OSC Makes New Rule On Distributions Outside Canada
The Ontario Securities Commission has adopted a new rule 72-503 Distributions Outside Canada. The new rule will come into force on March 31, 2018.
The Ontario Securities Act does not expressly state whether it applies to any activities that take place outside Ontario. Over the years, the courts and the OSC have taken the position that Ontario securities laws will apply to activities outside Ontario if there is a real and substantial connection to Ontario. So for instance, it is possible that Ontario securities law could apply if a company that is incorporated in Ontario or is managed from an office in Ontario wants to sell shares or other securities to persons outside Canada.
For many years, the OSC has recognized that this approach is too broad, duplicates the regulation in foreign countries and can prevent Ontario companies from accessing foreign capital. Since the early 1980s, the OSC has generally taken the position that the prospectus requirements of Ontario securities law do not apply to a distribution of securities outside of Canada, if the securities stay outside Ontario and the distribution is made in compliance with the laws of the foreign country. This makes sense since a foreign investor will usually expect to rely on the prospectus or similar requirements of his home country. Rule 72-503 updates the OSC’s position on this issue.
Rule 72-503 Only Applies in Ontario
One important thing to note is that Rule 72-503 only applies in Ontario. So if in connection with a distribution the securities law of another province also apply, the company issuing the securities will need to ensure that it is also complying with the laws of that other province. There are significant differences in the rules and approach of each province to the foreign distribution of securities.
Exemptions Available Under Rule 72-503
Rule 72-503 provides four different exemptions for the distribution of securities outside of Canada.
- Distribution Under Public Offering Document in Foreign Jurisdiction
The first exemption is available if a company is selling securities to an investor outside Canada and at the time of the distribution:
- The company has filed a registration statement in accordance with the Securities Act of 1933 of the United States of America registering the securities and the registration statement is effective; or
- the company has filed an offering document that qualifies, registers, or permits the public offering of those securities in accordance with the securities laws of a specified foreign jurisdiction and, if required, a receipt or similar acknowledgement of approval or clearance has been obtained for the offering document in the specified foreign jurisdiction.
A specified foreign jurisdiction includes all members of the European Union, Australia, New Zealand, Hong Kong, Japan, Mexico, Singapore, South Africa and Switzerland.
- Concurrent Distribution under Final Prospectus in Ontario
The second exemption applies where:
- the company has materially complied with the disclosure requirements applicable to the distribution under the securities law of the foreign jurisdiction, or the distribution is exempt from such requirements; and
- the company has filed with the OSC, and a receipt has been issued for, a final prospectus qualifying a concurrent distribution of the same class, series or type of securities to purchasers in Ontario in accordance with Ontario securities law.
- Distributions by Reporting Issuers
The third exemption is available to companies that are reporting issuers anywhere in Canada. This exemption is available for a distribution by a company of its own securities to a person outside Canada if:
- the company has materially complied with the disclosure requirements applicable to the distribution under the securities law of the foreign country, or the distribution is exempt from such requirements; and
- the company is a reporting issuer in a jurisdiction of Canada immediately preceding the distribution.
- Distributions by Non-Reporting Issuers
The fourth exemption is for companies that are not reporting issuers in Canada. It is available for the issuance by the company of its own securities to a person outside Canada if, the company has materially complied with the disclosure requirements applicable to the distribution under the securities law of the foreign country, or the distribution is exempt from such requirements.
Distributions Through a Foreign Stock Exchange
For the purpose of the application of the four exemptions, if a company makes a distribution through the facilities of a foreign stock exchange, then each person buying the shares through the foreign stock exchange is deemed to be a person outside Canada, unless the company or any person acting on its behalf has reason to believe that the distribution has been pre-arranged with a buyer in Canada.
The shares or securities purchased by a person outside Canada pursuant to the first three exemptions will not be subject to any resale restrictions under Ontario securities law. However they may be subject to resale restrictions under the laws of the foreign country.
The shares or securities purchased by a person outside Canada pursuant to the fourth exemption will be subject to the resale restrictions contained in section 2.5 of National Instrument 45-102. This means that under Ontario securities law those shares or securities cannot be traded until:
- the company is and has been a reporting issuer somewhere in Canada for the four months immediately before the resale;
- at least four months have elapsed from the date that the foreign person bought the shares or securities;
- the certificates representing shares or securities contained the applicable legend; and
- the other conditions of section 2.5 of National Instrument 45-102 are satisfied.
The four exemptions in Rule 72-503 are not available with respect to any transaction or series of transactions that is part of a plan or scheme to avoid the prospectus requirements in connection with a distribution to a person or company in Canada. One of the purposes of the anti-avoidance clause in rule 72-503 is to make it clear that a company cannot get around the Ontario prospectus requirements by selling shares to a foreign investor and then having the foreign investor immediately reselling those shares back into Ontario, either privately or through the TSX or another stock exchange. The foreign investor must be purchasing the shares for investment purposes and not to redistribute them back into Ontario.
Report of Distribution outside Canada
Companies that rely on the third exemption (Distributions by Reporting Issuers) or the fourth exemption (Distributions by Non-Reporting Issuers) will have to file a report of their trades with the OSC. The report must be filed, within 10 days of the distribution, electronically through the OSC portal on Form 72-503F.
Caution for Private Issuers
Under Ontario securities law, private issuers are companies, that:
- are not reporting issuers;
- whose securities or shares are subject to restrictions on transfer contained in their articles or a shareholders’ agreement;
- whose shares are beneficially owned by not more than 50 persons, not counting employees and former employees; and
- have distributed their shares or securities only to persons listed in section 2.4 of National Instrument 45-106.
Companies that qualify as private issuers under Ontario securities law should not be using or relying on these exemptions when they sell shares to investors located outside Canada. Instead, they should be relying on the private issuer exemption contained in section 2.4 of National Instrument 45-106 and they should make sure that each foreign investor is a person who falls within one of the categories listed in section 2.4 of National Instrument 45-106.
If a private issuer uses any of the exemptions in Rule 72-503 to issue shares or securities to a foreign investor who is not a person listed in section 2.4 of National Instrument 45-106, then it will lose its status as a private issuer. This will mean that it will cease to be able to rely on the private issuer exemption after that date. For any future distributions of shares or securities, it will need to rely on another prospectus exemption, such as the accredited investor exemption, $150,000 exemption or the offering memorandum exemption, and it will need to file reports with the OSC and pay the applicable fees in respect of the shares or securities it issues under these exemptions.