Sept 2005
Exempt distributions – new Rules expected for Sept 2005
The current prospectus exemption regime will be changed in two ways:
The Canadian Securities Administrators (the CSA), have amended proposed National Instrument 45-106 which will consolidate the prospectus and registration exemptions in the provincial statues, and national, multilateral and local instruments. At present, market participants who wish to effect a multi-jurisdictional exempt distribution must familiarize themselves with the various exempt distribution regimes of the relevant jurisdictions. This typically means culling through the various acts, regulations and rules of the different jurisdictions.
In addition, Ontario is consolidating many of its local exemptions that have not been included in NI 45-106 in an amended and restated local Rule - Revised Ontario 45-501. The Rules are expected to come into force on September 2005.
Some of the more significant exemptions for small issuers in Ontario would be:
- Section 2.4 - Private issuer: The private issuer exemption replaces, in the interest of harmonization, the closely-held issuer exemption currently set out in the Existing 45-501.
- Section 2.5 - Family, friends and business associates: Ontario is not adopting the family, friends and business associates exemption as Ontario does not believe that an exemption that allows securities to be issued to an unlimited group of non-accredited investors is appropriate for the Ontario market.
- Section 2.7 - Family, founder and control person - Ontario: Section 2.7 contains an Ontario-only exemption for founders, affiliates of founders, control persons and certain family members of founders, directors and executive officers.
- Section 2.9 - Offering memorandum: Ontario is not adopting the offering memorandum exemption.
Capital Pool Companies prospectuses to be primarily reviewed by TSX Venture
The BC, Alberta, Saskatchewan, Manitoba, Ontario and Nova Scotia Securities Commissions (the “Commissions”) intend to rely primarily on the analysis and review carried out by TSX Venture regarding a Prospectus and review of the Qualifying Transaction of a Capital Pool Company (“CPC”). Existing TSX Venture Policy 2.4 establishes a program under which a CPC may conduct an initial public offering by prospectus and obtain a listing on TSX Venture’s Tier 2. The program requires the CPC to identify and complete a Qualifying Transaction within a specified period of time after listing. After the CPC obtains the necessary shareholder approval or files the QT Circular on SEDAR, as applicable, it closes the Qualifying Transaction and submits to TSX Venture all required post-meeting and post-closing documents. Provided that the Resulting Issuer meets applicable TSX Venture minimum listing requirements, TSX Venture issues a Final Exchange Bulletin and the Resulting Issuer is no longer considered to be a CPC.
In agreeing to accept the CPC program, the Commissions have set out the standards TSX Venture will apply in review of CPC Prospectuses and QT Circulars. In addition, each Commission may conduct a detailed review of a CPC Prospectus and retains its discretion to refuse to issue a Receipt for a CPC preliminary or final Prospectus.
The IPO Regulator will be responsible for issuing the Receipt for the preliminary CPC Prospectus, the final CPC Prospectus and any amendment to a preliminary or final CPC Prospectus. An Applicable Commission (i.e. each Commission with which a CPC has filed a preliminary CPC Prospectus) may elect to conduct a detailed review of a CPC Prospectus.
Audit Committee Rule application to Non-Corporate Entities.
Paragraph 1.2 of Companion Policy 52-110CP to Multilateral Instrument 52-110 Audit Committees (“52-110CP”) is deleted and replaced by the following:
The Instrument applies to both corporate and non-corporate entities. Where the Instrument or this Policy refers to a particular corporate characteristic, such as a board of directors, the reference should be read to also include any equivalent characteristic of a non-corporate entity. For example, in the case of a limited partnership, the directors of the general partner who are independent of the limited partnership (including the general partner) should form an audit committee which fulfils these responsibilities.
Income trust issuers should apply the Instrument in a manner which recognizes that certain functions of a corporate issuer, its board and its management may be performed by any or all of the trustees, the board or management of a subsidiary of the trust, or the board, management or employees of a management company. For this purpose, references to “the issuer” refer to both the trust and any underlying entities, including the operating entity.
If the structure of an issuer will not permit it to comply with the Instrument, the issuer should seek exemptive relief.”
Financing of Take-Over Bids and Issuer Bids – Proposed Ontario Rule 62-503
The Ontario Commission is publishing for comment proposed Rule 62-503—Financing of Take-over Bids and Issuer Bids. Section 96 of the Securities Act (Ontario) (the “Act”) provides as follows:
96. Financing of bid—Where a take-over bid or issuer bid provides that the consideration for the securities deposited pursuant to the bid is to be paid in cash or partly in cash, the offeror shall make adequate arrangements prior to the bid to ensure that the required funds are available to effect payment in full for all securities that the offeror has offered to acquire.
The judgment of the Ontario Superior Court of Justice earlier this year in BNY Capital Corp. v. Katotakis, reported at [2005] O.J. No. 813, has created some uncertainty regarding the scope of the financing requirement under section 96. The court’s judgment included the following statement (at para. 5):
“Adequate arrangements” has been interpreted to mean that there must be accurate, clear and unequivocal assurance that the financing is in place in the sense that a public shareholder contemplating tendering his or her shares to the bid can be unequivocally assured that the funds are available to complete the purchase.
In the Commission’s view, the proposed rule reflects the general understanding in the legal community as to how section 96 of the Act has been applied in practice. The Commission considered whether to accompany the rule with a companion policy listing the types of financing conditions that likely would be or not be acceptable. The Commission decided against this approach because conditions that may comply with the rule in one factual context may not be suitable in others. The rule is intended to enable the policy objectives of section 96 to be met in a flexible manner, as bidders and lenders will be able to tailor their conditions to the specific circumstances of the transaction.
