Category: Corporate Finance
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
On August 6, the Canadian Securities Administrators (CSA) published final amendments to national rules affecting the prospectus and registration exemptions for distributions of securities involving syndicated mortgages (National Amendments). In addition, some provinces including Ontario have proposed additional changes to their local prospectus and registration exemptions, and the Financial Services Regulatory Authority of Ontario (FSRA) is consulting on draft guidance (FSRA Guidance) for its supervision of mortgage brokers and administrators dealing in certain syndicated mortgages. The National Amendments, proposed FSRA Guidance, and proposed Ontario-specific amendments prospectus and registration exemptions (Ontario Rules) are expected to come into effect on March 1, 2021. Below, we highlight key features of the reforms.
The National Amendments will amend National Instrument 45-106 Prospectus Exemptions (NI 45-106), National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), and the related companion policies. Among other things:
- The existing prospectus and registration exemptions in Ontario, Newfoundland and Labrador, the Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island and the Yukon for securities that are syndicated mortgages (Mortgage Exemptions) will be removed. This will align the regulatory frameworks in these jurisdictions with the rest of Canada.
- The private issuer prospectus exemption (Private Issuer Exemption) will be removed for distributions of syndicated mortgages.
- Because of these changes, exempt distributions of syndicated mortgages in Canada will have to be effected under another prospectus exemption, such as the accredited investor exemption (AI Exemption), offering memorandum exemption (OM Exemption), or family, friends and business associates exemption (FFBA Exemption).
- Consistent with the current approach in British Columbia for syndicated mortgages distributed under the OM Exemption, the National Amendments will require supplemental disclosure tailored to syndicated mortgages.
- In Ontario and other jurisdictions where the Mortgage Exemptions currently apply to syndicated mortgages, market participants that are in the business of trading syndicated mortgages will need to determine whether the registration requirement applies to them.
Changes since 2019: The National Amendments are substantially similar to the proposed amendments published by the CSA for comment in March 2019 (2019 Proposal). But there have been a few changes. For example, Form 45-106F18 Supplemental Disclosure for Syndicated Mortgages will require disclosure of the potential subordination of the syndicated mortgage, clarify the calculation of the loan-to-value ratio, and include additional examples of risk factors.
Some jurisdictions have proposed further changes to their exemptions:
- Qualified syndicated mortgages: Ontario and New Brunswick have published for comment prospectus and registration exemptions for “qualified syndicated mortgages” (QSMs), and we expect Nova Scotia to introduce a similar pair of exemptions. Alberta and Québec have proposed a prospectus-only exemption for trades in QSMs.
- Distributions of non-qualified syndicated mortgage investments (NQSMIs) to permitted investors: Ontario and New Brunswick also have proposed prospectus and registration exemptions for distributions of NQSMIs to permitted clients (i.e. institutional and high net worth investors). Alberta has proposed a prospectus-only exemption for trades in NQSMIs to permitted clients, while Québec is asking for feedback on whether such an exemption should be introduced.
- Reports of exempt distribution: Ontario and New Brunswick will not require a Form 45-106F1 Report of Exemption Distribution to be filed for distributions of QSMs under their new prospectus exemptions or for distributions of NQSMIs sold to permitted clients.
Who will regulate what in Ontario beginning in March 2021? FSRA currently regulates all syndicated mortgage investments in Ontario. When the new regime comes into effect, FSRA will continue to supervise transactions involving qualified, syndicated mortgage investments and the mortgage brokers and administrators involved in such transactions. Oversight of NQSMIs will be split between FSRA and the OSC, depending on the status of the investor/lender and the type of transaction. In particular, FSRA will supervise:
- NQSMI transactions with permitted clients;
- NQSMI transactions with permitted and non-permitted clients before March 1, 2021 (Legacy NQSMIs); and
- Administrators of NQSMIs.
