On March 29, 2021, the Canadian Securities Administrators (“CSA”) and the Investment Industry Regulatory Organization of Canada (“IIROC”) jointly published Staff Notice 21-329 Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements (“Notice 21-329”)[1]. Notice 21-329 provides guidance on how securities legislation will be applied to crypto-asset trading platforms (“CTPs”) and in doing so expands on the regulatory guidance previously set out in CSA Staff Notice 21-327[2] and joint CSA/IIROC Consultation Paper 21-402[3].

On the same day, the Ontario Securities Commission (“OSC”) issued a news release imposing a deadline of April 19, 2021 for CTPs to contact OSC regarding bringing their operations into compliance. The OSC intends to take enforcement actions towards those CTPs who fails to do so by the deadline, including CTPs located outside of Ontario that allow access to Ontarians.

Notice 21-329 delineates CTPs into three principal categories:

  • CTPs that operate in a similar manner to securities dealers, such as facilitating the primary distribution of Security Tokens, or trading Security Tokens on behalf of clients (the “Dealer CTPs”);
  • CTPs that operate in a similar manner to “marketplaces”, such as providing a facility that enables multiple buyers and sellers to trade in Security Tokens (the “Marketplace CTPs”); and
  • CTPs that operate in a similar manner to a stock exchange, such as regulating participants and overseeing their continuing compliance obligation, standards of practice and business conducts (the “Exchange CTPs”).

Notice 21-329 re-states the position taken in Notice 21-327 and Consultation Paper 21-402, namely that  CTPs will be subject to securities legislation if they deal with either crypto assets that are securities or derivatives (defined as “Security Tokens”), or crypto assets that, while not securities or derivatives themselves, are held on behalf of customers, thereby creating a security (defined as a “Crypto Contract”).   

Requirements for Dealer CTPs

Notice 21-329 provides that Dealer CTPs are required to be register as some form of securities dealer, depending on the precise nature of the Dealer CTP’s business.

Dealer CTPs that distribute or trade Security Tokens or enter into Crypto Contracts exclusively on a prospectus exempt basis and that do not offer margin or leverage can register as exempt market dealers or restricted dealers.

Dealer CTPs that offer margin or leverage for Security Tokens, or that offer services to retail investors in either Security Tokens or Crypto Contracts, are generally expected to be registered as investment dealers and become members of IIROC. In addition, such Dealer CTPs may require discretionary exemptive relief from the prospectus requirement and the over-the-counter trade reporting requirements in order to conduct their business.

Requirements for Marketplace CTPs

Notice 21-329 provides that Marketplace CTPs are required to comply with National Instrument 21-101 Marketplace Operation,  23-101 Trading Rules, and 23-103 Electronic Trading and Direct Electronic Access to Marketplaces, as well as IIROC’s Universal Market Integrity Rules. Marketplace CTPs may also be required to register as investment dealers and become members of IIROC if they conduct activities similar to those performed by Dealer Platforms or take custody of client assets.

Similar to Dealer CTPs, Marketplace CTPs that offer services in respect of Security Tokens or Crypto Contracts may also need exemptive relief from the prospectus requirement to facilitate the distribution of or trades in the Security Tokens or Crypto Contracts and from the over-the-counter trade reporting requirements.

Requirements for Exchange CTPs

While Notice 21-329 does not discuss Exchange CTPs in great detail, it notes that where a CTP regulates participants and disciplines them, it would be an Exchange CTP and be expected to apply for recognition as an exchange. This would be the case even if the Exchange CTP’s business also included elements of a Dealer CTP or a Marketplace CTP.

Interim Approach and limitations on business operation

In an effort to ensure CTPs are operated within regulated environment while providing flexibility in the meantime, CSA introduced a two-year “interim approach”.

Under the interim approach, a Dealer CTP that trades Crypto Contracts may operate by seeking registration as a restricted dealer, provided it does not offer leverage or margin trading. Such Dealer CTPs would be expected to work with regulators and complete its investment dealer registration and IIROC membership within the two-year interim period.

