Category: Corporate Finance
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
The Alberta Securities Commission is continuing to explore unique exemptions to revitalize Alberta’s capital markets and assist small businesses to raise capital efficiently while balancing investor protection.
The proposed new blanket order would provide an exemption from the dealer registration requirement in Alberta for individual finders who utilize pre-existing personal contacts. It would replace the current Northwestern Exemption which has been revoked everywhere except Alberta. The targeted exemption is intended to assist early stage businesses raising modest amounts of capital without the participation of a registered dealer. There are a number of requirements for the use of the exemption, including that the issuer must have its head office in Alberta, and that the issuer can not have raised more than $5 million under all exemptions from the prospectus requirements. The registration exemption for finders would only be available if the issuer uses certain specified prospectus exemptions, such as the private issuer exemption where the purchaser is an accredited investor or not a member of the “public”, the offering memorandum exemption and the accredited investor exemption.
Finders would not be permitted to solicit prospective purchasers other than people with whom they have a “substantial pre-existing relationship”, and as a result advertising would also be prohibited. In addition, the finder would not be allowed to rely on the dealer exemption if they have previously provided certain financial services to the purchaser of securities, such as financial planning, provision of insurance products or mortgage services. Investors would be required to sign a specified risk acknowledgement form, and an information form with respect to the finder would need to be filed with the ASC within 10 days of the distribution. Comments on the new proposal are due by May 7.
April 30, 2021
The Supreme Court of British Columbia has confirmed that monetary penalties and disgorgement orders from regulatory proceedings are exempt from a bankruptcy discharge. In 2015, the British Columbia Securities Commission ordered Thalbinder Singh Poonian and Shailu Poonian to pay more than $19 million in penalties and disgorgement after the commission found that the pair had engaged in market manipulation. In 2018, the Poonians sought a discharge from bankruptcy absolving them of their debts. The British Columbia Supreme Court denied their application for an absolute or suspended discharge from bankruptcy under the Bankruptcy and Insolvency Act.
The ruling sends a strong message that securities law violators may have difficulty using bankruptcy laws to release themselves of the financial consequences of their wrongdoing.
April 30, 2021
In January 2021, the Capital Markets Modernization Taskforce published its final report after completing its review of the status of Ontario’s capital markets. In its most recent provincial budget, the Government of Ontario indicated that it will proceed with certain of the recommendations made in the report, including to expand the Ontario Securities Commission’s mandate to include fostering capital formation and competition in the markets. The OSC’s current mandate is to provide protection to investors from unfair, improper, or fraudulent practices, to foster fair and efficient capital markets and confidence in capital markets, and to contribute to the stability of the financial system and the reduction of systemic risk.
April 30, 2021
As reported in our December 2020 bulletin, on December 7, the Ontario Securities Commission (OSC) released the final amendments to OSC Rule 45-501 Ontario Prospectus and Registration Exemptions (Amendments). The Amendments form part of the changes across Canada which, in Ontario, will have as one of their effects the transfer from the Financial Services Regulatory Authority of Ontario (FSRA) to the OSC of regulatory oversight over the distribution of non-qualified syndicated mortgages (NQSMIs) to persons that are not permitted clients.
On February 25, 2021, the Canadian Securities Administrators (CSA) published CSA Staff Notice 45-328 Update on Amendments relating to Syndicated Mortgages. In that notice, the CSA confirmed that the Amendments and the amendments in the local jurisdictions to the syndicated mortgage rules, took effect in all jurisdictions on March 1, 2021, except in Ontario and Quebec where the amendments are expected to take effect on July 1, 2021.
Accordingly, if a firm trading syndicated mortgages is operating only in Ontario or Quebec, they have until July 1, 2021 to comply with the Amendments. Firms operating in all other Canadian jurisdictions needed to comply with the Amendments by March 1, 2021.
Furthermore, on March 10, 2021, FSRA released final approach guidance (the “SMI Guidance”) for supervising mortgage brokerages and administrators that engage in NQSMIs. FSRA consulted on the proposed guidance in August-September 2020. The SMI Guidance will apply to: (a) mortgage brokerages dealing and/or trading in NQSMs with permitted clients on or after July 1, 2021; (b) mortgage brokerages acting on behalf of the borrower in NQSMIs with investors/lenders that are non-permitted clients; (c) mortgage brokerages that dealt and/or traded in legacy NQSMIs (conducted prior to July 1, 2021); and (d) mortgage administrators administering NQSMIs. The SMI Guidance highlights the division of regulatory oversight of NQSMIs, risk profile factors for mortgage brokerages, administrators and NQSMIs, information required for the quarterly data report for NQSMIs with permitted clients and data collection for legacy NQSMIs. Firms in Ontario dealing and/or trading in NQSMIs or mortgage administrators administering NQSMIs will want to review the final guidance in detail. Please don’t hesitate to contact your usual lawyer at AUM Law.
