Timely Disclosure

Timely Disclosure

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

CSA adopts new prospectus exemption making it easier to resell securities of non-Canadian issuers

The Canadian Securities Administrators (CSA) have adopted amendments to National Instrument 45-102 Resale of Securities (NI 45-102) and changes to Companion Policy 45-102CP which provide for a new prospectus exemption for the resale by Canadian investors of securities of non-Canadian issuers. The amendments are expected to come into force as of June 12, 2018. The amendments will be applied to all Canadian jurisdictions other than Alberta and Ontario.

In Alberta and Ontario, the new exemption will be found in the following local instruments:

The amendments will apply if: (1) the issuer is not a reporting issuer in Canada, (2)  the issuer is a foreign issuer, and (3) the resale is on an exchange or a market outside of Canada or to a person or company outside of Canada. The CSA deem a “foreign issuer” to be one that is not incorporated or organized under the laws in Canada unless specific facts suggest that the issuer has more than a minimal connection to Canada (such as the issuer has a head office in Canada or the majority of its directors or executive officers ordinarily reside in Canada).

Currently, NI 45-102 provides for an exemption if (1) the issuer is not a reporting issuer in Canada and the resale is on an exchange, or a market, outside of Canada or to a person or company outside of Canada, and (2) residents of Canada do not own more than 10% of the outstanding securities of the issuer and do not represent more than 10% of the total number of security holders.

The CSA have noted that they recognize that many foreign issuers without any other connection to Canada are having trouble meeting the 10% maximum Canadian ownership prong of the current exemption. Consequently, Canadian security holders of these non-Canadian issuers would have to hold the securities for an indefinite period. In some circumstances, non-Canadian issuers decide not to offer their securities in Canada to avoid doing the analysis of determining whether these ownership conditions will be met and thus, the opportunities for Canadian investors to participate in private placements with non-Canadian issuers are decreased.

Consequently, the CSA have determined that an alternative to the ownership condition is warranted for assessing whether an issuer has a minimal connection to Canada. The new exemption provides for this alternative. A security holder is exempted from the prospectus  requirement for the resale of securities acquired under a prospectus exemption if the resale is on an exchange, or a market, outside of Canada or to a person or company outside of Canada and if the issuer of the securities is a foreign issuer as described above. The policy rationale for these amendments is consistent with the policy rationale for the current exemption in NI 45-102 – to provide an exemption for resales outside of Canada for the securities of an issuer having a minimal connection to Canada.

Aurora-CanniMed: Securities Regulators Hold Firm on New Bid Regime

On March 15, 2018, the Ontario Securities Commission (OSC) and the Financial and Consumer Affairs Authority of Saskatchewan (FCAAS) released highly anticipated reasons for a combined decision relating to Aurora Cannabis Inc.’s (Aurora) unsolicited take-over bid to acquire CanniMed Therapeutics Inc. (CanniMed). The reasons followed a December 21, 2017 decision in which the OSC and FCAAS, among other things:

  • Permitted Aurora’s use of “hard” lock-up agreements with other CanniMed shareholders to build support for its bid (finding that the locked-up shareholders were not “acting jointly or in concert” with Aurora).
  • Cease traded a tactical shareholder rights plan (poison pill) implemented by the CanniMed board in the face of the Aurora bid.
  • Declined to grant Aurora exemptive relief from the 105-day minimum deposit period.
  • Declined to restrict Aurora’s ability to rely on the exemption from the general restriction on purchases by a bidder to purchase up to 5% of the target company’s shares during the currency of its bid.

The decision confirms the limited role for poison pills following the June 2016 amendments to NI 62-104 Take-Over Bids and Issuer Bids (NI 62-104). Perhaps more significantly, the decision confirms the importance of lock-up agreements under the new take-over bid regime and, going forward, may provide greater confidence to bidders as they gather support for a takeover bid. The reasons also suggest that securities regulators will be reluctant to depart from the ground rules set out in NI 62-104.

Background and Issues

During the fall of 2017, the CanniMed board was investigating strategic alternatives, including a potential sale of the company or whether to pursue an acquisition of Newstrike Resources Ltd. (Newstrike). CanniMed’s CEO favoured the latter approach, while certain members of the board and a significant shareholder favoured a strategic sale of the company.

Over the vocal objections of certain board members, who represented certain large shareholders, the majority of the CanniMed board authorized management to enter into formal negotiations with Newstrike for a potential acquisition of Newstrike.