The same “interim approach” also applies to Marketplace CTPs. Within the interim period, Marketplace CTPs could seek registration as an exempt market dealer or restricted dealer, as long as they are not offering leverage or margin.

CSA will evaluate Exchange CTPs on a case-by-case to determined whether certain exemptions are appropriate.

Certain limitation may be imposed on any CTP’s businesses during the interim period, such as limitations on the investment amount, number and types of products and participants.

IIROC may also modify its existing membership requirements based on the novel business models presented by CTPs. In exchange for any such relaxed requirements, IIROC may impose limitations and surveillance on a CTP’s activities.

IIROC’s Crypto-asset working group

Following the joint publication of Notice 21-329, IIROC announced a list of new members to its Crypto-asset working group[4]. New members include industry practitioners, legal and compliance experts, academics, and other professionals. According to IIROC, this working group is tasked to address issues around market integrity and investor protection, as well as assess how the regulatory requirements might be best tailored for crypto-assets.

Conclusion

Prior to Notice 21-329, Canadian securities regulators had offered little concrete guidance on the applicability of securities laws to the cryptocurrency industry, preferring to simply remind participants that securities laws may apply and to let those participants make their own determinations regarding compliance. Notice 21-329, however, provides some clarity as to how regulators would like CTPs to proceed to become compliant, including setting out specific paths forward for different types of companies. Another helpful point is that Notice 21-329 acknowledges that securities registrations are time-consuming to obtain and that interim solutions, and exemptions, should be considered.

We encourage all cryptocurrency industry participants to carefully read Notice 21-329 and consider how it might apply to their business and to come to us with any questions.

[1] Staff Notice 21-329 Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements: https://www.osc.ca/sites/default/files/2021-03/csa_20210329_21-329_compliance-regulatory-requirements.pdf

[2] CSA Staff Notice 21-327 – Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets (“Notice 21-327”): https://www.osc.ca/sites/default/files/pdfs/irps/csa_20200116_21-327_trading-crypto-assets.pdf

[3]  Joint CSA/IIROC Consultation Paper 21-402 Proposed Framework for Crypto-Asset Trading Platforms: https://www.securities-administrators.ca/uploadedFiles/Industry_Resources/2019mars14-21-402-doc-cons-en.pdf

[4] News Release by IIROC dated March 29, 2021: https://www.iiroc.ca/Documents/2021/c05f0606-51ec-41ce-a536-27705baed9ce_en.pdf

 

On March 24, 2021, the Minister of Innovation, Science and Industry (the “Minister”) announced updates to the Guidelines on the National Security Review of Investments (the “Guidelines”) issued under the Investment Canada Act (the “ICA”).

This first update since the Guidelines were issued on December 21, 2016 appears to respond to widely expressed concerns about the sanctity of personal information, vulnerability of Canadian intellectual property, and the growing importance of things like critical minerals to Canada’s geopolitical positioning and the basic health and safety of citizens in a post-pandemic world. Additionally, areas of technology broadly understood to be of concern to the Government of Canada (the “Government”) have been expressly listed, with the only potential surprise being “Advanced Ocean Technologies.”

Background

Separate and distinct from the “net benefit to Canada” economic impact assessment, the ICA provides for a national security review that gives the Government the authority to review any acquisition (or establishment) of all or part of a Canadian business, that, in its opinion, could be injurious to Canada’s national security.

In 2016, the Minister issued Guidelines as a way to provide foreign investors with a clearer picture as to the circumstances under which the Government of Canada may initiate a national security review. For more information on the introduction of the Guidelines in 2016, see our post, Investment Canada Issues National Security Review Guidelines.

