Oct 2005
Prospectus and registration exemptions –national consolidation and harmonization – sort of
The Canadian Securities Administrators (CSA) have implemented National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106) together with consequential repeals and amendments to various national, multilateral and local instruments, rules and regulations. Although NI 45-106 consolidates and harmonizes many exemptions, differences remain in the provinces.
Capital Raising Exemptions – (please review Rule 45-106 for full details)
Section 2.4 – Private Issuer. All jurisdictions have adopted the “private issuer” exemption from MI 45-103. For Ontario this means a return to a modified “private company” exemption and a repeal of the closely-held issuer exemption. A private issuer has transfer restrictions on its securities (other than non-convertible debt), and no more than 50 beneficial owners excluding employees and former employees of the issuer or its affiliates. Unlike the former closely-held issuer, a private issuer cannot sell its securities to the public.
Section 2.5 – Family, Friends and Business Associates. The “family, friends and business associates” exemption from MI 45-103 has been adopted in all jurisdictions except Ontario. Saskatchewan has retained the requirement for a signed risk acknowledgement from certain purchasers. Ontario has adopted a more restrictive version, which is contained in section 2.7 of NI 45-106 “founder, control person and family”, which includes the persons previously covered in the “accredited investor exemption” in Ontario Rule 45-501.
Section 2.3 – Accredited Investor. The definition of “accredited investor” differs from that previously contained in Multilateral Instrument 45-103 and Ontario Rule 45-501. There are a number of changes, including the addition of particular entities to Quebec, the addition of “an individual who, either alone or with a spouse, has net assets (as opposed to “net financial assets”) of at least $5 million”, inclusion of certain investment funds, a definition for “fully managed account” and the inclusion of persons designated as an exempt purchaser in Alberta or British Columbia. Every jurisdiction, except Ontario, includes as an accredited investor, a person who is acting on behalf of a fully managed account and who is registered as an advisor in Canada or in a foreign jurisdiction even when purchasing investment funds.
Section 2.9 – Offering Memorandum. NI 45-106 contains two versions of the offering memorandum exemption, one for British Columbia, New Brunswick, Nova Scotia and Newfoundland and Labrador (the BC model) and one for Alberta, Manitoba, the Northwest Territories, Nunavut, Price Edward Island, Quebec and Saskatchewan (the Alberta model). Ontario has not adopted any offering memorandum exemption. The BC model requires that the purchaser purchase as principal and at or prior to the agreement to purchase, the issuer delivers an offering memorandum in the specified form to the purchaser and obtains a signed risk acknowledgement in the specified form from the purchaser. There is no limit on the acquisition cost. The Alberta model has the same requirements as the BC model, except that if the acquisition cost exceeds $10,000, the purchaser must also be an “eligible investor” (as defined in NI 45-106) and there is an additional limitation for investment funds. In the Northwest Territories, Nunavut, Saskatchewan and New Brunswick, no finder’s fee or commission may be paid except to a registered dealer in connection with the exemption.
Section 2.10 – Minimum Amount Investment - $150,000. In all Canadian jurisdictions, the purchaser must purchase as principal at an acquisition cost of not less than $150,000 paid in cash at the time of the trade and the trade must be in a security of a single issuer. The exemption is not available for a person that is created or used solely to purchase or hold securities in reliance on the exemption.
Transaction Exemptions - (please review Rule 45-106 for full details)
Section 2.11 – Business Combination and Reorganization. The exemption is available not only for “an amalgamation, merger, reorganization or arrangement that is under a statutory procedure”, but also for: “an amalgamation, merger, reorganization or arrangement” that is described in an information circular made pursuant to National Instrument 51-102 Continuous Disclosure Obligations (“NI 51-102”) or in a similar disclosure record that is delivered to each security holder whose approval is required and is approved by such security holders; and a dissolution or winding-up of the issuer.
Section 2.12 – Asset Acquisition. An issuer may issue securities to acquire assets (including resource properties) with a fair market value of not less than $150,000 in all jurisdictions. This amount represents an increase in Alberta, British Columbia and Ontario where the fair market value was previously not less than $100,000.
Section 2.13 – Petroleum, Natural Gas and Mining Properties. This exemption represents a relaxation of previously more onerous requirements such as exchange approval or an escrow. An issuer can issue securities to acquire petroleum, natural gas or mining properties or any interest therein.
Section 2.14 – Securities for Debt. A reporting issuer may issue its securities to a creditor to settle a bona fide debt of such reporting issuer.
Section 2.16 – Take-over Bid and Issuer Bid. This exemption permits trades in a security in connection with a take-over bid or issuer bid. It is specifically broad enough to cover both sides of the trade and any securities issued in connection with the bid.
Employee, Executive Officer, Director and Consultant Exemptions (please review Rule 45-106 for full details)
The exemptions previously contained in Multilateral Instrument 45-105 Trades to Employees, Senior Officers, Directors and Consultants (“MI 45-105”) have been incorporated into NI 45-106 and MI 45-105 will be repealed. The broader term “executive officer” replaces “senior officer”, in order to parallel the language used NI 51-102.
The Rule was effective September 15th 2005
Ontario Prospectus and registration exemptions
Ontario has consolidated many of its local exemptions that have not been included in NI 45-106 in an amended and restated local Rule - Revised 45-501. - (please review Rule 45-501 for full details)
Ontario’s “government incentive security” exemption (for “flow-through” securities) continues, provided that, in the aggregate in all jurisdictions in Canada, not more than 75 prospective purchasers are solicited resulting in sales to not more than 50 purchasers. Also, before entering into an agreement, each investor must receive an offering memorandum with specific matters included. The investor must have access to prospectus-equivalent disclosure, and each investor must
“because of net worth and investment experience or because of consultation with or advice from a person that is not a promoter of the issuer and that is an adviser or dealer registered under the Act, [be] able to evaluate the prospective investment on the basis of information about the investment presented to the prospective purchaser by the issuer or selling security holder, or (ii) is an executive officer or director of the issuer or of an affiliate of the issuer or a spouse or child of a director or executive officer of the issuer or of an affiliate of the issuer”
The offer cannot be accompanied by an advertisement and no selling or promotional expenses can be paid or incurred. Also, the promoter, if any, cannot have acted as a promoter of any other issue of securities under this exemption within the calendar year.
There are other Ontario only rules, including commodity futures options or contracts, security of a co-operative, membership or security of a credit union, self-directed RRSP, and other exemptions. Reference should be made to local Rule 45-501
The Rule was effective September 15th 2005