One of the CanniMed shareholders opposed to the Newstrike transaction contacted Aurora to suggest a possible transaction between Aurora and CanniMed. Upon learning that CanniMed was considering an imminent transaction, Aurora expedited its decision to make a bid for CanniMed and began building support for the bid. To that end, Aurora solicited interested shareholders to sign “hard” lock-up agreements to tender their shares to an Aurora bid. Aurora entered into lock-up agreements with CanniMed shareholders holding approximately 38% of the outstanding shares of CanniMed. This was disclosed in Aurora’s proposal to the CanniMed board.

A special committee of the CanniMed board recommended against negotiations with Aurora. Shortly thereafter, CanniMed and Newstrike signed an arrangement agreement providing for the acquisition of Newstrike. Following announcement of that transaction, Aurora launched its bid.

In response, CanniMed adopted a shareholder rights plan (or poison pill) to prevent Aurora from acquiring any shares other than those tendered to its bid or from entering into additional lock-up agreements.

Consequently, Aurora commenced applications to the OSC and the FCAAS for an order cease trading the rights plan. In turn, CanniMed and its special committee filed their own applications in respect of Aurora’s bid seeking, among other relief, a declaration that Aurora and the locked-up shareholders were joint actors for the purpose of NI 62-104 and to prohibit Aurora from relying on the exception permitting it to acquire up to 5% of CanniMed’s shares during the currency of the bid.

Analysis and Conclusion

Locked-Up Shareholders Not Acting Jointly or In Concert with Aurora

The OSC and FCAAS found that Aurora and the locked-up shareholders were not joint actors for the purposes of NI 62-104.

First, the regulators confirmed that the shareholders could not be considered acting jointly or in concert with Aurora solely because they signed hard lock-up agreements. Further, the regulators found the terms of the lock-up agreements did not give rise to joint actor status on the basis that such terms were customary for transactions of this nature and did not provide for the locked-up shareholders to transfer voting rights to Aurora or give Aurora their proxies. As helpful guidance to drafters of lock-up agreements, the OSC and FCAAS stated:

  • … The presumption that an agreement to exercise voting rights leads to joint actor status can be rebutted, where, as here, the voting rights are tailored to be consistent with and to support otherwise permissible commitments to tender securities to a bid.

Second, the OSC and FCAAS declined to recognize the locked-up shareholders as acting jointly or in concert with Aurora notwithstanding that one of the locked-up shareholders shared information with Aurora with the effect of providing Aurora with a timing advantage in the making of its bid. The regulators concluded that the locked-up shareholders were acting in their own self-interest to maximize their returns as sellers of CanniMed shares and, as a result, remained “on fundamentally different sides of the transaction”. Notwithstanding this conclusion, the regulators recognized that a transfer of material non-public information could, depending on the circumstance, influence a finding of joint actor status if the transfer were “clear and extensive” and suggestive of a level of cooperation on the part of shareholders beyond merely seeking to “maximize the price and liquidity of their shares.”

Additionally, and perhaps as a signal to target companies who may seek a similar order in the future, the regulators suggested that the evidentiary record necessary to conclude that Aurora and the locked-up shareholders were joint actors (which is a question of fact) may have been undermined since the locked-up shareholders were neither parties to the proceeding nor called as witnesses.

CanniMed Rights Plan Cease Traded

The OSC and FCAAS concluded that the CanniMed shareholders rights plan was a defensive tactic designed to protect the Newstrike proposal and thwart Aurora’s bid, thereby impeding shareholder choice. The regulators noted that securing time for alternative bids was only a secondary motivator underlying the rights plan and that Cannimed led no evidence of efforts to seek other transactions. It is unclear whether the regulators’ views on the rights plan would have been different had CanniMed been actively pursuing alternative transactions.

In reaching their decision to cease-trade the rights plan, the regulators confirmed that the June 2016 amendments rendered prior regulatory decisions of limited use in this case since “the amendments have introduced features designed to provide sufficient time for other bids to surface without the need for Commission intervention to determine how long before a poison pill must be terminated.”

Importantly, the OSC and FCASS confirmed the increased importance of lock-up agreements following the June 2016 amendments since:

  • … the risks to the completion of a transaction have been increased by virtue of the lengthening of the period that a bid must remain open and since the minimum tender condition cannot be waived by the bidder. If tactical shareholder rights plans could, as a general matter, operate to prevent lock-ups and permitted market purchases, the take-over regime would be made far less predictable and the planning and implementation of shareholder value enhancing transactions made more difficult or inappropriately discouraged by such intervention.