April 30, 2021
In our July 2020 Bulletin we reported on the Consultation Report of Ontario’s Capital Markets Modernization Taskforce. On January 22, the Taskforce released its Final Report after engaging with over 110 stakeholders and receiving over 130 stakeholder comment letters in response to the Consultation Report.
Background: The Taskforce was appointed by Ontario’s former Finance Minister to review the capital markets regulatory framework and make recommendations to modernize Ontario’s capital markets regulation. One of the Taskforce’s main objectives was to amplify growth and competitiveness in Ontario’s capital markets.
As we did in our July 2020 Bulletin when we last reported on the Consultation Report, in this month’s bulletin we have highlighted the proposals that we think will be of particular interest to readers who are following this initiative.
Improving Regulatory Structure: The Final Report sets out a number of recommendations which the Taskforce believes will lead to a more modern and efficient securities regulator including:
- Replacing the Securities Act (Ontario) and Commodity Futures Act (Ontario) with the Capital Markets Act (CMA). The recommendation is to see the implementation of the CMA by the end of 2021. As for this timing … we’re betting on the Over.
- Expanding the mandate of the OSC to include fostering capital formation and competition in the markets in order to encourage economic growth and help facilitate capital raising.
- Enhancing collaboration between the Ontario Securities Commission (OSC) and Financial Services Regulatory Authority of Ontario (FSRA) to achieve efficiencies including examining the potential of back-office efficiency opportunities.
- Introducing a single self-regulating organization (SRO) that covers all advisory firms, including investment dealers, mutual fund dealers, portfolio managers, exempt market dealers (EMDs) and scholarship plan dealers. In the short term the new SRO would regulate both investment and mutual fund dealers. In the long term this SRO would replace IIROC and MFDA and would also regulate exempt market dealers, portfolio managers and scholarship plan dealers and ultimately the OSC would delegate more registration responsibilities to the new SRO.
- Speed up the SEDAR+ project to create a more modern, centralized and user-friendly electronic filing/document retrieval system with the first phase to be complete in 2021. We’d love to see this happen in 2021 but again, don’t see this as being likely considering the heavy regulatory agenda this year.
Improving Regulations and Enhancing Investors Protection: Based on the Taskforce’s findings, capital markets participants are in favour of reducing regulatory burden and streamlining regulatory requirements. The Final Report recommends streamlining regulatory requirements and enhancing investor protection including:
- Lowering to 30 days the current four-month hold period for securities issued by a qualified reporting issuer using the accredited investor exemption and eliminating the hold requirement altogether after two years.
- Providing the Director of Corporate Finance at the OSC with power to impose terms and conditions on issuers similar to the power the Director of Compliance and Registrant Regulation has regarding registrants.
- Expanding civil liability for offering memorandum misrepresentation to extend to parties other than the issuer such as its board of directors, promoters, influential persons and experts.
- Allowing the OSC to adapt prospectus liability to address regulatory gaps resulting from new and evolving financing structures.
- For consistency with other jurisdictions, decreasing the ownership threshold for early-warning reporting disclosure from 10 to 5 per cent for non-passive investors.
- Designating a dispute resolution services organization that would have the power to issue binding decisions.
The Rise of Private Markets, Exempt Market Activities and Ensuring a Level Playing Field: The Taskforce included recommendations that aim to increase capital raising opportunities for small intermediaries and increase the variety and quality of independent products available to retail investors, such as:
- A dealer registration safe harbour for issuers that wish to distribute their own securities without an intermediary. We agree that this would be incredibly helpful to market participants.
- A finder category of registration which would impose fewer obligations compared to those imposed on EMDs or investment dealers (such as lower capital requirements) and eliminate the need for a finder to have an ultimate designated person or chief compliance office in certain instances. We also think this is a good idea, provided there’s clarity regarding when one crosses into being a registrable finder.
- The OSC and TMX to re-allow EMDs to act as “selling group members” in the distribution of securities made under a prospectus offering. This door was closed to EMDs a few years ago due to various policy concerns, so will be interesting to monitor this proposal.
