Timely Disclosure

Timely Disclosure

Updates and Commentary on Current issues in M&A, Corporate Finance and Capital Markets

OSC Highlights Potential Securities Law Requirements for Businesses Using Distributed Ledger Technologies such as Blockchain


By a press release issued March 8, 2017, the Ontario Securities Commission (OSC) warned businesses that use distributed ledger technologies (DLT), such as blockchain, as part of their financial products or service offerings that they may be subject to Ontario securities law requirements.

The OSC noted that businesses are using DLT in a variety of ways including, with respect to initial coin or token offerings where ownership of the coins or tokens is tracked using DLT, or the establishment of investment funds with DLT-based virtual currencies in their portfolios. The OSC advised that products or other assets that are tracked and traded as part of a distributed ledger may be securities, even if they do not represent shares of a company or ownership of an entity. Accordingly, the use of DLT may trigger Ontario securities law requirements, including the need to file a prospectus or rely on an exemption from prospectus requirements or for participants to be registered  as a dealer, adviser or investment fund manager.

The OSC reminded businesses to consider the types of offerings that involve securities within the meaning of securities legislation (e.g., evidence of title to or interest in the capital, assets, property, profits, earnings or royalties of any person or company, a product that is an investment contract) and the types of trading activities that will occur.  In addition, the OSC suggested that businesses may contact the OSC LaunchPad to discuss the associated securities law requirements.

Corporate Disclosure by Reporting Issuers on Social Media


It would be an understatement to characterize the presence and use of social media in our daily lives as being ubiquitous in scope and nature. The proliferation of social media venues allows us to communicate and share ideas and opinions in a manner beyond anything that we have experienced in human existence. The casual observer could easily see the impact which social media has on our personal lives and in the political arena. Clearly, business is not immune to the tool that is social media.

However the use of social media by reporting issuers to communicate with the market and shareholders raises certain issues relating to disclosure and is fraught with traps. The issue was dealt with in the United States when the Securities and Exchange Commission (SEC) stated that issuers may disclose key information on social media outlets to the extent that investors received prior notice as to which social media outlet was being used to publish the information [1].

The Canadian Security Administrators (CSA), which have traditionally taken a more conservative approach to disclosing information, clarified in a report last week that they do not intend to join the United States’ method of allowing information-sharing on social media pages, unless the disclosure complies with applicable securities laws and regulations. Published on March 9, 2017, CSA Staff Notice 51-348 Staff’s Review of Social Media Used by Reporting Issuers (Notice) directed public issuers to continue to report material information through traditional press releases, clarifying however that social media platforms could be used to disseminate and further publicize news after it is made public on the System for Electronic Document Analysis and Retrieval (SEDAR[2].

The Notice was written in an attempt to determine whether the disclosure provided by the new and growing venues complies with the principles enunciated in the National Policy 51-201 Disclosure Standards (NP 51-201) and the requirements of the National Instrument Continuous Disclosure Obligations (NI 51-102). After examining 111 reporting issuers that use social media in Quebec, Ontario and Alberta, the CSA identified three key areas where issuers need to take greater care when disseminating information through these new venues:

  1. Selective or early disclosure occurs when some investors receive privileged information due to their presence on a social media platform. The CSA specified that the nature of marketing on social media can lead to breaches of obligations that public issuers have under securities law. The CSA also recorded a number of instances where issuers disclosed forward-looking information online without ensuring that this information was disclosed to all stakeholders. Often, companies disclosed information on social media before disclosing it on SEDAR.
  2. Unbalanced or misleading disclosure on social media disclosure occurs where information is not sufficient to provide a complete picture or is inconsistent with information already disclosed on SEDAR. The CSA reported that issuers often provided a commentary on social media that was inconsistent with their SEDAR disclosures. For instance, they might sometimes disclose non-GAAP measures which were not officially disclosed elsewhere and without the accompanying information that should be included to understand the non-GAAP measures.. Moreover, the very fact that Twitter messages cannot be longer than 140 characters limits the accuracy of the information that can be provided in a single post.
  3. The social media governance policies in place to support social media activity are lacking or insufficient. A significant number of issuers do not have policies, procedures, and controls in place to ensure that information disseminated on social media reaches the same standards as it would in a regulatory filing. The CSA provided recommendations of some of the elements that ought to be included to ensure good social media practices. These include determining who can post information on the site, what types of sites can be used, what information can be disclosed on the sites, what approvals are needed before the information is posted, and who is responsible for monitoring the social media accounts.