Exemptive Relief from NI 62-104 Denied

In their combined reasons, the OSC and the FCAAS also demonstrated that they would not stray from the intended rebalancing created by the new take-over bid regime. By way of example, the regulators refused Aurora’s request to truncate the 105-day minimum deposit period. The regulators explained their general reluctance to do so on the basis that such a move would impact planning on the part of bidders and targets and introduce greater unpredictability to bid and secondary market pricing.

The regulators also refused CanniMed’s request to deny Aurora’s ability to rely on the 5% exemption from the general restriction on purchases by a bidder during the currency of its bid. The regulators, however, reserved the discretion to deny bidders the ability to avail themselves of this exemption in cases where the public interest would be undermined by its use. Although not the case here since the record date to vote on the Newstrike transaction had passed, query whether the regulators would have exercised this discretion (or might in future cases) if acquiring 5% of the target’s shares, when taken together with the locked-up shareholders’ shares, would have amounted to a de facto block of the Newstrike transaction.

The stated purpose of the new bid regime was to rebalance the dynamics between bidders and targets and to introduce greater certainty in the treatment of hostile bids. By cease trading the rights plan and denying all other relief requested, the securities regulators have signalled that, at least in this case, they remain comfortable with the current framework.

Ontario’s New Rules on Distributions Outside Canada Now In Effect

On March 31, 2018, the new rules from the Ontario Securities Commission (OSC) on distributions of securities outside of Canada came into force. OSC Rule 72-503 Distributions Outside Canada (Rule 72-503) provides clarity on a previously opaque subject in Canadian securities law: how do market participants comply with securities law when selling securities to buyers that reside in other countries? In response to this ambiguity, Rule 72-503 creates four new exemptions from the Ontario prospectus requirement for issuers distributing securities to buyers residing in other countries.


Since its publication in 1983, Interpretation Note 1 Distributions of Securities of Ontario (Interpretation Note) governed OSC policy on distributions outside of Canada. As a statement of principle, the Interpretation Note allows distributions of securities effected outside of Ontario without triggering Ontario’s prospectus requirement where “reasonable steps are taken by the issuer, underwriter and other participants effecting such distributions to ensure that such securities come to rest outside of Ontario.” The Interpretation Note then cites several examples of such “reasonable steps” including representations in the selling documents and legends on the securities, without committing to a bright-line test or concrete criteria. In the intervening decades, market participants have often complained about the vagueness of the Interpretation Note and the corresponding lack of certainty to international securities offerings in an increasingly globalized world.

In response to these sentiments, the OSC tabled Rule 72-503 as a proposed replacement of the Interpretation Note. The OSC received comments on their initial proposals for Rule 72-503 from June 29, 2017 to September 27, 2017, and published the current version of Rule 72-503 on November 28, 2017. No material changes were made to the proposals. The Minister of Finance approved Rule 72-503 on February 12, 2018 and it came into effect on March 31, 2018.


Rule 72-503 creates four new exemptions to the prospectus requirement in Ontario:

  1. Distribution Under Public Offering Document in Foreign Jurisdictions – The prospectus requirement does not apply to a distribution of securities to a person or company outside of Canada if the issuer has filed an offering document, such as a registration statement in accordance with the United States Securities Act of 1933, that permits the public offering of those securities in accordance with the securities laws of a specified foreign jurisdiction* and, if required, a receipt or similar acknowledgement of approval has been obtained for the offering document.
  2. Concurrent Distribution under Final Prospectus in Ontario – The prospectus requirement does not apply to a distribution of securities to a person or company outside of Canada if (i) the issuer of the securities or the selling security holder has materially complied with the disclosure requirements applicable to the distribution under the securities law of the jurisdiction outside Canada, or the distribution is exempt from such requirements, and (ii) the issuer of those securities has filed with and received a receipt from the OSC for a final prospectus qualifying a concurrent distribution of the same type of securities to purchasers in Ontario in accordance with Ontario securities law.
  3. Distribution by Reporting Issuers – If the issuer is a reporting issuer in Canada, the prospectus requirement does not apply to a distribution of securities to a person or company outside of Canada if the issuer has materially complied with its disclosure requirements under the securities law of the jurisdiction outside Canada, or the distribution is exempt from such requirements.
  4. Distribution by Non-Reporting Issuers – The prospectus requirement does not apply to a distribution by an issuer that is not a reporting issuer in a jurisdiction of Canada to a person or company outside Canada if the issuer has materially complied with the disclosure requirements applicable to the distribution under the securities law of the jurisdiction outside Canada, or the distribution is exempt from such requirements.