- Additional accredited investor categories to include individuals that have passed relevant proficiency requirements.
- Improving access to the shelf system for independent product through guidance to address product shelf issues and the makeup of New Product Committees, title clarification for proprietary product to ensure a level playing field for all products gaining action to a distribution channel and that conflicts are addressed in the best interest of clients.
Fostering Innovation: The Taskforce made recommendations to help support stakeholders request for a more nimble and flexible regulator in order to foster innovation in the Ontario capital markets including:
- Foster an Ontario Regulatory Sandbox to benefit entrepreneurs and in the longer-term, consider developing a Canadian Super Sandbox where the OSC and FSRA should design an approach that would offer rapid exemptive relief or use other available regulatory tools to permit companies with innovative business models operating across the financial services sector in Ontario to test new financial services and products.
- Encourage access to retail investors in less liquid private equity and debt markets by introducing an appropriate retail investment fund structure (e.g. Interval Funds in the U.S.)
Other Recommendations: The summary above highlights only a handful of the Taskforce’s 70 plus recommendations. The Final Report also included other proposals such as:
- A fully electronic or digital delivery in relation to documents mandated under securities law requirements within six months.
- Name change of the Ontario Securities Commission to the Ontario Capital Markets Authority.
- Reducing the minimum consultation period for rule-making from 90 days to 60 days.
- Providing the OSC with additional tools for continuous disclosure and exemption compliance.
- Modernizing Ontario’s short selling regulatory regime to include protections allowed for in other jurisdictions (e.g., U.S. and U.K.)
- Introducing an exemption from the disclosure of conflicts of interest in connection with private
placements to institutional investors. An issue that’s been kicking around for years.
What’s Next? The next steps for the Final Report are now up to recently appointed Minister of Finance. The Minister may choose to act on some, none or all of the recommendations. As we have previously mentioned, we think that initiatives that can be implemented by Ontario authorities on their own could start moving forward if no legislative or rule changes are required. Other proposals (such as SRO reform) will require coordinated, cooperative and determined actions by multiple parties across the country and therefore likely to take much more time to achieve, if they are achievable at all.
AUM Law will continue to monitor the status of the recommendations and update you on significant developments. If you are interested in discussing any of the recommendations, please do not hesitate to contact Sandy Psarras, Chris von Boetticher or another member of our team.
January 29, 2021
On December 7, the Ontario Securities Commission (OSC) released the final amendments to OSC Rule 45-501 Ontario Prospectus and Registration Exemptions (Amendments). The Amendments are a part of the proposed changes across Canada which, in Ontario, will have as one of their effects the transfer from the Financial Services Regulatory Authority of Ontario (FSRA) to the OSC of regulatory oversight over the distribution of non-qualified syndicated mortgages (NQSMIs) to persons that are not permitted clients. The final version of the Amendments contain no substantive changes from the earlier version released on August 6 other than coming into effect on July 1, 2021, a few months later than the originally scheduled effective date of March 1, 2021. A firm that intends to engage in trades of NQSMIs to persons other than permitted clients on or after July 1, 2021 will be required to 1) either meet the prospectus requirements (or rely on an available exemption) and 2) either be registered as an exempt market dealer (EMD) or engage the services of a third-party EMD (or rely on an available exemption).
December 11, 2020
On November 19, the Corporate Finance Branch (CFB) of the Ontario Securities Commission (OSC) published Staff Notice 51-731 Corporate Finance Branch 2020 Annual Report (Report). The Report provides insight into how the CFB has undertaken its operations throughout fiscal 2020 and is a resource to help issuers and their advisors comply with their reporting obligations. Due to the ongoing impact of the Covid-19 pandemic, the Report also provides issuers with guidance on additional considerations related to the impact of Covid-19. Issuers should review the Report to better understand CFB expectations related to their regulatory obligations, including continuous disclosure obligations with respect to Covid-19.
Key compliance trends noted in reviews included issues relating to MD&A disclosure, the use of non-GAAP financial measures, forward-looking information and executive compensation. In addition, the Report notes that in fiscal 2020, the CFB receipted approximately 400 prospectuses, representing a slight decrease from the prior year. Key issues noted by staff during prospectus reviews include issues relating to an issuer’s (in)sufficiency of proceeds and financial condition, as well as relating to audit committees in the context of an IPO. In addition, the Report provides an update on the progress made on reducing the regulatory burden for issuers. A key recommendation for burden reduction, which was completed in 2020, includes a program that allows issuers to file an entire prospectus confidentially for staff review prior to filing a preliminary prospectus publicly on SEDAR.