In view of some alarming figures brought forth in the Notice, Canada’s decision to implement stricter social media disclosure guidelines is a responsible approach. Such a position will ensure that all material information reaches investors simultaneously and will ensure it will be complete when published. Clearly, posting a tweet does not amount to a full public announcement and does not constitute wide dissemination of information to the public. Unlike the United States, where an attempt to adopt conservative measures by the SEC was considered a lack of understanding of market realities by the regulatory authorities, the CSA’s report has clearly justified their reasons for holding higher standards for the dissemination of information on social media.

The Notice also reminds issuers that disclosures of material information must be made in accordance with securities laws – no matter what the venue. The danger lies in the fact that social media does not lend itself well to subtle and complex financial disclosure and that such disclosure, without first widely disseminating it, may indeed constitute selective disclosure.

[1] Securities and Exchange Commission, “SEC Says Social Media OK for Company Announcements if Investors Are Alerted” SEC Press Release, 02 April 2013

[2]  McFarland, Janet. “Canadian firms can’t use social media to report key information, CSA rules”, The Globe and Mail, 09 Mar. 2017

OSC releases results of #RegHackTO, its first regulatory hackathon

apple-1853306_1280On March 6, 2017, the Ontario Securities Commission issued a white paper titled “Insights from Canada’s first regulatory hackathon”.  The paper provides an overview of the RegHackTO hackathon hosted by the OSC on November 25-27, 2016.   At the event, more than 120 members of the fintech community competed to find solutions to regulatory problems in four areas: RegTech, Know-Your-Client (KYC)/identity authentication, financial literacy and transparency in the capital markets.

The solutions presented by the various teams included technologies that would standardize data in the capital markets, applications to allow for easier investment product comparability, and surveillance applications to conduct analytics and identify industry trends.

The winning teams were as follows:

First place: Existence Labs for “KeyStamp” which uses blockchain technology to verify compliance with securities requirements such as KYC and suitability in real time.

Second place: RicLoo for “TLSRegistry”, another blockchain-based solution, which verifies identities using existing secure websites and permits certain actions such as granting permissions and providing proof of employment.

Third place: Extreme Securities 2k16 for “Rubix Solution” which is a portal that validates initial coin offerings and provides standardized data for comparing investment products in key areas such as returns and fees and allows real time oversight by regulators.

The OSC identified three themes that emerged from the event: (i) technology (and in particular distributed ledger technology) is rapidly changing how financial services are delivered; (ii) open access to data is essential for advancing fintech solutions; and (iii) regulators must be open to new ways of doing business.

In addition, the OSC set out a list of next steps including considering ways to leverage technologies such as DLT and artificial intelligence in its regulatory work, supporting the facilitation of access to data, subject to privacy and security concerns, and reviewing potential solutions to centralized KYC information collection and verification processes.

For more information, please see the RegHackTO site.

American Bar Association Publishes Canadian Private Target Mergers and Acquisitions Deal Points Study


The American Bar Association has published its Canadian Private Target Mergers & Acquisitions Deal Point Study[1] (Study) analyzing transactions that involved Canadian private targets that were acquired or sold by public companies in 2014 and 2015. The Study included a sample of 101 transactions and excluded transactions with a value less than C$5 million, transactions where the target was in bankruptcy, transactions involving non arm’s length parties, transactions not governed by Canadian law and transactions otherwise deemed inappropriate for inclusion.

A subset of the Study’s findings include:

  • Transaction values ranged between C$5.78 million and C$4 billion, with 41% of transaction values ranging between C$5 million and C$50 million.
  • The majority of the transactions (55%) consisted of all cash consideration, whereas 6% of transactions included all share consideration and 39% of transactions included cash and share consideration.
  • The principal industries of the targets were: natural resources (17%); oil & gas (16%); and industrial goods & services (11%).
  • 71% of transactions involved corporate sellers compared to 17% with entrepreneurial sellers and 8% with private equity sellers.
  • 87% of transactions involved corporate buyers compared to 10% with private equity buyers and 2% with entrepreneurial buyers.