* The list of “specified foreign jurisdiction” currently includes Australia, France, Germany, Hong Kong, Italy, Japan, Mexico, the Netherlands, New Zealand, Singapore, South Africa, Spain, Sweden, Switzerland, the United Kingdom and the United States.

No hold period is mandated for securities distributed in reliance on the first three exemptions listed above and, as such, those securities are freely tradable upon issuance. However, the statement of principles in the companion policy to Rule 72-503 (Companion Policy) still puts the onus on issuers and underwriters to take steps to assure themselves that securities distributed under the Rule 72-503 exemptions will not be traded back into Canada. Similar to the Interpretation Note, the Companion Policy sets out an illustrative list of measures that could be taken to ensure that securities distributed outside of Canada do not flow back in.

Reports of Distributions Outside of Canada

Within ten days following a distribution made in reliance on the second and third exemption listed above, an issuer must file a report in the form of Form 72-503F Report of Distribution Outside Canada (Report) with the OSC. If the issuer is an investment fund, the deadline to file the Report is 30 days following the distribution and may be waived altogether provided that the investment fund makes certain other routine filings. The type of disclosure required in the Report is similar to that of Form 45-106F1 Report of Exempt Distributions.

Exemption from Dealer and Underwriter Registration Requirements

The dealer registration requirement and the underwriter registration requirements under Ontario securities law do not apply to any person or company distributing securities in reliance on the exemptions listed above if a number of conditions apply, including a head office or principal place of business in the United States or any of the other “specified foreign jurisdictions”, and compliance with applicable dealer registration requirements in such jurisdiction.

BCSC Seeks Feedback on Fintech Regulation

The British Columbia Securities Commission (BCSC) published BC Notice 2018/01 – Consulting on the Securities Law Framework for Fintech Regulation on February 14, 2018.  The Notice follows from a series of consultations (both in person and by survey) conducted by the BCSC on various elements of the financial technology (fintech) industry.  The Notice sets out the results of the consultations, the general approach to date of the BCSC on certain of the matters and poses specific questions for comment on potential regulatory action to clarify or modernize securities laws in the space. Written submissions are due on April 3, 2018.

The Notice discussed the following topics, among others:

  • crowdfunding and online lending business models
  • online adviser business model
  • cryptocurrency funds
  • initial coin offerings (ICOs) and cryptocurrencies.

The BCSC posed a series of questions in the Notice to solicit feedback including with respect to the following matters:

  • possible alternatives to limitations of current crowdfunding rules
  • the use and oversight by registrants of third parties or artificial intelligence to either provide Know-your-client (KYC) information or conduct certain KYC and/or suitability responsibilities.
  • what kinds of outsourcing arrangements exist or are being contemplated by online advisers and independent portfolio managers
  • what regulatory or administrative requirements can result in an inefficient flow of capital when investors switch accounts or transfer assets between firms (e.g. the requirement for a wet signature) and what are better alternatives
  • how are cryptocurrency exchanges working to address arbitrage, security of funds and tokens and anti-money laundering
  • best practices followed by cryptocurrency wallets and custodians to address cybersecurity and antimony laundering concerns
  • best practices of investment fund managers to address concerns of pricing volatility, fair valuation, transparency, liquidity and anti-money laundering when trading cryptocurrencies
  • the challenges of custodial requirements in the cryptocurrency space
  • should different proficiency and operational requirements apply to registrants advising or managing cryptocurrency funds as compared to registrants advising or managing other funds
  • what variables or factors should be relevant when assessing whether an investment contract exists within an ICO
  • what factors should be considered and are there conceptual distinctions between a virtual currency and other coins or tokens that securities regulators should consider in assessing whether a security exists
  • whether there are any specific securities regulatory requirements that stifle innovation without an adequate rationale or are there other suggestions for modernizing the regulatory framework for fintech.

Once the BCSC has considered the feedback it receives, it will determine the appropriate regulatory action.

