individual investor thresholds are slightly higher if financial statements are provided.
It is proposed that the financial statements provided under the exemption would not need to be audited (review engagement only) and could be prepared based on Canadian GAAP applicable to private enterprises (with some modifications). It is noted that corporate or other legislation might still require certain issuers to provide audited statements. The financial statements would have to continue to be provided to investors but only until such time as the proceeds from the offering are expended, and continuous distribution offerings would not be permitted. The exemption is intended to address financing challenges for small businesses that do not yet attract venture capital investors, and the exemption would not be available to issuers that are reporting issuers or investment funds. Other conditions to the exemption include requiring investors to sign a prescribed risk acknowledgement, the filing of a report of exempt distribution and the filing of the offering document on SEDAR.
Interestingly, an issuer would be given the choice of creating their own offering document with the specified information included, or to use a pre-designed form of offering document with a drop down menu that could be completed electronically in a Q&A format. Comments on the proposal are due on May 7 (May 24 with respect to the technical amendments relating to SEDAR filing requirements).
April 30, 2021