Reporting sales of securities in Canada under private placement prospectus exemptions has recently changed under the amendments to National Instrument 45-106 – Prospectus Exemptions.
This bulletin highlights some important aspects of the recent amendments (the “Amendments”) to National Instrument 45-106 – Prospectus Exemptions, its related companion policy and Form 45-106F1 (the “Report”), as they relate to reporting sales of securities in Canada under private placement prospectus exemptions. The Amendments came into force on October 5, 2018.
When distributing securities in Canada using a prospectus exemption, an issuer or underwriter (the “Filer”) is generally required to report the sale of these securities to Canadian securities regulators. In June 2016, a number of new reporting rules were implemented that changed the private placement reporting regime. This resulted in certain unintended consequences, particularly for foreign dealers and Canadian institutional investors. The purpose of the Amendments is to address a number of issues encountered by these impacted parties and the following discusses some of them.
Qualified report certification
The Amendments made a number of changes to the Filer’s required certification of the contents of the Report. Previously, the certification of the Report could only be provided by an officer or director of an issuer. This presented complications for international Filers, who would need to educate an officer or director not only of the contents of the Report but also the nuances of Canadian securities laws and how they apply to the information disclosed in the Report. The Report now states that the Filer can designate an agent to certify the report.
The Amendments also add a number of qualifications which clarify the capacity and understanding of the individual certifying the report, including:
- The Report has removed the reference that “it is an offence to make a misrepresentation in this report”;
- The Report clarifies that an agent is certifying the report “on behalf of” an issuer, which by implication means not in the agent’s personal capacity;
- The Report clarifies that the individual is certifying the contents of the report in “[his/her] knowledge, having exercised reasonable diligence,” which aligns with the statutory due diligence defence generally available under securities legislation in most jurisdictions; and
- The Report clarifies that “the information provided in this report is true, and to the extent required, complete.” This statement addresses concerns that were raised regarding certifying the completeness of the Report, when parts of the Report were not applicable to a particular fact situation, when multiple disclosure options were applicable but only a single option could be selected or additional clarifying comments could not be added to the disclosure.
Permitted client definition
One of the most common prospectus exemptions used in Canada is for distributions to Accredited Investors (as defined in Canadian securities legislation). When reporting a distribution to Accredited Investors, the Filer had to previously identify the specific subparagraph of the Accredited Investor definition applicable to each investor. The Amendments now permit an issuer who is distributing securities to a non-individual Permitted Client (as defined in Canadian securities legislation) to simply identify the investor in the Report as a Permitted Client.
The Report requires the disclosure of certain personal information about an issuer’s directors, executive officers and promoters, unless the issuer falls within certain exemptions from this requirement. Previously, a Filer had to disclose all of the available exemptions from this disclosure requirement which could apply to an issuer. The Amendments clarify that even when multiple such exemptions are applicable to an issuer, the Filer needs only to select one. This will reduce the information gathering burden for issuers.
Previously, a Filer was required to identify all exchanges on which any of the issuer’s securities were publicly traded. This presented a major burden for Filers where numerous types of securities were traded on numerous exchanges. The Amendments specify that a Filer must now only identify the exchange on which the issuer’s equity securities “primarily” trade. A Filer is also no longer required to report the exchanges upon which any of the issuer’s debt securities trade.
NAICS industry code
The Report requires all Filers to specify the issuer’s North American Industry Classification System (“NAICS”) code. This requirement has been amended to qualify the selection as “in [the Filer’s] reasonable judgment” most closely corresponds to the issuer’s primary business activity. This Amendment alleviates concerns surrounding the subjective nature of choosing an industry code, while still allowing securities regulators to track and analyze exempt market activity based on industry classification.
Change in basis of assets determination
The Report has been amended to direct Filers to determine the size of an issuer’s assets based on the most recently “available” annual financial statements. The previous instructions only specified that Filers should determine the size of an issuer’s assets based upon the most recent annual financial statements. The Amendment clarifies this for issuers who have completed a financial year end but have not yet actually prepared annual financial statements. This Amendment only impacts issuers who have not already completed a System for Electronic Document Analysis and Retrieval (“SEDAR”) profile.
Reporting requirements for co-issuers
Previously, whenever an issuer distributed a security, the issuer had to file a Report, regardless of whether there was a co-issuer who was similarly filing an identical report. Under the Amendments, where two or more issuers or underwriters distribute a single security, only one of the issuers or underwriters is now required to file the Report, which can identify all co-issuers of the security.
The Amendments introduce the concept of cryptoassets to the Report. Filers may now specify when an issuer’s primarily business is to invest all or substantially all of its assets in cryptossets. Similarly, a Filer may specify when the most accurate description of an investment fund is a cryptoasset investment fund.
In addition, the list of security codes available to describe a distribution has been amended to include a new code, “DCT,” which identifies distributions of securities involving digital coins or tokens. Each of these changes assists securities regulators in tracking market activity involving cryptoassets.
Overall, the purpose of the Amendments is to simplify the reporting process for Filers, reduce the amount of duplicative reporting and information gathering burdens, and clarify the specific information required by Canadian securities regulators.
This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.
By Grace Latimer and Robert Black, DLA Piper
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