Issuers who utilize the offering memorandum prospectus exemption should take note of specific reminders in the Report relating to ongoing financial reporting to investors and the OSC, as well as relating to marketing materials. The Report notes that not only are such materials incorporated by reference into the offering memorandum, but they must be filed with the OSC, either together with the offering memorandum, or, if subsequently prepared, within 10 days after their first use.
December 11, 2020
How do you summarize a year like no other in history? Well, the shift to a remote work environment didn’t do much to slow our regulators who, along with the Canadian asset management industry, rose to meet the multi-faceted challenges presented by the COVID-19 pandemic.
A. Burden Reduction and Capital Markets Modernization Initiatives
Regulators moved forward with initiatives intended to reduce regulatory burdens and modernize the regulatory framework, including the following:
Crowdfunding: In February, the Canadian Securities Administrators (CSA) proposed a harmonized, start-up crowdfunding regime. In July, after the comment period closed on the CSA proposal, the Ontario Securities Commission (OSC) issued an interim class order (Order) providing prospectus and registration exemptions for start-up crowdfunding that are similar to the exemptions already in place in a number of other provinces. The Order is expected to remain in place until the earlier of the date the new CSA regime is adopted or January 31, 2022.
SRO Reform: When market participants and regulators weren’t coming to grips with remote work arrangements, they were debating whether and how to reform Canada’s self-regulatory organizations (SROs) for registrants. The Mutual Fund Dealers Association of Canada (MFDA) kicked things off in February when it published its Proposal for a Modern SRO. The CSA followed up in June with its own consultation paper on SRO reform, and the Ontario Government’s Capital Markets Modernization Task Force (Task Force) set out its draft recommendations on the subject in its July consultation report.
OSC Burden Reduction Initiatives: In early 2019, the OSC kicked off a multi-year process to identify and implement actions to reduce regulatory burdens in Ontario and improve the investor experience. Check out our December 2019 regulatory recap if you’d like to refresh your memory. In May 2020, the OSC provided a progress report on its regulatory burden reduction initiatives and provided a further update in the June 2020 Interim Progress Report on its 2019-2022 priorities. We also reported on several specific projects, including the following:
- In June, the CSA announced changes designed to make it easier for advising representatives (ARs) of portfolio managers (PMs) to register as client relationship management (CRM) specialists.
- In July, the CSA published guidance on flexible CCO arrangements.
- In August, the CSA published final amendments that raise the threshold for when non-venture reporting issuers are required to file business acquisition reports.
- In October, the Ontario government proposed changes to the Business Corporations Act (OBCA) that, if enacted, will eliminate director residency requirements for OBCA corporations and introduce a more flexible regime for privately held OBCA corporations regarding written shareholder resolutions.
B. Business Continuity and Risk Management
Business continuity planning and risk management have been top of mind for firms and regulators this year, and not just because of the COVID-19 pandemic.
- In March we discussed pandemic-related business continuity issues for firms to consider in the short and medium and term.
- In July, we highlighted an interesting publication by the North American Association of Securities Administrators (NAASA) focusing on the need for firms to be prepared to deal with colleagues experiencing diminished capacity.
- In September, we discussed the CSA’s guidance on liquidity risk management for investment fund managers as well the discussion paper issued by Office of the Superintendent of Financial Institutions (OSFI) on core principles for operational resilience in a digital world.
C. Crypto Assets
Crypto-currency issues remained in the news in 2020.
- In January, we highlighted CSA Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets.
- In February, we discussed U.S. Securities and Exchange Commission (SEC) Commissioner Hester Pierce’s informal proposal for a safe harbour for token offerings.
- In July, we wrote about the OSC’s approval of a settlement agreement with Coinsquare Ltd and its executives regarding market manipulation on a crypto-asset trading platform.
- In August, we highlighted the CSA’s first decision registering a crypto-asset trading platform under its regulatory sandbox program.
- In October, we discussed the settlement reached by Kik Interactive with the SEC regarding its unregistered token offering.
Regulators responded to the COVID-19 pandemic in impressive fashion by, among other things, extending regulatory deadlines, granting temporary relief from certain requirements, and scaling back certain initiatives. They also turned their attention to compliance and other risks affecting market participants that were specific to, or exacerbated by, the pandemic.
A number of the pandemic-related regulatory actions we wrote about in 2020 were temporary in scope, so we have highlighted below the pandemic-related articles we wrote in 2020 that continue to be relevant for market participants.