The text of the proposed rule is as follows:
For the purposes of section 96 of the Act, the financing arrangements required to be made by the offeror prior to a bid may be subject to conditions if, at the time the bid is commenced, the offeror reasonably believes the possibility to be remote that the offeror will be unable to pay for securities deposited under the bid solely due to a financing condition not being satisfied.
Comments are due October 3, 2005
Principal Regulator System to be in force in all jurisdictions except Ontario, effective Sept 19
The Canadian Securities Administrators (the CSA) are adopting Multilateral Instrument 11-101, the “Principal Regulator System” effective September 19, 2005. Instrument 11-101 will allow market participants access to the capital markets in multiple jurisdictions by dealing with its principal regulator. A market participant’s principal regulator will usually be the regulator in the jurisdiction where its head office is located. The issuer must still comply with filing, delivery, fee and some other requirements of each non-principal regulator, but will only have to look at the disclosure requirements that apply in its principal jurisdiction.
However, Ontario is not supporting the system because it endorses the idea of different regulatory standards for market participants depending on where their head office is located. As OSC Vice-Chair Susan Wolburgh Jenah said: The proposal moves Canada’s capital market further away from achieving the important objective of establishing a single, consistent set of securities laws… The principal regulator system would allow different standards for public companies doing business in Ontario, creating a competitive disadvantage across Canada.
Ontario-based market participants can continue to use the mutual reliance review system. But an issuer that has a principal regulator other than Ontario would continue to have to comply with Ontario securities law to the extent it participates in Ontario’s capital market.
OSC Rule 13-502 Fees –Replacement Proposed
The Ontario Securities Commission (OSC) has published for comment proposed changes to its fee schedules that incorporate overall reductions of 11% for market participants. The OSC’s analysis of costs and revenues confirms that since the introduction of the new fee regime in 2003, issuers have been paying a disproportionate amount of costs - 84% of the OSC surplus was generated by reporting issuers and 16% was generated by registrants. Under the proposed rule, the participation fee paid by an issuer will decline in the range of 40% to 57% depending on the issuer’s fee tier. The most significant decreases will affect issuers in the lowest four tiers. This group, which represents 77% of issuers, will have an average decrease of 45%.
In an effort to improve fairness to smaller registrants, the changes in fees for the various tiers were adjusted to reduce differences that existed in fees as a percentage of registrant revenue levels. Participation fees for registrants with revenues below $3 million will decrease in the range of 10% to 38%. Participation fees for registrants with revenues between $3 and $5 million will increase by 32%. This group was underpaying under the previous fee structure. Participation fees for registrants with revenues of $5 million or more will increase in the range of 9% to 13%.
The overall effect of the changes to both sets of participation fees is that they will be more equitable in two respects. First, the proportion of capitalization or revenue paid in participation fees will be more similar across the fee levels. In addition, the proposed participation fees better reflect the actual regulatory costs associated with each group. That is, where issuers were bearing over 50% of these costs, under the proposed participation fees (before the surplus reduction) they will now cover 45%.
Comments are due November 10, 2005
Income Trust Disclosure Relating To Distributable Cash – CSA guidance
The Canadian Securities Administrators (CSA) have provided guidance about the nature and extent of disclosure necessary to ensure transparency when an income trust issuer presents information about estimated distributable cash in a prospectus. Estimated distributable cash is a non-GAAP financial measure for which disclosure expectations are outlined in CSA Staff Notice 52-306 Non-GAAP Financial Measures (Staff Notice 52-306) and National Policy 41-201 Income Trusts and Other Indirect Offerings.
Most income trust issuers present information about estimated distributable cash in their prospectuses. Staff Notice 52-306 directs issuers to provide with this non-GAAP financial measure a quantitative reconciliation to the most directly comparable measure calculated in accordance with GAAP. The adjustments may be based on anticipated strategies, programs and actions, which may or may not involve contractual commitments. When any reconciling adjustment is based on the expected economic effects of anticipated future events, this presentation is providing a forward-looking perspective on estimated distributable cash. In these instances, the presentation raises many of the same issues that have concerned staff with other forms of future-oriented financial information. CSA Staff expect that the reconciliation be supported by:
• a detailed discussion of the nature of the adjustments;
• a description of the underlying assumptions used in preparing each element of the forward-looking information and the forward-looking information as a whole, including how those assumptions are supported; and
• a discussion of the specific risks and uncertainties that may affect each individual assumption and that may cause actual results to differ materially from the estimated distributable cash figure.
Ontario Civil Liability for Continuous Disclosure to come into force on Dec 31, 2005
The Ontario Government has announced that the amendments to the Securities Act (Act) in respect of civil liability for continuous disclosure (Part XXIII.1 of the Act), as well as fraud and market manipulation (section 126.1 of the Act), and misleading or untrue statements (section 126.2 of the Act), will come into force on December 31, 2005. Amendments made to the Commodity Futures Act respecting fraud and market manipulation, and misleading or untrue statements will also come into on December 31, 2005.
Essentially, there are new rights of action, including a right of action for damages by persons or companies who acquire or dispose of the securities of a responsible issuer (being a reporting issuer, or any other publicly traded issuer with a substantial connection to Ontario) during a period of time in which there is an uncorrected misrepresentation in a document released by the responsible issuer or by a person with actual, implied or apparent authority, or in a public oral statement by such a person or by an influential person (a defined expression) relating to the affairs of the responsible issuer.
Regarding the fraud and market manipulation amendments, various increased enforcement powers were proclaimed in force in Ontario in April 2003, but the following were not proclaimed at the time: prohibition against securities fraud and market manipulation; the prohibition against making misleading or untrue statements; and the statutory right of action for investors in the secondary market to sue companies and other responsible persons for misrepresentations or a failure to make timely disclosure. By the Government announcement, these will be proclaimed in force on December 31, 2005.