The Study analyzed additional deal points, including financial provisions, qualifiers, representations & warranties, closing conditions, indemnification and dispute resolution.


[1] Membership to ABA required

The Canadian Securities Administrators Launch a Regulatory Sandbox Initiative for FinTech, RegTech and other innovative products

toronto-73565_1280On February 23, 2017, the Canadian Securities Administrators (CSA), the umbrella organization of Canada’s provincial and territorial securities regulators, launched a regulatory sandbox initiative to support businesses seeking to offer innovative products, services and applications including:

  • online platforms, including crowdfunding portals, online lenders, angel investor networks or other technological innovations for securities trading and advising;
  • business models using artificial intelligence for trades or recommendations;
  • cryptocurrency or distributed ledger technology based ventures; and
  • technology service providers to the securities industry, such as non-client facing risk and compliance support services (also known as regulatory technology or regtech).

The CSA stated that they will consider applications, including for time-limited registrations, on a coordinated and flexible basis to provide a harmonized approach throughout Canada for business models, whether they are start-ups or incumbents.

The sandbox is open to business models that are truly innovative from a Canadian market perspective. The CSA intend to assess the merits of each business model, on a case-by-case basis, and businesses that register or receive relief could be permitted to test their products and services throughout the Canadian market.

To apply to the CSA regulatory sandbox, businesses should contact their local securities regulator, which will consider the eligibility of their business model and refer it to the CSA regulatory sandbox if it provides genuine technological innovation in the securities industry. As part of the application process, CSA Staff may request live environment testing, a business plan and demonstration of potential investor benefits (as well as how investor risks are minimized).

The CSA advised that local securities regulators can also provide early stage guidance on the application of current securities regulatory obligations, as well as information and support.

The CSA Move Forward on Consultations Regarding the Discontinuation of Embedded Commissions

office-1209640_1280On January 10, 2017, the Canadian Securities Administrators (CSA) issued for comment CSA Consultation Paper 81-408 – Consultation on the Option of Discontinuing Embedded Commissions (the Consultation Paper) for a 150-day comment period. The Consultation Paper presents for discussion, the CSA’s position regarding the effects of sales of investment fund securities or structured notes through commissions, including sales and trailing commissions, paid by investment fund managers (embedded commissions), and proposes that the use of embedded commissions be discontinued in favour of direct pay arrangements.

Proposed Changes

The Consultation Paper currently anticipates that the new regulatory framework would aim to

discontinue any payment of money to dealers in connection with an investor’s purchase or continued ownership of a security described above that is made directly or indirectly by a person other than the investor.

This would, at a minimum, include ongoing trailing commissions or service fees as well as upfront sales commissions for purchases made under a deferred sales commission (DSC) option.

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Rights Offering Prospectus Exemption – Warning for Reporting Issuers

architecture-1048092_1280On January 12, 2017, the Canadian Securities Administrators (CSA) published Multilateral CSA Staff Notice 45-322 Potential Concerns with the Structure of Rights Offerings. The notice, issued on behalf of the securities regulators in Ontario, Quebec, Saskatchewan, Manitoba and Alberta, is a warning to issuers who may be perceived as taking improper advantage of the rights offering prospectus exemption available under section 2.1 of National Instrument 45-106 Prospectus Exemptions.

The exemption’s purpose is to enable reporting issuers to raise capital while facilitating fully informed, voluntary participation by existing securityholders based on their proportionate interest. An issuer may be perceived as misusing the exemption in circumstances where an offering is structured to disincentivize existing securityholders from participating in the offering, or where stand-by commitments of guarantors are not reasonably assured, such as where a stand-by commitment is conditional upon minimal participation by existing securityholders. These situations may prevent existing securityholders from making free and informed decisions about participating in the offering, which is contrary to the public interest in the eyes of securities regulators.

To mitigate these concerns with the knowledge that prior regulatory review is not currently required under the rights offering regime, the CSA indicated that staff may choose to review a rights offering if it appears to be conducted in a fashion that is contrary to the public interest. Staff may even recommend to cease trade an offering where they believe an issuer is acting in a manner that is contrary to the goals of the offering regime and investor protection. Accordingly, issuers should be wary of the effect of the structure of an offering on existing securityholder participation.

