In the previous issue of our bulletin, we provided a high level report on the new draft Capital Markets Act (Act) released by the Ontario Ministry of Finance (Finance) on October 12, 2021. In this issue, we highlight some of the provisions of the Act, together with the related Capital Markets Modernization Taskforce (Taskforce) recommendations, which we think will be of particular interest to our readers.
Additional Accredited Investor Categories
Citing the OSC’s 2020 report on exempt market activities in Ontario, the Taskforce noted in its final report that the accredited investor exemption was the most used prospectus exemption in Ontario in 2019, accounting for 95% of the gross proceeds invested by Ontario investors. Acknowledging its importance, the Taskforce recommended expanding the definition of accredited investors, in particular to include the individuals who have completed relevant proficiency requirements.
In response, Finance proposed giving the OSC rule-making authority to introduce additional categories under the accredited investor exemption, which would represent a departure from the current approach of setting out the relevant definition in the Securities Act. In addition, the Act would permit the Chief Regulator to designate a particular person to be an accredited investor if the Chief Regulator considers that it would be in the public interest to do so.
The approach contained in the Act would more closely align Ontario’s practices to those of the other CSA jurisdictions, and give the OSC additional flexibility to tailor the categories of accredited investors to ensure that they remain adapted to evolving capital markets.
Expansion of Civil Liability for Offering Memorandum Misrepresentations
Under the Securities Act, Ontario investors have civil liability recourse based on a right of action relating to misrepresentations in an offering memorandum. However, claims may only be brought against the issuer and a selling security holder (if any).
The Act would expand these rights by permitting an investor to bring an action for damages for misrepresentations in certain prescribed disclosure documents against i) the issuer, ii) the directors of the issuer, iii) promoters of the issuer, iv) influential persons, v) experts and vi) every person who signed the prescribed disclosure document, and an action for recission against the issuer. For certain other prescribed disclosure documents, rules having the same scope as those under the Securities Act would apply.
Although it is not yet exactly clear which documents would be included in the first category of prescribed disclosure documents and which documents would be included in the second category, Finance suggests that the first category would certainly include an offering memorandum.
While providing additional protection to the investing public, the increase in the size of the group of persons with respect to whom liability may be imposed significantly increase the stakes for everyone involved in the preparation of the relevant disclosure or offering documents because each of them could become responsible on a joint and several basis for the liability.
Additional Tools for Enforcing Compliance with Securities Legislation
Under the current regulatory regime, the OSC’s primary tool for bringing market participants into compliance is the enforcement procedures set out in the Ontario Securities Act. Although these procedures are designed to be more efficient and less burdensome than judicial proceedings, they may not always be efficient enough and do not allow the OSC to respond to securities law violations quickly.
The Act would permit the Chief Regulator of the OSC to issue compliance orders to quickly resolve specific situations. Such orders would include:
- Orders that relate to the dissemination of information to the public or to a fee required to be paid;
- Orders that any or all of the exemptions under capital markets law do not apply to the issuer or to a prescribed person; and
- Cease trade orders.
An opportunity to be heard would be afforded to specified persons for these orders. A number of additional changes to enforcement provisions have been proposed, including additional coverage for production orders and the ability to search a dwelling-house in the specified circumstances during the day (important to note while many people are still working from home).
Other Notable Measures
In addition to the above, the Act contains other measures aimed at ensuring that the capital markets rules stay current, flexible and responsive to developments such as:
- Imposing a requirement for five-year periodic reviews of the capital markets rules and the OSC rules;
- Giving the OSC designation powers and rulemaking authority to permit the OSC to provide regulatory clarity to businesses with unique offerings and appropriate protection to investors, such as in the area of crypto assets;
- Giving the OSC rule-making authority to allow for requirements to be placed on public issuers to have an annual advisory shareholders’ vote on executive compensation;
- Giving the OSC authority to prescribe requirements and restrictions for persons engaging in the promotion of purchases or trades of securities, and specifically prohibiting false and misleading statements (similar to prohibitions that currently exist in British Columbia);
- Increasing the maximum administrative monetary penalties to $5 million and the maximum fine for offences to $10 million;
- Explicitly prohibiting activities such as aiding, abetting or counselling a contravention of capital markets law and front-running;
- Establishing automatic and streamlined reciprocating provisions for orders from the other CSA jurisdictions, such as sanction orders, cease trade orders and settlements; and
- Establishing a procedure to have amounts disgorged from capital markets offenders and have them distributed to the investors who suffered financial losses.
Reduction in the Minimum Consultation Period for Rule-Making
Currently in Ontario, proposed OSC rules are required to go through a minimum public consultation period of 90 days. The Act would change the minimum consultation period to 60 days. Although this would bring Ontario’s practices in line with the other CSA jurisdictions, it would also require market participants and other impacted stakeholders to be vigilant in looking out for proposed new rules or changes to the existing rules that may affect them in the early stages in order to ensure that they do not miss the opportunity to provide input in the rulemaking process.
As the Act represents an overhaul of, rather than an incremental change to, the regulatory regime, it is expected that much attention will be required to be paid to transitional matters. Finance states that the primary goal is to minimize the impact of the transition to the Act on market participants and their businesses. It is Finance’s intention that no action need be taken by market participants. For example, existing registrations and activities would be continued under the new regime by operation of law.
In addition, because the Act introduces a new “platform” approach to the capital markets rules, Finance advises that market participants can expect that new rules as well as rule changes would be necessary to ensure that there will be no regulatory gaps and that the status quo is preserved where appropriate. In particular, Finance tells market participants to expect that:
- Prospectus and registration exemptions currently embedded in the Securities Act would be carried forward in rules;
- Carve-outs from the investment fund insider trading/self-dealing requirements would be found in the rules;
- The Commodity Futures Act would be repealed and replaced with a local rule that carries forward the existing registration regime except that the instruments will be treated as derivatives under the Act and registration will move to a derivatives registration regime; and
- The existing registration exemptions that derivatives dealers currently rely on would be carried forward in rules, subject to a separate OTC derivatives business conduct rule that would apply regardless of a dealers’ registration status.
We will continue to monitor the Act and its developments. In the meanwhile, if you have any questions about how the Act may affect your business or have any comments about the Act requiring our assistance for submission to Finance, please do not hesitate to contact any member of our team.
November 30, 2021