- In March, we wrote about factors for registered firms to consider in the short to medium term after they activated their business continuity plans.
- In April, we reported that the CSA had extended the deadline for implementing the CFRs concerning conflicts of interest and related relationship disclosure information (RDI) reporting requirements by six months to June 30, 2021.
- In May, we wrote about guidance provided by the Financial Services Regulatory Authority of Ontario (FSRA) to mortgage brokers and administrators regarding their disclosure and other obligations in respect of mortgage-based investments during significant market disruptions, such as the COVID-19 pandemic.
- In August, we wrote about the U.S. SEC’s risk alert on COVID-related compliance risks relevant to dealers and advisers as well as the task force established by the North American Securities Administrators Association (NASAA) to target COVID-19 fraudsters.
- The CSA and FSRA extended the expected deadline for implementation of changes to the regulatory framework for syndicated mortgages in April and again in August. As recently announced, the new framework is now expected to take effect on July 1, 2021.
- In October, we wrote about the CSA’s biennial report on their continuous disclosure review program, which included guidance for reporting issuers on how to disclose COVID-19 impacts.
E. Cyber-Security and Data Privacy
Cyber-security and data privacy continued to be hot topics, with the shift to remote work arrangements due to the pandemic presenting increased risks for inadvertent cyber-security failures as well as opportunities for hacking. AUM Law addressed these and other privacy and cyber-security issues in a number of articles, including the following:
- Cyber-Resilience: We touched on cyber-resilience in our March FAQ on business continuity planning and wrote a more detailed article in our April bulletin. In September, we reported on the Office of Superintendent of Financial Institutions’ consultation paper on operational resilience in a digital world, which includes recommendations regarding cyber-resilience, and in October, we reported that the international Financial Stability Board (FSB) had finalized its cyber incident recovery and response toolkit.
- Artificial Intelligence: In February we wrote about the consultation paper on the regulation of artificial intelligence published by the federal Office of the Privacy Commissioner (OPC), and in June we discussed the consultation paper published by the International Organization of Securities Commissions (IOSCO) regarding potential regulatory measures addressing asset managers’ and market intermediaries’ use of artificial intelligence.
- Privacy: In August, we reported that the Ontario government had launched a consultation to determine whether reforms to Ontario privacy legislation are warranted. See also our article in this bulletin regarding the Canadian government’s proposed Digital Charter Implementation Act, 2020.
F. Compliance Review and Enforcement Report Cards
The summary reports that regulatory staff publish about their oversight of market participants are valuable tools that can help firms learn more about recent and proposed regulatory initiatives, what staff consider to be problematic (or, conversely, beneficial) practices, and how staff interpret legislation and rules. In 2020, we wrote about:
- Alberta Securities Commission (ASC) staff’s review of issuers’ and registrants’ compliance with the offering memorandum exemption (January);
- Insights from staff of the OSC’s Compliance and Registrant Regulation (CRR) Branch regarding their compliance program, shared during a webinar hosted by the Portfolio Management Association of Canada (PMAC) in May;
- The annual enforcement report published by the Investment Industry Regulatory Organization of Canada (IIROC) in May;
- The CRR Branch’s annual Summary Report for Dealers, Advisers and Investment Fund Managers (September) – a ‘must read’;
- The CSA’s biennial report card on reporting issuers’ continuous disclosure practices (October); and
- The OSC’s Corporate Finance 2020 Annual Report (discussed later in this bulletin).
G. Cases and Enforcement Sweeps
In 2020, we wrote about a number of regulatory decisions that we think offer lessons for our readers.
- In January, we wrote about IIROC’s decision to fine a representative for his failure to follow through on red flags regarding a client account being handled under a power of attorney.
- In March, we discussed the IIROC decision to fine TD Waterhouse $4 million for deliberate non-compliance with relationship disclosure information requirements. In the same month, the Ontario Court of Appeal upheld Daniel Tiffin’s conviction for trading in promissory notes without registration and distributing securities without a prospectus, but overturned the lower court’s decision sentencing him to six months in jail. (PS: if you’re ever tempted to conclude that a particular instrument is not a security, first read Tiffin).
- In May, we highlighted the enforcement action initiated by OSC staff against a mutual funding dealing representative who agreed to serve as executor for a client’s will even though he was alleged to have known that he was a beneficiary under that will. We also discussed undertakings given by two issuers to the Alberta Securities Commission (ASC) regarding internal controls, training and other requirements to ensure compliance with prospectus exemptions.