What’s new

The Guidelines previously contained specific factors the Government would consider during the national security review process. The updated Guidelines expand that list of factors and provide additional clarity with respect to some of the pre-existing factors, including the potential effects of the investment on:

  • Canada’s defence capabilities and interests – this consideration now includes, but is not limited to, the defence industrial base and defence establishments.
  • Transfer of sensitive technology or know-how outside of Canada – this factor has been updated to provide additional clarity on what may be considered sensitive technology, including those developed in the following fields:
    • Advanced Materials and Manufacturing
    • Advanced Ocean Technologies
    • Advanced Sensing and Surveillance
    • Advanced Weapons
    • Aerospace
    • Artificial Intelligence
    • Biotechnology
    • Energy Generation, Storage and Transmission
    • Medical Technology
    • Neurotechnology and Human-Machine Integration
    • Next Generation Computing and Digital Infrastructure
    • Position, Navigation and Timing
    • Quantum Science
    • Robotics and Autonomous Systems
    • Space Technology
  • Critical minerals – the list of factors now includes consideration of the impact of an investment on critical minerals and critical mineral supply chains. For more information on which minerals are considered critical in Canada, see our recent post, Newly Critical: Copper, Helium and More – Canada’s List of Critical Minerals has Expanded for 2021.
  • Involving or facilitating the activities of corrupt foreign officials – corrupt foreign officials have been added to the examples of illicit actors whose activities may be considered.
  • Exploitation of sensitive personal data – the list adds consideration of the ability to enable access to sensitive personal data, exploitation of which could harm Canadian national security. Helpfully, the Guidelines provide a non-exhaustive list of the types of personal data that may be considered sensitive: (a) personally identifiable health or genetic data, (b) biometric data, (c) financial data, (d) communications data, (e) geolocation data, and (f) personal data concerning government officials, including members of the military or intelligence community. These are not new concerns to the Government, but the express listing represents a welcome move towards clarity that tends to explain the “why” behind past general expressions of federal concern.

Note that the Guidelines provide a non-exhaustive list of factors that may be taken into account during a national security review. Investments that do not possess the listed characteristics may nevertheless present national security concerns. Conversely, investments that possess some of the above-listed characteristics will not necessarily be viewed by the Government as injurious to Canada’s national security. Each of the factors must be set within the current bilateral, geopolitical, and domestic political contexts in order to produce a more fully-developed picture of the likelihood of an investment’s ultimate approval by the Government.

What Stays the Same

Consistent with the Government’s April 2020 Policy Statement on Foreign Investment Review and COVID-19, the updated Guidelines now provide that the Government will subject all foreign investments by state-owned investors, or private investors assessed as being closely tied to or subject to direction from foreign governments, to enhanced scrutiny under the ICA, regardless of the investment’s value. Enhanced scrutiny of foreign direct investments, both controlling and non-controlling, in Canadian businesses, has been the Government’s policy for some time now.

What’s Next

While these revised National Security Guidelines do provide a new level of transparency to the investment community concerning what types of transactions may attract national security scrutiny, they do not address the need for more openness and transparency during actual national security reviews in the context of specific transactions.

Actions to mitigate perceived security issues should always be something to be considered. In the past, the Government has shown reluctance to engage in mitigation discussions, appearing to prefer a binary “go / no go” approach. Hindering the ability to determine whether mitigation is even a possibility is a certain lack of transparency or openness by the government as to the exact nature of its security concerns with respect to a specific transaction.  Acknowledging that mitigation discussions are inherently difficult given that national security matters are involved, something more needs to be done to ensure that otherwise beneficial transactions are not blocked simply because the parties to the deal have not been given a full and fair opportunity to address the government’s security concerns and to offer possible mitigation options to address those concerns. A published list of specific areas of federal concern will make it more difficult for the Government to keep its concerns general and instead, will invite a healthy debate about specific problems with a deal — and specific solutions thereto. This is a step in the right direction in the attraction of the foreign capital crucial to Canada’s economic recovery from COVID-19.

On March 11, 2021, the Canadian Securities Administrators (“CSA”) published Staff Notice 51-363 – Observations on Disclosure by Crypto Assets Reporting (“Notice 51-363”), the first update from CSA regarding entities dealing in crypto assets in more than a year[1]. Based on the disclosure of reporting issuers acting in the crypto asset space, Notice 51-363 provides staff guidance on expectations for disclosure in this industry.

