By A. Neil Hutton
The golden rule of securities distribution throughout the provinces and territories of Canada is that both a preliminary prospectus and a prospectus must have been filed, and receipts issued before an issuer can make a distribution of securities. This fundamental concept is encoded in the Securities Act of each province and territory and is generally referred to as the ‘prospectus requirement.’
Exemptions from the prospectus requirement are found in National Instrument 45-106 Prospectus Exemptions (NI 45-106). NI 45-106 sets out a number of exemptions that can be relied upon by an issuer or a security holder to avoid the prospectus requirement. Provided the specific criteria, conditions and requirements of the prospectus exemption are met, a distribution can be made without a prospectus.
Unfortunately, the prospectus exemptions and their mandatory criteria are not uniform across the provincial and territorial jurisdictions. Some jurisdictions have specific nuances for the same prospectus exemption that other jurisdictions do not; while some jurisdictions have entire prospectus exemptions that others do not. This means that an issuer cannot simply rely on a valid prospectus exemption in its principal jurisdiction but must also determine if there is a valid prospectus exemption in the jurisdiction of any extra-provincial purchaser. In fact, it was established in Reference re Securities Act  SCC 66,  3 SCR 837 that, short of a cooperative scheme, the provinces continue to have general autonomy over their own securities regulation. This means that each province’s or territory’s securities laws are paramount within the jurisdiction and compliance with the laws of each jurisdiction is necessary.
Typically, an issuer’s principal jurisdiction is determined based on the location of the ‘mind and management’ of the issuer and is generally understood to be where the issuer’s head office is located. A purchaser’s jurisdiction is generally considered to be in the province or territory where the purchaser is domiciled.
As each provincial and territorial jurisdiction has its own statutory prohibition on securities distribution that must be complied with, an issuer must first determine whether NI 45-106 contains available prospectus exemptions for both the issuer and each purchaser prior to distributing securities. This is straight forward where the issuer and purchaser are in the same jurisdiction, but requires some careful analysis where they are not. For example, a B.C. based issuer may wish to rely on the Offering Memorandum exemption in B.C. but if it also wants to distribute its securities into Alberta, the issuer must be sure to comply with the Alberta nuances of the Offering Memorandum exemption. This requires the issuer to confirm that the Alberta purchaser is an eligible investor (as defined in NI 45-106) if the Alberta purchaser’s acquisition cost will exceed $10,000.
This analysis also applies in reverse. For example, if an Alberta issuer is distributing securities under an Offering Memorandum into British Columbia, the Alberta issuer must comply with both the Alberta and the B.C. variations of the Offering Memorandum exemption. In order for the Alberta issuer to remain compliant with Alberta’s eligible investor test for subscriptions exceeding $10,000, it should still confirm that the B.C. subscriber meets the eligible investor definition, even though the B.C. version of the exemption does not require this. This practise is viewed as defaulting to the jurisdiction with the most restrictive criteria. Although perhaps a matter of perspective, under this scenario the issuer is complying with the requirements of both jurisdictions.
The situation gets trickier where a B.C. or an Alberta issuer is relying on an Offering Memorandum and has a willing purchaser in Ontario. Since Ontario does not currently have an Offering Memorandum exemption available, the Alberta or B.C. issuer can still rely on the Offering Memorandum exemption in its principal jurisdiction, but it must establish and rely upon an entirely different prospectus exemption for the purchaser in Ontario. This also means that an Ontario issuer is unable to avail itself of the Offering Memorandum exemption for purchasers in Alberta and B.C. Instead, the Ontario issuer must rely on a prospectus exemption available in both jurisdictions, such as the Accredited Investor prospectus exemption. This analysis also holds true if the purchaser is a U.S. resident. A Canadian issuer would need to have a valid prospectus exemption in its principal jurisdiction and a registration exemption under the United States Securities Act of 1933 in order to complete the distribution. Local state laws may also apply in the U.S.
To help this concept gel, a sports analogy is always useful: when an issuer wishes to throw a pass (make a distribution), it must not only have a valid prospectus exemption from where the football is thrown from (issuer’s jurisdiction), it must also have a valid prospectus exemption where the football is caught (purchaser’s jurisdiction).
Given the nuances between provincial and territorial jurisdictions and the opting out of certain provinces in the application of NI 45-106, the regulatory environment in Canada remains challenging when dealing with interprovincial financings and distributions. One might suggest that the distribution of securities should be addressed in the manner similar to a provincial drivers’ licence. If a person has a valid drivers’ licence in Quebec then that person is recognized as having a valid licence to drive throughout Canada. This approach has been adopted by provincial securities regulators under the ‘passport system’ but this does not apply to prospectus exemptions. This ‘passport’ concept is set out in Multilateral Instrument 11-102 - Passport System. The intended effect of this Instrument is, in many cases, to permit certain issuers to deal exclusively with their principal regulators for prospectuses and discretionary exemption applications.
Can prospectus exemptions be managed in a similar fashion and still address regional considerations or concerns? One would argue that it should be manageable, but without further acceptance and harmonization of the existing prospectus exemptions it is difficult to envision a uniform approach. Based on the 2014 effort of the securities regulators respecting the proposed amendments to the Offering Memorandum exemption, suggests that the regulatory direction will see less harmonization and more local nuances among Canadian jurisdictions. Although the proposed amendments to NI 45-106 in 2014 did see the long awaited proposed introduction of the Offering Memorandum in Ontario, the amendments to the Offering Memorandum proposed in other jurisdictions had the country, as a whole, moving from the two different Offering Memorandum regimes that currently exist to a system with four regimes resulting from local nuances. Two steps forward and one step back?
Whether a cooperative regulatory system would resolve this seems questionable since the Canadian Securities Administrators have been unable to harmonize these matters to date and the Canadian experience on ‘opting-in’ has had mixed success with the current Multilateral and National Instruments.
Neil is a partner in the Corporate & Commercial group of McLeod Law. He has over 20 years of experience providing comprehensive business-focused legal advice. He strives to provide his clients with responsive advice with an emphasis on “getting the deal done”. Working with entrepreneurs, closely held businesses, and public companies, Neil provides legal advice on mergers and acquisitions, exempt market financings, regulatory compliance, equity financing, debt financings, initial public offerings, stock exchange listings, corporate governance, re-organizations, shareholder agreements and contractual drafting. Neil also has extensive experience structuring and setting up real estate-based joint ventures, limited partnerships and management agreements. Neil has been a member of McLeod Law’s Executive Committee since 2007. For further information please email email@example.com.
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