- In June, we discussed a significant decision issued by the Federal Court of Appeal regarding the constitutionality and application of Canada’s Anti-Spam Legislation (CASL).
- in July, we wrote about the OSC’s approval of a settlement agreement with Coinsquare Ltd and its executives regarding market manipulation on a crypto-asset trading platform.
- In September, we reported that the Financial Institutions Regulatory Authority of Ontario (FSRA) had fined Fortress Real Developments for operating without a license.
- And, as mentioned in Section C above, we wrote about two crypto-asset-related enforcement decisions, concerning market manipulation on a crypto-asset trading platform (Coinsquare) and an unregistered token offering in the U.S. (Kik Interactive).
In 2020, we published a number of FAQs offering practical insights on various topics. Although many of them touched on issues arising out of the COVID-19 pandemic, we think the insights will continue to have relevance in other contexts.
- In January, we discussed whether an advising representative (AR) can act as the executor of an estate on behalf of a client.
- In February, we discussed things to watch out for when firms describe themselves and their representative on social media.
- In March, we outlined issues for registered firms to consider, in light of the COVID-19 pandemic, regarding their know-your-client (KYC) and suitability determination obligations.
- In April, we discussed the use of electronic signatures for subscription documents, investment management agreements and similar agreements with the firm’s clients.
- In May, we addressed the issue of whether an associate advising representative can work remotely or in a one-person branch office.
- In July, we described how a registered firm’s ultimate designated person (UDP) can certify the firm’s RAQ responses if they do not have online access to the survey.
- In July, we also discussed whether registered individuals (and applicants for registration) have to disclose offenses they have been charged with, if the matter hasn’t adjudicated yet. (This issue was also covered later in the year in an Advisor’s Edge interview with our Erez Blumberger).
In 2019, the CSA published its own FAQ guidance, this time focusing the client-focused reforms (CFRs). We discussed those FAQs in our September and October bulletins.
Although the COVID-19 pandemic delayed implementation of the revised oversight framework for syndicated mortgages to July 2021, the good folks at FSRA kept busy in 2020 with a number of initiatives, including:
- In August, FSRA published for comment an oversight framework, including proposed rules and guidance, regarding the use of financial planner and financial titles.
- Also in August, FSRA and the OSC published for comment proposed local rules and guidance regarding syndicated mortgages, while the CSA finalized its amendments for the syndicated mortgages regime.
- In September, FSRA published proposed service standard for comment.
- In October, FSRA published its 2021-22 Statement of Priorities for comment.
December 11, 2020
On October 6, the Government of Ontario introduced Bill 213 Better for People, Smarter for Business Act, 2020 (the Bill). If enacted as proposed, the Bill will eliminate director residency requirements for corporations established under the Ontario Business Corporations Act (OBCA) and introduce a more flexible regime for privately held OBCA corporations regarding written shareholder resolutions.
Director Residency: The Bill eliminates the requirement that at least 25% of the directors of an OBCA corporation be “resident Canadians”, as that term is defined in the OBCA. Dropping this residency requirement is consistent with the approach taken in the majority of provinces and territories and will provide Ontario corporations, both public and private, with greater flexibility in determining board composition. Corporations established under the Canada Business Corporations Act (CBCA), however, still must abide by the 25% director residency requirement.
Shareholder Resolutions: Currently, the written resolutions of an OBCA corporation’s shareholders must be signed by all of the shareholders entitled to vote on the resolution at a meeting of shareholders. If the corporation cannot obtain a shareholder’s signature, the only alternative is to call and hold a meeting for shareholders to vote on the resolution. If the Bill is enacted as proposed, the default approval threshold for an ordinary written resolution of the shareholders of a privately held OBCA corporation will drop from unanimity to a simple majority. This will enable corporations to avoid the cost and delay associated with holding a shareholders’ meeting. However, a higher approval threshold can be set in the corporation’s articles or in a unanimous shareholders’ agreement (USA). Note that if a written resolution of shareholders is passed by some but not all of the corporation’s shareholders, the corporation must provide written notice of the resolution, within ten days of the resolution being passed, to any voting shareholders who weren’t signatories to the written resolution. Importantly, no change is proposed to the requirement that written, special resolutions must still be signed by all shareholders, ensuring that minority shareholders have advance notice of any fundamental changes to the business.
