Reducing the Regulatory Burden of Selling Foreign Securities to Sophisticated Canadian Investors

Canadian securities regulators have granted exemptions to a group of dealers that will make it easier for foreign issuers to extend their securities offerings to sophisticated Canadian investors in private placement transactions. The exemptions are not available for offerings by investment funds. For non-investment funds, the exemptions remove many Canadian-specific disclosure requirements, thereby eliminating the need to supplement a foreign offering document with a Canadian wrap in most foreign offerings that are extended to Canadian institutional investors on a private placement basis.

The effective date of the exemptions is June 22, 2013, giving other dealers the opportunity to apply for the same relief.¹ Dealers and their clients may develop the contemplated notices and acknowledgments ahead of time, but Canadian wraps are still required until the effective date. The exemptions are scheduled to last for three years, with the expectation that they will be codified through formal rule-making within that period. The Ontario Securities Commission (OSC) has taken the first step towards codification by proposing changes to some of the disclosure requirements that apply when foreign issuers offer securities on a private placement basis to sophisticated Ontario investors.

Exemptions for Dealers in Foreign Offerings

Transactions that are eligible for the dealer exemptions are those that are conducted under the accredited investor exemption from the prospectus rules and in which

• the securities are offered primarily in a foreign jurisdiction (on a private or public basis) by (i) a foreign issuer that is neither an investment fund nor a reporting issuer in Canada and whose head office is outside Canada or (ii) a foreign government; and
   
• the investor is a "permitted client" under National Instrument (NI) 31-103 (this includes financial institutions, pension funds, large corporations, government entities, registered dealers and advisers, investment funds having a Canadian-authorized adviser or a Canadian-registered investment fund manager and very high net worth individuals).

The dealer exemptions cover the following requirements that currently create a disincentive to extend foreign offerings into Canada:

• the requirement in NI 33-105, Underwriting Conflicts, to provide disclosure in an offering memorandum explaining the nature of any relationship between the issuer and underwriter, such as significant security holdings or another relationship that could reasonably affect the underwriter’s independence, provided that in lieu of such disclosure, U.S.-style disclosure about underwriting conflicts is included in the offering document; and
   
• the requirements in OSC Rule 45-501, Ontario Prospectus and Registration Exemptions, and other provincial and territorial securities laws that an offering memorandum include disclosure about purchasers’ statutory rights of action for misrepresentations.

Securities regulators have also given permission for offering documents to include representations about securities being listed on a stock exchange.² To take advantage of the exemptions, a dealer must

• provide a notice and form of acknowledgment in prescribed form to each client before the dealer’s first reliance on the exemptions informing the client about (i) the substitution of U.S. underwriting conflicts disclosure in lieu of similar Canadian disclosure in offering documents, (ii) the client’s statutory rights of action for misrepresentations and (iii) the potential absence of disclosure about tax consequences in the offering document, with advice to the client to consult its own tax adviser; and
   
• provide a list to securities regulators on a monthly basis describing all transactions conducted in reliance on the exemptions.

OSC Proposed Rules

In conjunction with the dealer exemptions, the OSC has proposed changes to certain disclosure requirements to facilitate foreign offerings being extended to sophisticated Ontario investors in private placement transactions that meet the criteria described above. Under the proposals, representations about the securities being listed on a foreign stock exchange would be permitted in offering documents without the consent of the exchange or the OSC director. In addition, instead of an offering document having to disclose investors’ statutory rights of action for misrepresentations, alternative means would be available for informing investors of these rights (e.g, a dealer could provide a one-time notice to each permitted client to inform the client about these rights, with the client signing back an acknowledgment form.)

The comment period for the proposed rules is open until July 24, 2013. The proposed changes would apply only to distributions to Ontario-resident investors. Pending the implementation of final rules across Canada, it may be possible to eliminate the Canadian wrap in a foreign offering if securities are distributed through a dealer that is eligible to rely on the exemptive relief described above.

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¹ The dealers who are party to the exemptive relief order are Barclays Capital Inc., Barclays Capital Canada Inc., Citigroup Global Markets Inc., Citigroup Global Markets Canada Inc., Deutsche Bank Securities Inc., Deutsche Bank Securities Limited, HSBC Securities (USA) Inc., HSBC Securities (Canada) Inc., J.P. Morgan Securities LLC, J.P. Morgan Securities Canada Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Merrill Lynch Canada Inc., RBC Capital Markets, LLC, RBC Dominion Securities Inc., Scotia Capital (USA) Inc., Scotia Capital Inc., UBS Securities LLC and UBS Securities Canada Inc. Other dealers may apply for the same exemptions.

²  In practice, representations about stock exchange listings already typically do not require Canadian securities regulatory approval.

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