Regulatory Net Tightening on the “Wild West” of the Blockchain and Cryptocurrency Industry

In August 2017, we considered the guidance offered by the Canadian Securities Administrators (CSA) regarding the application of securities laws to the blockchain industry and initial coin offerings (ICOs), primarily as set out in CSA Staff Notice 46-307 Cryptocurrency Offerings.  In that post, we noted that the CSA have provided little guidance regarding when they would consider cryptocurrencies to be securities, and thus subject to Canadian securities rules.

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Bill C-25 and its Amendments to the CBCA: A Legislative Tortoise Approaches a Finish Line

Bill C-25 is a federal government bill that would, if adopted, introduce sweeping changes to the corporate governance regime for reporting issuers incorporated under the Canada Business Corporations Act (CBCA). Like the proverbial tortoise, the bill has moved unhurriedly through the legislative process, in part due to several changes made to the bill since our previous post that discussed Bill C-25. The bill’s enactment would be just one of many “finish lines”, and it may take several years for all provisions of the bill and accompanying regulations to be drafted and brought into force. This post will canvass the amendments made so far to Bill C-25, with a focus on the proposed gender diversity disclosure framework, and will show a path forward to its eventual coming into force.

What has changed in Bill C-25?

Bill C-25 has been amended in several ways by both houses of Parliament since it was originally introduced in September 2016.

  • Majority voting: The most significant amendments made to the bill have changed the operation of the majority voting system that Bill C-25 proposes to enshrine into the CBCA. As originally drafted, Bill C-25 provided that a director candidate in an uncontested election would be elected only if they received a majority of the votes cast in their favour from among all votes cast “for” and “against” them. Senator Wetston, a former Chair and CEO of the Ontario Securities Commission and the sponsor of Bill C-25 in the Senate, proposed instead that a director candidate who receives the support of less than a majority of votes cast may continue in office until the earlier of (a) the 90th day after the date of their election, and (b) the day on which their successor is appointed or elected. Senator Wetston’s amendments were ultimately adopted the by the Standing Senate Committee on Banking, Trade and Commerce (BANC) and the Senate as a whole. The revised regime is somewhat analogous to the existing majority voting rules in the TSX Company Manual.
  • Diversity review: Much of the debate over Bill C-25 has been about its impact, or lack thereof, on diversity in corporate leadership. During hearings before the House Standing Committee on Industry, Science and Technology (INDU), several witnesses and both main opposition parties pressured the government do more to promote diversity. INDU ultimately voted to insert a five-year review period in respect of the bill’s diversity disclosure regime. The five-year review period starts on the day the diversity disclosure provisions are brought into force, which may take years (as described below), meaning such review may not occur until about 2025. The Conservatives and NDP attempted to shorten the time to review to three and two years, respectively, but the Liberals used their majority on INDU to defeat such amendments.
  • Other amendments: Both INDU and BANC also adopted several housekeeping amendments. In particular, they corrected certain drafting problems to ensure CBCA reporting issuers can make full use of the notice-and-access mechanism available under provincial securities laws.

What diversity-related information would have to be disclosed?

In addition to the enshrinement of majority voting, the biggest change that CBCA reporting issuers would experience under Bill C-25 relates to diversity-related disclosure requirements.

Currently, all reporting issuers (other than venture issuers) that solicit proxies for the election of directors must disclose gender-diversity-related information regarding their directors and senior management under a comply-or-explain model, as further described in Form 58-101F1 Corporate Governance Disclosure.

The changes the federal government is proposing would be effected through amendments to both the CBCA and to the regulations made thereunder. Bill C-25 would amend the CBCA to require disclosure in respect of diversity among directors and senior management, but all further details are left to regulation. Formal drafting of federal regulations does not begin until after enabling legislation is passed. However, to help understand what the full impact would be under Bill C-25, Corporations Canada has published a description of the proposed regulations that would operate alongside the statutory changes. Corporations Canada updated the proposed descriptions in January 2018. According to the proposed descriptions as amended, all CBCA reporting issuers, including venture issuers, would have to disclose the information required by items 10–15 of Form 58-101F1, subject to the following:

  • In respect of items 11–15, rather than just “women”, information is to be disclosed in respect of at least each of the designated groups as defined by the federal Employment Equity Act: women, Aboriginal peoples, persons with disabilities, and members of visible minorities.
  • The information to be disclosed must be in respect of both directors and “executive officers” as such latter term is defined in NI 51-102 Continuous Disclosure Obligations.