Crypto asset reporting issuers have the same obligations as other public companies in disclosing material information and changes that affecting their businesses, as well as the financial impacts of such risks. Notice 51-363 reiterates the importance of fulfilling these obligations, and at the same time, recognizes the emerging nature of the crypto asset industry and novel issues reporting issuers may face.

Notice 51-363 can assist current and future reporting issuers because it provides detailed guidance on disclosure expectations in the context of crypto assets industry and highlights perceived insufficiencies in the disclosure of current reporting issuers.

Summary of guidance

Custodial Issues

With respect to custody matters, Notice 51-363 sets out Staff’s position that a reporting issuer’s controls and safeguard measures are material to investor protection and will be a focus of the regulators’ review of their public filings. For reporting issuers using third-party custodian services, Staff believes that material information includes, but is not limited to: i) identity, status and location of the service provider; ii) quantity or percentage of assets so held; iii) insurance and limitation on the custodian’s liability; and iv) treatment of assets held in the event of custodian’s bankruptcy. Notice 51-363 also points out that custodian agreements can be considered a material contract, requiring their filing on SEDAR. If the repotting issuer self-custodies, Notice 51-363 states that the reporting issuer should provide reasons for not engaging a third party.

Use of Third-Party Crypto Asset Trading Platforms

Notice 51-363 also notes that if a reporting issuer relies on third party trading platforms to hold, manage and safeguard its crypto assets, it is subject to the risks related to the solvency, integrity and proficiency of the operators of the platform, which warrants, at minimum, the same amount of information as required if the platform is a third-party custodian.

Description of Business and Risk Factors

Notice 51-363 also discusses the fundamental requirement to provide disclosure on business operations and expertise of personnel, as well as disclose risk factors tailored to the issuer and business. Notice 51-363 provides examples of potential risks that should be disclosed, such as the availability and cost of electricity, potential declines on the price of crypto assets, and risks associated with crypto assets held at third-party custodians or trading platforms.

Material Changes

CSA Staff believes that reporting issuers have generally failed in complying with their obligations in reporting material changes or filing the material change report within the required 10-day period. Notice 51-363 provides a list of potential material changes for reporting issuers in the crypto asset space, including obtaining or changing custodian services; loss or theft of crypto assets; purchase or sale of crypto mining equipment; and entering into arrangements in relation to crypto mining activities.

Investing in Crypto Assets

According to Notice 51-363, if a reporting issuer’s main operation is investing in crypto assets, it might be subject to requirements and considerations under the investment fund regime, even though it does not technically meet the definition of an investment fund. If such a reporting issuer plans to file a prospectus, it will be required to address certain investor protection considerations, such as including investment concentration restrictions; continuous disclosure regarding investee companies; and a requirement to use a qualified custodian.

Financial Statements

Notice 51-363 also discusses certain novel accounting issues crypto assets pose, including with respect to the holding of crypto assets. Notice 51-363 provides that reporting issuers should apply International Accounting Standards (“IAS”) 2 inventories standard on the sale of cryptocurrencies and apply IAS 38 Intangible Assets to holdings of cryptocurrencies.

Staff notes that issuers in the crypto mining industry face unique complexities associated with the arrangement of mining pools, mining transaction fees, mining equipment and infrastructures. Notice 51-363 recommends that reporting issuers include robust disclosure of accounting policies and carefully consider whether an indicator of impairment exist with regards to mining equipment.

Notice 51-363 further points out that non-monetary transactions settled in cryptocurrencies present risk of market manipulation given the volatility of cryptocurrencies prices, and reporting issuers are expected to have measures in place to control those risks.

Conclusion  

Notice 51-363 provides a useful guide to reporting issuers in the crypto assets industry regarding CSA’s disclosure expectations, but also suggests that CSA considers certain disclosures made by current reporting issuers as being insufficient. Industry participants that are reporting issuers, or that are considering going public through a reverse take-over or initial public offering should carefully consider the guidance provided in Notice 51-363 and adjust or plan their disclosure accordingly.