Cross-Border Bond Offerings – Implications of a “distribution to the public” under the Canada Business Corporations Act


Economic Environment

The volume of securities purchased by foreign investors in Canada has been steadily increasing in recent years.  While equity securities account for the majority of the increase, debt securities still comprise most of the foreign investment in Canada.[1]  Of these debt securities, corporate bonds attracted the largest increase in investment in 2016 compared to 2015.[2]  The continued significance for Canadian issuers (Issuers) of foreign markets for raising capital emphasizes the importance of understanding the nature of cross-border debt securities offerings (Offerings) and, in particular, uncertainties in their technicalities which, if not properly traversed, can lead to increased costs for Issuers.

Overview of Offerings

Bonds can be offered by Issuers pursuant to a public offering under a prospectus or can be placed privately by way of a private placement, in which case Issuers may choose to prepare and distribute an offering memorandum to potential investors.  The method employed will vary depending on the Issuer’s target market and the extent to which the Issuer is known to participants in the capital markets.  Bonds, regardless of the type of Offering, are typically issued under the terms and conditions of a trust indenture which is entered into between the Issuer and an indenture trustee (Trustee).  The Trustee protects the interests of the Bondholders by enforcing the terms and conditions provided in the trust indenture.

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CSA Provide Update on Enhanced Segregation and Portability Initiatives for Clearing Agencies Serving the Domestic Futures Markets

dubai-1767540_1280The Canadian Securities Administrators (CSA) published a staff notice on February 9, 2017 highlighting the initiatives regulators have taken to enhance segregation and portability arrangements for the exchange-traded derivatives markets in Canada following the CSA’s advanced notice of its adoption of National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions (NI 94-102). NI 94-102 implements a segregation and portability regime to protect customer collateral and positions in the over-the-counter derivatives markets.

Since 2015, the CSA have engaged industry stakeholders to determine an appropriate central counterparty segregation and portability model for domestic futures markets. Industry stakeholders, as well as the regulators, have demonstrated support to enhance segregation and portability arrangements through a gross-customer margin (GCM) model.

The GCM model requires daily submission of customer level position data to a derivatives clearing organization (DCO). Unlike the net margin system, the GCM model does not allow futures commission merchants to offset positions of one customer with those of its other customers and submit margins that cover the netted amount. The GCM model has gained support by the industry participants as it will enhance customer protection, especially by strengthening the ability to port customer positions and collateral in the event of a clearing participant default. Furthermore, the GCM model may also reduce systemic risk by bolstering confidence that losses related to counterparty risk will be managed by eliminating the ability to offset margins by netting long and short positions when submitting margins to a DCO.

The GCM model has already been adopted by the Canadian Derivatives Clearing Corporation (CDCC) and ICE Clear Canada Inc. However, the CSA have indicated that they do not intend to impose a GCM model at this time, citing that implementing a GCM framework would be inconsistent with the principled approach taken by the clearing agency requirements in NI 24-102. Moreover, if the CSA were to implement a GCM model, it may require changes to certain dealer member rules under the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund regime currently in place.

The CSA have indicated that they will continue to meet regularly during 2017 to discuss proposed new or amended IIROC or CDCC rules. In the event the CSA decide to implement new rule changes, such changes would be subject to a public comment process and regulatory approval by CSA members.

Statutory Compliance, and the Continued Relevance of the Oppression Remedy, in the Wake of Mennillo v. Intramodal inc.


In its decision Mennillo v. Intramodal inc., 2016 SCC 51 (Intramodal), the Supreme Court of Canada (Court) was asked whether a corporation’s failure to comply with statutory formalities was oppressive against a shareholder. The majority ruled that based on the facts the company’s failure to comply with certain Canada Business Corporation Act (CBCA) requirements did not trigger the oppression remedy. In the words of Justice Cromwell, who provided reasons for the majority, “sloppy paperwork on its own does not constitute oppression” (para 5).

Companies, directors and their shareholders should be cautious, however, not to draw the wrong lesson from the majority’s decision in Intramodal. Compliance with corporate statutes, whether federal or provincial, is not optional. In addition to violating the law, a failure to comply with corporate statutory formalities can still trigger an oppression remedy where the violation frustrates the reasonable expectations of a company stakeholder, which includes a company’s shareholders, directors, officers and creditors.

As this post will discuss, the decision in Intramodal did not establish a precedent that statutory non-compliance on its own cannot result in an oppression remedy.

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