In light of the apparently slow progress made among reporting issuers in achieving gender diversity among their leadership ranks, questions have been raised on the merits of continued adherence to the comply-or-explain model. As a result, a group of Senators proposed an amendment to Bill C-25 at third reading that would have required prescribed corporations to establish numerical goals for the representation of persons in designated groups, and timetables for achieving such goals.[1] The amendment was drafted such that while it would be open to prescribed companies to set any target (even zero), it would be potentially embarrassing to do so. In the end, the amendment was defeated.

When will Bill C-25 receive royal assent?

Making guesses about when legislation will pass is fraught with difficulty. Bill C-25 was granted first reading in the House of Commons back on September 28, 2016, making it one of the bills that has taken the longest to wind its way through the current session of Parliament. Its advancement has been stalled due to being amended both in the House and the Senate, and from having its time for debate consumed by, among other things, unexpected discussions of parliamentary privilege, and by political gamesmanship.

Indeed, many things could still happen to the bill to slow its progress, including further amendments, prorogation, stalling, more pressing matters unexpectedly arising, etc. In particular, the newly independent Senate has been much more inclined to amend government bills, which delays their passage. However, Bill C-25 remains a government bill proposed by a party with a majority of seats in the House of Commons, and the bill also has the support of the main opposition party, so there is every reason to think it eventually will be enacted into law.

There are three steps remaining before Bill C-25 can become law: third reading in the Senate, concurrence in the House, and Royal Assent. Concurrence is the process whereby one house of Parliament considers and, if thought fit, approves the changes made to a bill by the other house. No bill can receive Royal Assent until an identical version thereof has been adopted by both the House of Commons and the Senate. Because the Senate has amended Bill C-25, the bill will return for consideration by the House of Commons. Senator Harder, the Representative of the Government in the Senate, has previously indicated all of the amendments so far made to the bill will find favour with the government. As a result, it is expected that the House will move to concur in all of the changes proposed by the Senate, at which point the bill can proceed to Royal Assent.

From the week of March 19, 2018, Parliament has about 11 sitting weeks until it rises for the summer break at the end of June. Barring further unexpected developments, the bill should likely be passed into law by that time.

When would the changes in Bill C-25 take effect?

Many of the key provisions in Bill C-25 will not take effect on Royal Assent. Instead, they will come into force on a day to be named by order of the federal cabinet. Many provisions, including those implementing majority voting and mandating diversity-related disclosure, can function properly only if accompanying regulations come into force concurrently. The federal Treasury Board Secretariat advises that regulations normally take 6–24 months to proceed from “triage” (initial impact assessment) until enactment. Consider also that time may be required to educate investors about the changes; and, in the case of majority voting, the government may have to delay coming-into-force to avoid such a major change taking effect in the middle of proxy season. Accordingly, it may take until 2020 (or later) before all of Bill C-25’s changes come into force.

We will continue to monitor the progress of Bill C-25 as it moves through the legislative process and beyond. Each of Fasken’s Corporate Finance & Securities and Government Relations & Strategy practice groups would be happy to speak further about Bill C-25 as suits particular needs.

[1] It’s unclear what corporations would have been prescribed and what designated groups would have been defined, as this would have been left to regulation. We understand that the Senators understood the framework would have been similar to what has been set out in the most recent proposed regulation descriptions published by Corporations Canada: prescribed corporations would be reporting issuers, and designated groups would be those as set out in the federal Employment Equity Act.

Review of SEC’s Statement on Potentially Unlawful Online Platforms for Trading Digital Assets

On March 7, 2018 the U.S. Securities and Exchange Commission (SEC) released a “Statement on Potentially Unlawful Online Platforms for Trading Digital Assets”. The statement is a warning to investors, service providers operating platforms through which digital assets are traded, and those providing ancillary services involving the transfer or maintenance of digital assets

With regard to investors, the SEC’s principal suggestion was to conduct diligence to ensure online trading platforms with which investors engage are SEC-registered and regulated marketplaces, whether as national securities exchanges, alternative trading systems, or broker-dealers.

For market participants operating online trading platforms, the SEC has confirmed that platforms which are effectively operating as an exchange, specifically by trading assets fitting into the definition of a “security” under U.S. federal securities laws, must either register as a national securities exchange or be exempt from registration, for example, by falling into the alternative trading system exemption.