Fasken will continue to monitor further guidance or policy changes by the CSA and provincial securities commissions. We recommend stakeholders in the crypto industry to consult advisors and regulators for guidance when filing for disclosure documents.

[1] CSA Staff Notice 21-327 was published on January 16, 2020, which provided guidance on the application of securities law to crypto asset trading platforms. See detail: https://www.osc.ca/en/securities-law/instruments-rules-policies/2/21-327/csa-staff-notice-21-327-guidance-application

 

On March 15, 2021, the Investment Funds and Structured Products Branch (IFSP Branch) of the Ontario Securities Commission (OSC) issued an eNews communication advising that the IFSP Branch will consider requests for filing date extensions on a case-by-case basis for investment fund issuers that are unable to meet filing requirements as a result of difficulties arising from the ongoing COVID-19 pandemic.

Investment fund issuers that are experiencing challenges with meeting the upcoming deadline on March 31, 2021 for the filing of December 31, 2020 annual financial statements can submit a request for a filing deadline extension by providing the IFSP Branch with a detailed submission explaining why an extension is required and the length of the required extension.

In the event that the request for a filing extension is considered novel by the IFSP Branch, the IFSP Branch may have consultations with the other members of the Canadian Securities Administrators.

Introduction

Recently, the Ontario Securities Commission (“OSC”) released its reasons for a September order dismissing an application for exemptive relief from the minimum tender requirement under Canada’s securities take-over bid regime.[1] ESW Capital, LLC (“ESW”), the largest shareholder of Optiva Inc. (“Optiva”), sought the relief in connection with a contested proposed take-over bid involving shares of Optiva (“Voting Shares”). The application is the first instance in which a Canadian securities regulator has been asked to grant exemptive relief from the minimum tender requirement. The OSC concluded that “there were no exceptional circumstances or abusive or improper conduct that undermined minority shareholder choice to warrant intervention…[and that] predictability is an important aspect of take-over bid regulation and [OSC] must be cautious in granting exemptive relief that alters the recently recalibrated bid regime”.

Background

Optiva, a provider of telecommunications customer support software, had three control block shareholders: ESW, holding approximately 28% of Voting Shares; Maple Rock Capital Partners Inc. (“Maple Rock”); and EdgePoint Investment Group Inc. (“EdgePoint”). The latter two collectively held approximately 40.5% of the Voting Shares. The three control block shareholders had a history of disagreement over the strategic direction and governance of Optiva dating back to 2019.

In the summer, ESW announced its intention to proceed with all-cash offer to acquire all Voting Shares at $60 per share, a significant premium to the prevailing market price (the “Proposed Offer”). The Proposed Offer was conditional upon, among other things, exemptive relief from the mandatory minimum tender requirement under Ontario securities law. Following amendments to Canada’s bid regime in 2016, at least 50% of the securities subject to a bid (excluding those beneficially owned by the bidder and its joint actors) must be tendered to the bid before the bidder can take-up securities.[2] As both Maple Rock and EdgePoint announced their intention not to tender to the Proposed Offer, the Proposed Offer was doomed to fail without ESW obtaining relief since Maple Rock and Edgepoint together held more than 50% of the securities subject to the proposed bid excluding those held by ESW.

OSC’s Reasons

Under the Securities Act, the OSC may grant exemptive relief from the minimum tender requirement if satisfied it would not be prejudicial to the public interest. In its reasons, the OSC assessed a number of factors through the lens of the underlying policy rationale of the amended take-over bid regime, including the nature and circumstance of the bid; the control dynamics of the target; the impact of a grant or denial of exemptive relief on shareholders; and the conduct of the target, bidder and control block holders.

