The Canadian Securities Administrators (the “CSA”) recently adopted amendments to National Instrument 45-102 Resale of Securities (“NI 45-102”) and changes to Companion Policy 45-102CP to National Instrument 45-102 Resale of Securities (“45-102CP”) (collectively, the “Amendments”).
Provided all necessary regulatory and ministerial approvals are obtained, it is anticipated that the Amendments will come into force on June 12, 2018. As such, the following is subject to any further changes which may be implemented prior to such approval.
Substance and Purpose
The Amendments introduce a new prospectus exemption in section 2.15 of NI 45-102 (“Section 2.15”) for the resale of securities (and underlying securities) of a foreign issuer that applies in all jurisdictions other than Alberta and Ontario if:
- the issuer is not a reporting issuer in any jurisdiction of Canada, and
- the resale is on an exchange, or a market, outside of Canada or to a person or company outside of Canada.
A foreign issuer is an issuer that is not incorporated or organized under the laws in Canada unless certain circumstances suggest that the issuer has more than a minimal connection to Canada (i.e., the issuer has a head office in Canada or the majority of its directors or executive officers ordinarily reside in Canada).
In Alberta and Ontario, the new exemption in Section 2.15 and the existing exemption in section 2.14 of NI 45-102 (“Section 2.14”) will be located in the following local instruments:
- in Alberta, Alberta Securities Commission Blanket Order 45-519 Prospectus Exemptions for Resale Outside Canada (ASC Blanket Order 45-519);
- in Ontario, Ontario Securities Commission Rule 72-503 Distributions Outside Canada (OSC Rule 72-503).
Section 2.14 of NI 45-102 (“Section 2.14”) provides a prospectus exemption for the resale of securities (and underlying securities) where the issuer is not a reporting issuer in any jurisdiction of Canada provided that:
- the resale is on an exchange, or a market, outside of Canada or to a person or company outside of Canada, and
- residents of Canada own not more than 10% of the outstanding securities of the issuer and represent not more than 10% of the total number of security holders (the ownership conditions).
The policy rationale for Section 2.14 is that it is not necessary to restrict the resale of securities over a foreign market or to a person or company outside Canada if the issuer has a minimal connection to Canada and there is little or no likelihood of a market for the securities to develop in Canada. The purpose of the ownership conditions is to measure whether the issuer has a minimal connection to Canada.
Since the adoption of NI 45-102, there have been a number of changes to securities regulation and information accessibility, and a greater access to securities markets worldwide. Canadian investors, particularly institutional investors, are increasingly acquiring securities of foreign issuers to participate in global market growth by investing in a more diversified global portfolio. Foreign securities are acquired either through private placements or on foreign exchanges.
Many foreign issuers, without any other connection to Canada, are finding they have exceeded the ownership conditions, including through Canadians purchasing their securities on foreign markets. As a result, Canadian security holders of these foreign issuers would have to hold the securities for an indefinite period. In some cases, foreign issuers decide not to offer their securities in Canada to avoid the work necessary to determine if the ownership conditions will be met and thereby reduce opportunities for Canadian investors to participate in private placements with foreign issuers.
Section 2.15 provides an alternative to the ownership criteria set out in Section 2.14. A security holder is exempted from the prospectus requirement for the resale of securities acquired under a prospectus exemption if the resale is on an exchange, or a market, outside of Canada or to a person or company outside of Canada and if the issuer of the securities is a foreign issuer.
The Amendments set out in 45-102CP provide further guidance on certain of the defined terms used in the Amendments including “directors and executive officers” and “foreign issuer”. 45-102CP is also being amended to provide that a selling security holder engaged in activities to sell or create a demand for the security in Canada would not be able to rely on the exemptions in section 2.15.