Focusing on national securities exchanges, these platforms must “have rules designed to prevent fraudulent and manipulative acts and practices… have rules and procedures governing the discipline of its members and persons associated with its members, and enforce compliance by its members and persons associated with its members with the federal securities laws and the rules of the exchange”.  The national securities exchange itself must also comply with federal securities laws and file its rules with the SEC. As a cautionary note, a platform may be deemed to be participating in the unregistered offer and sale of securities if digital assets that fall under the definition of “security” are being offered and/or sold on the platform and the securities are not registered or exempt from registration.

Focusing on alternative trading systems, these platforms must become a member of a self-regulatory organization and register with the SEC as a broker-dealer. A number of additional regulatory requirements will apply, such as requirements for “reasonable policies and procedures to prevent the misuse of material non-public information, books and records requirements, and financial responsibility rules…” Self-regulatory organization membership further imposes additional regulatory requirements and rules.

Finally, for those platforms which do not meet the definition of a national securities exchange but directly or indirectly offer trading or other services related to digital assets that fall under the definition of “security”, certain regulations may still apply. For example, digital wallet services may trigger broker-dealer, transfer agent or clearing agency registration requirements under federal securities legislation.

The original statement may be viewed on the SEC’s website.

International Women’s Day Recap

Gender diversity during proxy season and National Instrument 58-101 Disclosure of Corporate Governance Practices (NI 58-101) are reviewed when CSA releases their staff notice regarding compliance for 2018 (as reported in our Timely Disclosure posts in 2017, 2016 and 2015). In celebration of international women’s day, here is a recap of gender diversity promotion and a preview of discussion points to come at the end of proxy season 2018:

Catalyst Report

Increasing the number of women in powerful positions has the potential to transform our workplaces and society.[1]

In a report commissioned by the Government of Ontario in 2016, Catalyst outlined recommendations for accelerating progress for gender diversity on boards of directors in Canada. The report noted that Canada continues to lag behind other developed nations in terms of gender balance on corporate boards. Although more women than men graduate annually from Canada’s universities and colleges, Canadian women continue to be underrepresented on boards and in senior management.[2]

ISS Governance

Canadian institutional investors have begun to voice their frustration with the slow movement on boardroom gender diversity through their voting policies.[3]

After a round table discussion in 2017, ISS announced it will adopt a board gender diversity policy in 2018 that will promote better disclosure by companies and higher levels of gender diversity in boardrooms. Under the proposed new policy, if: i) the company has not adopted a formal written gender diversity policy, and ii) no female directors serve on the board; then ISS will generally recommend withholding votes for the chair of the nominating committee or equivalent.

Canadian Coalition for Good Governance

While the quality of individual directors is paramount, we also expect boards as a whole to be diverse. A high performance board is comprised of directors with a wide variety of experiences, views and backgrounds which, to the extent practicable, reflects the gender, ethnic, cultural and other personal characteristics of the communities in which the corporation operates and sells its goods or services.[4]

In October 2015, Canadian Coalition for Good Governance (CCGG) provided a board gender diversity policy which outlined the need for enhanced gender diversity on boards and at the executive level, stating the current regulations should go beyond simply requiring disclosure under NI 58-101. Further, CCGG recognizes that a “comply or explain” approach may not be sufficient if the CSA rules do not lead to real progress.

Bill C-25

Nearly half of all companies listed on the TSX [in 2017] still had zero women on their boards of directors, virtually unchanged from the year before [and] only 10 per cent had set targets for the number of female representatives on their board, only slightly up from the year before.[5]

Bill C-25 may encourage corporations to place women on boards and in executive positions. Bill C-25 is an Act to amend the Canada Business Corporations Act, the Canada Cooperatives Act, the Canada Not-for-profit Corporations Act, and the Competition Act to, among other things, (a) reform some aspects of the process for electing directors of certain corporations and cooperatives; (b) modernize communications between corporations or cooperatives and their shareholders or members; (c) clarify that corporations and cooperatives are prohibited from issuing share certificates and warrants, in bearer form; and (d) require certain corporations to place before the shareholders, at every annual meeting, information respecting diversity among directors and the members of senior management. It further amends the Competition Act to expand the concept of affiliation to a broader range of business organizations.[6]

Canadian Budget 2018

Engineers Canada is encouraged by the government’s funding of $5 million per year for Status of Women Canada to undertake research and data collection, including support for a project that analyzes the unique challenges visible minority and newcomer women face in finding employment in STEM occupations.[7]