Mortgage brokerages that deal in mortgages and syndicated mortgages only with permitted clients will not have to register with the OSC and the distributions of these products to permitted clients will be exempt from the prospectus requirement. There will be dual oversight however, in some circumstances. For example, FSRA will have oversight over mortgage brokers dealing in NQSMIs when they act on behalf of the borrower who is not a permitted client, with the OSC having oversight over the trades with respect to that investor/lender.
The proposed FSRA Guidance describes FSRA’s forward-looking, risk-based approach to supervision of the firms and transactions over which it will have authority and outlines the data it plans to collect from firms to inform its risk assessments.
Comment Deadline: Comments on the proposed Ontario Rules and FSRA’s Proposed Guidance are due on September 21, 2020. If you are interested in submitting comments or have questions about how these changes to the syndicated mortgages regime could affect your business, please contact us.
August 31, 2020
On August 20, the Canadian Securities Administrators (CSA) published final amendments (Amendments) to the business acquisition report (BAR) requirements for non-venture reporting issuers. Currently, such issuers must file a BAR after an acquisition if any of the significance tests set out in National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) exceeds 20%. To reduce the regulatory burden for issuers, the Amendments:
- Narrow the circumstances under which a BAR must be filed to transactions where at least two of those significance tests are triggered; and
- Raise the significance threshold to 30%.
The CSA expects the Amendments to take effect on November 18, 2020. If you have questions about the BAR requirements, please do not hesitate to contact us.
August 31, 2020
In our February 2020 bulletin, we reported on proposed National Instrument 45-110 Start-up Crowdfunding and Registration Exemptions (NI 45-110), which is intended to create a nationally harmonized regime. The comment period for that proposal ended on July 13. On July 30, the Ontario Securities Commission (OSC) adopted an interim class order (Order) that provides prospectus and registration exemptions for start-up crowdfunding that are substantially similar to the local exemptions already in place in Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Québec, and Saskatchewan (collectively, the Crowdfunding Orders).
In the news release accompanying the Order, the Canadian Securities Administrators (CSA) noted that start-ups and other small businesses are facing significant funding challenges due to COVID-19 and might benefit from more unified regulatory requirements to expand their access to capital. The Order will remain in place until the earlier of the date that NI 45-110 is adopted or January 31, 2022. If you wish to learn more about the Crowdfunding Orders and their potential usefulness for your business, please contact us.
July 31, 2020
Inventions, apologies, clean water and comedians. Canada is great at many things. Add to that list our tolerance for studies of our securities regulatory system. Here at AUM Law, we’ve been dipping into the initial consultation report (Report) of the Ontario government’s Capital Markets Modernization Task Force (Task Force). Like ice wine, the Report is better sipped than guzzled and so in this month’s bulletin we’ve highlighted a handful of proposals that we think will be of particular interest to readers of this newsletter.
Background: The Task Force began its work in February 2020 and since then has engaged with over 110 stakeholders to learn more about the challenges that businesses and investors face in Ontario’s capital markets. Now, the Task Force is seeking feedback on 47 proposals to supplement the policing function of Ontario’s capital markets regulatory framework with a public policy imperative to grow those markets.
Self-Regulatory Organizations (SROs): SRO reform is a hot topic. Adding to the proposals we discussed last month, the Task Force has its own recommendations, including those outlined below, to transform the regulatory framework for SROs and registered firms.
- Create a single SRO to regulate both investment fund dealers and mutual funder dealers and conduct national market surveillance.
- In the longer term, transfer all registration functions and oversight of all firms distributing products and providing advice to investors from the OSC to the SRO.
- Increase the OSC’s oversight over the existing SROs and any future SRO. For example, the OSC would approve SRO annual business plans and be able to veto significant publications (including rules and guidance) and key appointments.
- Link SRO executives’ compensation and incentive structures to their public interest and policy mandate, require SROs boards to include directors with investor protection experience, require a greater proportion of directors (including the chair) to be independent, and introduce cooling-off periods between working for a member firm and becoming an independent director of an SRO.