The OSC describes the minimum tender requirement as part of “a material recalibration of bid dynamics” designed to facilitate collective shareholder decision-making.  In order to maintain the recalibrated dynamics and ensure a clear and predictable framework, the OSC notes that the public interest discretion should only be exercised in exceptional circumstances or where there is clear improper or abusive conduct that undermines minority shareholder choice.

Though acknowledging that a potential consequence of the minimum tender requirement is enhanced leverage for control block holders, which may result in bids not being made at all or shareholders being deprived of the ability to respond to a bid, the OSC found no circumstances or conduct on the part of Maple Rock, EdgePoint or Optiva that warranted intervention. Because the control dynamics pre-dated the Proposed Offer, the OSC notes that it would have been apparent to Optiva’s remaining minority shareholders that the support of at least two of the control block shareholders would be necessary for a potential bid to succeed. The OSC also notes that, absent abuse, shareholders may engage in co-ordinated efforts to obtain additional control and influence, in order to pursue their own financial interests. In considering the shareholders rights plan, the OSC notes that it was approved by a majority of shareholders after the Proposed Offer and that adopting a tactical shareholders rights plan often provides protection to minority shareholders.

Conclusion

Though the take-over premium was substantial, the OSC ultimately held that, in the context of this application, preserving the minimum tender requirement protects against the potential for coercion of the minority shareholders and allows for potentially superior offers. The decision underscores the role of predictability of take-over bid regulation and the OSC’s commitment to the amended bid regime’s core objective of facilitating shareholder choice.

 

 

[1] ESW Capital, LLC (Re), 2021 ONSEC 7.

[2] NI 62-104 Take-Over Bids and Issuer Bids, s 2.29.19(c).

The author wishes to thank Gilles Leclerc for his advice and contributions.

“Nothing happens. Nobody comes, nobody goes. It’s awful.” This quote from Estragon, one of the main characters in Samuel Beckett’s play “Waiting for Godot”, summarizes well the previous year from an economic and social perspective. Today, while the hopes of a vaccine rollout and economic recovery are looming on the horizon,
the Covid-19 pandemic continues to have a material adverse impact on our economy. It poses widespread challenges for many businesses, including challenges in reporting and disclosing the effect of Covid-19 to investors.

In a series of bulletins[1] published last year, we highlighted the guidance provided by both the Canadian Securities Administrators (“CSA“) and the U.S. Securities Exchange Commission relating to the continuous disclosure obligations of public issuers in the context of Covid-19. On February 25, 2021,  CSA issued Staff Notice 51-362 (the “Staff Notice“) to report the results of  their review of the disclosure provided by reporting issuers on the impact of Covid-19 on their business. CSA examined the filings of approximately 90 issuers Continue Reading Continuous Disclosure Obligations in Times of a Continuous Pandemic: Canadian Securities Regulators’ Review of Issuers’ Disclosure

On January 3, 2019, the final phase of the Canadian Securities Administrators (“CSA”)’s Modernization of Investment Fund Product Regulation Project relating to the establishment of a regulatory framework for alternative mutual funds came into effect. These amendments introduced a new category of mutual funds, “alternative mutual funds”, which are mutual funds that have adopted investment objectives that permit those funds to invest in physical commodities or specified derivatives, borrow cash or engage in short selling in a manner not typically permitted for “regular” mutual funds.

These amendments moved most of the regulatory framework then applicable to commodity pools under National Instrument 81-104 – Commodity Pools (now renamed “Alternative Mutual Funds”) (“NI 81-104”) into National Instrument 81-102 – Investment Funds, with the exception of the proficiency standards for mutual fund dealers distributing alternative mutual funds. These proficiency standards actually prevent mutual fund restricted individuals[1] (“Restricted Individuals”) from distributing alternative mutual funds unless they possess one of the courses set forth under Part 4 of NI 81-104. These provisions were retained by the CSA “in recognition that alternative mutual funds can be more complex than other types of mutual funds and that additional proficiency may be needed for mutual funds dealers selling these products[2]”. It was the CSA’s view that maintaining more robust dealer proficiency standards for alternative mutual funds ensured Restricted Individuals were better equipped to sell these products.

