Category: Corporate Law
On December 10, the OSC published a report on recent capital raising activity in the exempt market by corporate (i.e., non investment-fund issuers). As noted in CSA press release, the report revealed that while there has been notable year-over-year growth in the number of individual investors with capital invested in Ontario’s exempt market, the number of issuers raising capital has remained relatively stable. The report can be found on the OSC website here.
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 November, we published an FAQ video about regulatory and compliance factors to consider when setting up an investment vehicle.
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
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
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.
On March 25, FINTRAC issued a notice (Notice) indicating that it is committed to working constructively with businesses (Reporting Entities) subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) to minimize the impact of ongoing anti-money laundering and anti-terrorist financing (AMLTF) requirements while Reporting Entities are experiencing challenges due to the disruptions caused by COVID-19. FINTRAC had four main messages:
- Reporting: Reporting Entities should give priority to submitting suspicious transaction reports (STRs), as required.
- Verification of Identity: Some provincial governments are extending the validity of various identification documents to avoid in-personal renewal visits. If a person presents a document or information affected by such a decision, the Reporting Entity must still determine the authenticity of that document or information but can, until further notice, consider the document or information valid and current.
- Compliance Assessment and Enforcement: For now, FINTRAC does not plan to initiate any new examinations and plans to limit its other interactions with Reporting Entities to: (1) completion of existing examinations situations relating to reporting issues; and (2) requests for guidance.
- If Non-Compliance Is Unavoidable: In the Notice, FINTRAC stressed the importance for Reporting Entities of documenting the reasons for any situation where the Reporting Entity cannot meet a reporting or other regulatory obligation for reasons beyond its control. The Reporting Entity should document the reason for not meeting the obligation (g. employee responsible for fulfilling an obligation affected by COVID-19) and, where possible, any measures taken to mitigate the non-compliance. Firms are also encouraged to submit a voluntary self-declaration of non-compliance via email, when they can, and such a notification will be taken into account in future compliance activities.
If your firm is experiencing challenges complying with your obligations under the PCMLTFA or your monthly AMLTF reporting obligations to securities regulators, AUM Law can help. For example, we can prepare and file on your behalf your monthly AMLTF reports with securities regulators. And if you are facing an instance of potential or actual non-compliance with your obligations, we can advise you on how to document the issues, develop mitigation strategies and liaise with regulators on your behalf as needed.
March 31, 2020
As we discussed in our January 2019 bulletin, most private corporations organized under the Canada Business Corporations Act (CBCA) are now required to keep a register of individuals with significant control (ISC Register). Responding to feedback received since these requirements came into effect in June 2019, Corporations Canada and Innovation, Science and Economic Development Canada and Corporations Canada (the Departments) are considering whether regulations should be enacted to provide more guidance and clarity about the ISC Register regime. On March 9, 2020, they published a consultation paper on this subject.
The Departments are seeking feedback on the following questions, among others:
- What steps should a corporation follow if it determines that there are no individuals who qualify as ISCs? Should it note that conclusion in its register?
- Corporations subject to the ISC Register requirements must take reasonable steps to update their ISC Register at least once per year. What would constitute reasonable steps?
Comments are due by May 12, 2020. If you would like to discuss the Consultation Paper and its potential impact on your business, please contact us.
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
On January 16, the Canadian Securities Administrators (CSA) published Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets (Crypto Guidance). The Crypto Guidance is the latest in a series of publications intended to help the emerging crypto industry understand when securities legislation applies to their business models. (See, for example, our March 2019 article on regulatory approaches to crypto-asset trading platforms and our June 2018 article covering the CSA’s guidance on token offerings.)
The major takeaways from this new publication are as follows:
- Most forms of tokenized crypto assets that carry voting rights and/or rights to receive dividends will almost always be considered a security and subject to applicable securities laws.
- One of the key determinations of whether a crypto platform is subject to securities laws is whether crypto assets traded on the platform are immediately delivered to the purchaser, with “ownership, possession and control” resting with that purchaser upon that purchaser. This means that services that provide custody functions on their crypto platform likely have to comply with applicable securities laws.
If you would like to further understand the implications of the Crypto Guidance, please contact your usual lawyer at AUM Law.
January 31, 2020
On January 9, the Canadian Securities Administrators (CSA) published Consultation Paper 51-405 Consideration of an Access Equals Delivery Model for Non-Investment Fund Reporting Issuers (CP 51-405). They noted that electronic access is a more cost-efficient, timely and environmentally friendly way of communicating to investors than physical delivery. Under an “access equals delivery” model, issuers would effect delivery by issuing a news release to alert investors that the document is available on the System for Electronic Document Analysis and Retrieval (SEDAR) and the issuer’s website. Initially, the focus would be on delivery of prospectuses, financial statements and MD&A but the CSA is also seeking feedback on whether the model should be extended to documents that require immediate investor attention, such as rights offering documents, proxy materials and takeover bid circulars.
CP 51-405 is more of a concept release than a rule proposal, with the CSA seeking feedback on questions such as whether such an initiative should be prioritized as a burden reduction measure, which documents should be covered, how withdrawal rights would be calculated, and whether issuers should be required to have websites where investor materials could be access under this model. The comment period expires on March 9. AUM Law will monitor this initiative and report back on further developments.
January 31, 2020