- The Task Force also is considering whether to recommend an ombudsperson service to address complaints that SRO member firms have about the services received from their SRO.
Capital-Raising: Many of the Task Force’s proposals, including the recommendations set out below, focus on making Ontario capital markets more attractive to issuers and investors:
- Expand the definition of accredited investor (AI) so that distributions under the AI exemption can be made to individuals who hold the CFA Charter or have completed other relevant proficiency requirements such as the Canadian Securities Course (CSC) exam, Exempt Market Products exam, or the Series 7 Exam plus the New Entrants Course Exam.
- Allow exempt market dealers (EMDs) to participate as selling group members in prospectus offerings and sponsor reverse takeovers (RTOs).
- Develop a regulatory framework for retail private equity investment funds, such as the “interval fund” concept in the United States. (An interval fund is a type of unlisted, closed-end fund that periodically offers to buy back a stated portion of its shares.)
- In the Report, the Task Force discusses the phenomenon of angel investor groups assisting with early stage financing of start-ups. According to the Report, angel investor groups consist of AIs who professionalize and share due diligence, domain knowledge, and expertise as they consider investing in early stage issuers. Some angel investor groups seek to be structured to earn a fee from working with their members to collaboratively finance these start-ups and such arrangements could, in some circumstances, trigger registration requirements. The Task Force recommends that the registration rules be changed so that angel groups can work with their AI members.
- Liberalize reporting issuers’ ability to pre-market transactions to institutional investors before filing a preliminary prospectus. This regulatory change would be combined with increased monitoring and compliance examinations by regulators of the trading of those who might have advance knowledge of an offering.
Ownership Transparency: The Task Force sets out several proposals that may be of particular relevance to institutional investors who hold securities of reporting issuers. For example:
- Decrease the ownership threshold for early warning reports decrease from 10% to 5%. Feedback is requested on, among other things, whether requiring passive investors to report ownership at the 5% threshold would create undue burden relative to the disclosure benefits.
- Require institutional investors whose investments exceed a certain dollar threshold to disclose on a quarterly basis their holdings in Canadian reporting issuers whose market capitalization is above a certain threshold.
A Bigger Sandbox: The Task Force recommends that the OSC Launchpad and the Financial Services Regulatory Authority (FSRA) create an Ontario Regulatory Sandbox to serve innovative start-ups operating across Ontario’s financial services sector. Ideally, the Ontario Regulatory Sandbox would expand into a Canadian Super Sandbox involving all provincial and federal financial sector regulators.
Other Recommendations: The summary above highlights only a handful of the Task Force’s recommendations. The Report also includes potentially high-impact proposals such as:
- Separating the OSC’s regulatory and adjudicative functions;
- Expanding the OSC’s investigative and enforcement powers;
- Providing greater rights for persons or companies affected by the OSC’s examinations and investigations, such as introducing a mechanism to ensure that the OSC’s questions or requests for documents are subject to a “reasonable and proportionate” threshold and enabling affected persons to apply to an OSC adjudicator to clarify investigation and examination-related orders; and
- Empowering the Ombudsman for Banking Services and Investments (OBSI) to issue binding decisions requiring a registered firm to pay compensation to harmed investors and increasing the limit on OBSI’s compensation recommendations;
What’s Next? The deadline for comments on the Report is September 7. The Task Force plans to deliver its final report to the Minister of Finance before the end of the year. After that, the Task Force’s proposals will become part of the mix of Ontario and Canada-wide reform proposals, including the OSC’s regulatory burden reduction initiative, establishment of the Cooperative Capital Markets Regulatory System, and the Canadian Securities Administrators’ agenda. We think that initiatives that can be implemented by Ontario authorities on their own could move forward fairly quickly, especially 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 are therefore likely to take much more time to achieve, if they are achievable at all.
AUM Law will continue to monitor the Task Force’s work and update you on significant developments. If you are interested in submitting a comment letter or wish to discuss the Report’s implications for your business, please do not hesitate to contact us.
July 31, 2020
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 nationally 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