Our Takeaways: The proposed changes offer more operational flexibility for Ontario corporations and make Ontario a more attractive jurisdiction for new businesses. Currently, the Bill is at the second reading stage. We will monitor its progress and update readers if and when it is passed. If the Bill is enacted, AUM Law can assist owners and managers of OBCA corporations in reviewing and, if appropriate, modifying their current articles, by-laws and USAs to take into account these amendments. In the meantime, please do not hesitate to contact us if you have any questions about the potential impact of these changes.
October 30, 2020
Readers might recall that in August 2019, we reported that the U.S. Securities and Exchange Commission (SEC) was taking enforcement action against Ontario-based crypto-currency issuer Kik Interactive Inc. (Kik), alleging that it had made an unregistered offering of tokens known as Kin in violation of the Securities Act of 1933 (Securities Act).
On September 30, U.S. District Court for the Southern District of New York (Court) awarded summary judgment in favour of the SEC. Focusing on the economic realities of the transaction, the Court concluded that Kin met the definition of an “investment contract” and, therefore, Kik’s offering of Kin without a registration statement or available registration exemption violated the Securities Act.
Having ruled on the legal issues, the Court left it up to the parties to negotiate a final judgment. On October 21, the Court approved the parties’ settlement, which provides, among other things, that Kik will pay US $5 million to the SEC. For the next three years, Kik also is required to give the SEC 45 days’ advance notice before it participates, directly or indirectly, in any offer, sale, or transfer of the existing Kin tokens or any new, similar digital asset.
As we emphasized last year, this case and the regulators’ continued focus in this area highlight 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.
October 30, 2020
On October 29, the Canadian Securities Administrators (CSA) published their biennial report (Report) on staff reviews of reporting issuers’ continuous disclosure (CD). Although the Report focuses mainly on staff’s findings for the fiscal years ended March 31, 2019 and March 31, 2020, CSA staff also have included guidance on how issuers should consider reporting the impact of COVID-19 on their operating performance, financial position, liquidity and future earnings. Staff’s recommendations in this area address the following topics among others:
- Financial statements: CSA staff note that given the rapidly changing environment, it may no longer be appropriate for issuers to condense or omit certain disclosures in their interim financial statements because the information disclosed in the latest annual financial statements may be less relevant. Issuers also must consider, as new information becomes available, whether their judgments and estimates must be updated and prospectively reflected in their interim financial reports.
- Forward-looking information (FLI): Due to the uncertainty arising from COVID-19, issuers may need to revise or withdraw previously announced FLI or outlooks.
- Don’t blame COVID-19 for everything: Staff emphasize that issuers’ MD&A should be entity-specific and transparent and provide a detailed explanation and breakdown of the impact not just of COVID-19 but of any other factors contributing to variances.
- Liquidity and capital resources: Issuers whose liquidity or capital resources are significantly affected by COVID-19 should provide a comprehensive assessment of the pandemic’s current and expected impacts and quantify that impact where possible.
- Material change reports: Staff reminded issuers to consider whether COVID-19 or resulting government or regulatory policies are having unique or more significant impacts on them compared with others in their industry and listed examples of developments that might require a material change report.
If you have questions about the Report or would like to discuss a potential disclosure issue, please do not hesitate to contact us.
October 30, 2020
On September 17, the Canadian Securities Administrators (CSA) published for comment proposed changes to the offering memorandum (OM) prospectus exemption (OM Exemption) in National Instrument 45-106 Prospectus Exemptions (NI 45-106) and related guidance in Companion Policy 45-106CP (Proposed Amendments). The principal changes introduce new disclosure requirements for issuers engaged in real estate activities and issuers that are collective investment vehicles.
A. New Requirements for Issuers with Real Estate Activities
“Real estate activities” are defined, subject to certain exceptions, as “an undertaking, the purpose of which is primarily to generate for security holders income or gain from the lease, sale or other disposition of real property.” Activities relating to mineral, oil and gas projects are excluded from the definition, as are distributions in Québec of certain products that provide a real right of ownership in an immovable or give the holder of a security a right of exclusive use of a residential unit and space in an immovable owned by the security’s issuer.
Independent Appraisal: Issuers that engage in real estate activities and wish to rely on the OM Exemption will have to provide to the purchaser and file with the relevant securities regulatory authorities an independent appraisal of any interest in real property if:
- The issuer has acquired or proposes to acquire an interest in real property from a related party (as that term is defined in NI 45-106);
- A value for an interest in real property is disclosed in the offering memorandum (OM); and/or
- The issuer intends to spend a material amount of the proceeds from the offering on an interest in real property.