With Budget 2018, the Government of Canada set a new standard of gender budgeting as a core pillar of budget-making. Going forward, the Government is committed to adopting a comprehensive and permanent approach to gender budgeting. Budget 2018 and future budgets under this Government will be guided by the new Gender Results Framework with its six pillars of i) Education and Skills Development, ii) Economic Participation and Prosperity, iii) Leadership and Democratic Participation, iv) Gender-Based Violence and Access to Justice, v) Poverty Reduction, Health and Well-Being, and vi) Gender Equality Around the World. The framework will outline meaningful indicators under each pillar to track success or failure.[8]

[1] Deborah Gillis, President & CEO, Catalyst

[2] Catalyst. Gender Diversity on Boards in Canada, Recommendations for Accelerating Progress. 2016 [http://www.catalyst.org/system/files/gender_diversity_on_boards_in_canada_final_pdf_version.pdf]

[3] ISS. 2018 Benchmark Policy Consultation. [https://www.issgovernance.com/file/policy/5-2017-comment-period-template-canada-director-elections-board-gender-diversity.pdf]

[4] CCGG. CCGG Pilocy, Board Gender Diversity. October 2015. [https://www.ccgg.ca/site/ccgg/assets/pdf/gender_diversitypolicy.pdf ]

[5] The Star. Amend Bill C-25 to push companies harder to get more women on boards. February 4, 2018. [https://www.thestar.com/opinion/editorials/2018/02/04/amend-bill-c-25-to-push-companies-harder-to-get-more-women-on-boards.html]

[6] Open Parliament Canada. Bill C-25 [https://openparliament.ca/bills/42-1/C-25/]

[7] Newswire. Budget 2018 acknowledges gender gap in STEM, particularly in engineering. February 28, 2018.  [https://www.newswire.ca/news-releases/budget-2018-acknowledges-gender-gap-in-stem-particularly-in-engineering-675408843.html]

[8] Government of Canada. Budget 2018. [https://www.budget.gc.ca/2018/docs/plan/chap-05-en.html]

Hostile Bids on Ice: Canadian Hostile Bid Activity Trends Substantially Lower

In May 2016, sweeping changes to the Canadian take-over bid regime came into effect.  The stated purpose of the new rules included the goal of rebalancing the dynamics between hostile bidders and target boards by extending the minimum bid period to 105 days, and mandating a 50% mandatory minimum tender condition and a ten-day extension once all bid conditions have been satisfied or waived.  We published our Canadian Hostile Take-Over Bid Study in the spring of 2015, just over a year before the new rules came into force.  In that study, we expressed concern that strengthening a target board’s hand could result in a decrease in hostile bid activity.  Over the past year, various commentators have suggested that the new rules have had no adverse impact on hostile bid activity.  We are not so sure.

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The Saga Continues: Marijuana, United States Federal Law and the Canadian Securities Administrators

We noted in our post of January 18, 2018 that the Canadian Securities Administrators (CSA) were reconsidering whether the CSA’s disclosure-based approach for issuers with U.S. marijuana-related activities remained appropriate.  The CSA’s reconsideration was triggered by an announcement on January 4, 2018 by Jeff Sessions, Attorney General of the United States, which expressly rescinded previous nationwide guidance from the Obama-era specific to marijuana enforcement (or forbearance therefrom) in the United States, including a “Memorandum for All United States Attorneys” dated August 29, 2013 from James M. Cole, then-Deputy Attorney General of the United States.  As we noted, while medicinal marijuana is legal in numerous American states and recreational marijuana is legal in several states, marijuana remains illegal at the federal level in the United States, thus creating a dilemma for the CSA with respect to Canadian issuers with marijuana-related activities in the United States.

On February 8, 2018, the CSA published CSA Staff Notice 51-352 (Revised) Issuers with U.S. Marijuana-Related Activities (Revised 51-352), setting out the expectations of CSA staff with respect to disclosure for specific risks faced by issuers with marijuana-related activities in the United States.  In short, the CSA have maintained their disclosure-based approach for Canadian issuers with marijuana-related activities in the United States, as opposed to prohibiting such issuers from raising funds in Canada or listing on a Canadian stock exchange.  Issuers will continue to be able to raise funds and list in Canada, notwithstanding the fact that their operations may be illegal under United States federal law and that they may face prosecution at any time, as long as such risks are adequately disclosed.

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