New Disclosure Schedule: Subject to the de minimis exemption noted below, issuers engaging in real estate activities also will have to complete new Schedule 1 Additional Disclosure Requirements for an Issuer Engaged in Real Estate Activities to Form 45-106F2:
- Issuers that develop real property will have to provide detailed disclosure about the project, such as descriptions of milestones and required permissions/approvals.
- Issuers that own and operate real property will have to provide detailed disclosure about matters such as the property’s age, condition and occupancy level.
- All issuers engaged in real estate activities will have to disclose the purchase and sale history of any of the issuer’s real property involving a related party.
- All issuers engaged in real estate activities will have to disclose penalties, sanctions, criminal or quasi-criminal proceedings, and/or bankruptcy or insolvency proceedings for parties such as the developer.
De Minimis Exemption: The disclosure requirements in Schedule 1 will not apply to an interest in real property, or more than one interest in real property taken together, that when considered in relation to all interests in real property held by the issuer, is not significant enough to influence a decision by a reasonable investor to buy, hold or sell a security of the issuer.
B. New Requirements for Collective Investment Vehicles
“Collective Investment Vehicle” is defined very broadly in the Proposed Amendments to mean an issuer whose primary purpose is to invest money provided by its security holders in a portfolio of securities. This definition will include issuers that hold portfolios of mortgages, other loans, or receivables. Also, the definition will include investment funds, to the extent they are permitted to use the OM Exemption.
New Disclosure Schedule: New Schedule 2 Additional Disclosure Requirements for an Issuer That is a Collective Investment Vehicle to Form 45-106F2 will require such issuers to disclose, among other things:
- The issuer’s investment objectives;
- Detailed information about the portfolio;
- Information about the portfolio’s performance; and
- Penalties, sanctions, criminal or quasi-criminal proceedings, and/or bankruptcy or insolvency proceedings for persons involved in the selection and management of the investments.
C. Other Amendments
The Proposed Amendments also include some general amendments, which are meant to clarify or streamline parts of NI 45-106 or improve disclosure for investors. For example, to make reading and reviewing OMs more efficient, the filed copy will have to be formatted so that words can be search electronically.
Form 45-106F2 Offering Memorandum for Non-Qualifying Issuers (Form 45-106F2) will be revised to include new cover page disclosure items, such as working capital deficiencies, payments to related parties, payments to finders and sellers, restrictions on redemption and retraction rights, and insufficiency of funds to accomplish the proposed objectives. Other changes to Form 45-106F2 include:
- Enhanced disclosure if a material amount of the offering proceeds will be transferred to another issuer that is not one of the issuer’s subsidiaries;
- Disclosure of purchase and/or sale histories of the issuer’s business or assets (other than real estate) involving a related party;
- The addition of related parties that receive compensation to the compensation disclosure and securities ownership table;
- Requirements to disclose criminal and quasi-criminal convictions;
- Additional disclosure regarding fees or limitations on redemption or retraction rights;
- More disclosure regarding redemption and retraction activities, including requests made to or fulfilled by the issuer, including the price paid, source of funds, and outstanding requests;
- Disclosure of the source of funds for dividends or distributions paid that exceed cash flow from operations; and
- Cautionary disclosure where expert reports, statements or opinions are included in an OM and the expert is not subject to statutory liability.
Interim Financial Reports for Ongoing Distributions: OMs will have to be amended to include an interim financial report for the most recently completed 6-month interim period when a distribution of securities under an OM is ongoing.
Form 45-106F4 Risk Acknowledgement (Form 45-106F4) will be amended, with the intention of making the form more understandable and useful to investors and to align the form with risk acknowledgment forms required with other prospectus exemptions.
Related Local Amendments Are Contemplated in Certain Jurisdictions. For example, the Alberta and British Columbia Securities Commissions expect to repeal local rules that require additional disclosure in OMs that relate to real estate projects. These local matters are disclosed, jurisdiction by jurisdiction, in Annex E of the version of the Notice of Proposed Amendments published in that jurisdiction. In Ontario, no local amendments are contemplated but the Ontario Securities Commission has included an Ontario-specific regulatory impact analysis in Annex E of the Notice published in Ontario.
D. Our Takeaways
The Proposed Amendments will make it more cumbersome for issuers with real estate activities or that are collective investment vehicles (including mortgage investment entities) to use the OM Exemption. The deadline for comments is December 16, 2020. If you have questions or would like to discuss how the Proposed Amendments might affect your business, please contact us.
September 30, 2020