Recognizing that the proficiency standards set forth under NI 81-104 have in fact limited retail investors’ access to alternative investment strategies through the mutual fund dealer channel, each member of the CSA issued on January 28, 2021 a blanket relief (the “Blanket Relief”) so as to provide Restricted Individuals and individuals designated to be responsible for the supervision of trades of securities of alternative mutual funds (“Supervisors”) with additional proficiency options in order to be authorized to distribute alternative mutual funds. These additional proficiency options are meant to expedite retail investors’ access to alternative mutual funds and enable them to benefit from additional portfolio diversification opportunities through alternative strategies.

Below is a table listing current and additional proficiency standards for Restricted Individuals and Supervisors and the terms and conditions set forth in the Blanket Relief. Note that a dealer must provide its principal regulator with a one-time notice prior to the first of any of its Restricted Individuals or Supervisors relying on the Blanket Relief.

Finally, note that this Blanket Relief is permanent in every jurisdiction except for Ontario, New Brunswick and the Northwest Territories where the Blanket Relief will cease to be effective on July 28, 2022. We expect this Blanket Relief to be codified prior to that date to make these additional course options a permanent solution.

 

[1] An individual registered as a dealing representative of a registered dealer, if the activities of that individual are restricted to trading in securities of mutual funds.

[2] See CSA Notice of Publication “Modernization of Investment Fund Product Regulation – Alternative Mutual Funds”, October 4, 2018.

Le 3 janvier 2019, la dernière étape du projet de modernisation de la réglementation des produits de fonds d’investissement des Autorités canadiennes en valeurs mobilières (les « ACVM ») concernant l’établissement d’un encadrement réglementaire des organismes de placement collectif est entrée en vigueur. Ces modifications ont introduit une nouvelle catégorie d’organismes de placement (ci-après, les « OPC »), soit les « OPC alternatifs », une expression qui désigne les OPC qui ont adopté des objectifs de placement leur permettant d’investir dans des marchandises physiques ou des dérivés visés, d’emprunter des fonds ou d’effectuer des ventes à découvert d’une manière généralement non permise aux OPC « réguliers ».

Ces modifications ont transféré la majorité du cadre réglementaire alors applicable aux fonds de marché à terme en vertu du Règlement 81-104 sur les fonds marché à terme (renommé le Règlement 81-104 sur les organismes de placement collectif alternatifs) (le « règlement 81-104 ») vers le Règlement 81-102 sur les fonds d’investissement, à l’exception des normes de formation visant les courtiers en épargne collective qui font des opérations sur des OPC alternatifs. Ces normes de formation interdisent aux personnes physiques dont les activités sont restreintes aux OPC[1] (les « personnes physiques dont les activités sont restreintes ») de faire des opérations sur les titres d’un OPC alternatifs sauf si elles ont réussi l’un des cours prévus dans la partie 4 du règlement 81-104. Ces normes de formation ont été conservées par les ACVM, qui « [reconnaît] que les OPC alternatifs peuvent être plus complexes que d’autres types d’OPC, et qu’une formation additionnelle pourrait s’avérer nécessaire pour les courtiers en épargne collective offrant ces produits[2] ». Selon les ACVM, le maintien de normes de formation plus rigoureuses à l’égard des OPC alternatifs contribuera à mieux outiller les personnes physiques dont les activités sont restreintes pour offrir ces produits.

Reconnaissant que les obligations de formation prévues dans le règlement 81-104 ont limité l’accès des investisseurs individuels aux stratégies de placement alternatives par l’intermédiaire des courtiers en épargne collective, tous les membres des ACVM ont publié le 28 janvier dernier des décisions générales de dispense (les « décisions générales de dispense »), lesquelles offrent aux personnes physiques dont les activités sont restreintes et aux personnes physiques désignées comme responsables de la surveillance des opérations sur les titres d’un OPC alternatif (les « responsables ») un choix supplémentaire de cours leur permettant d’obtenir l’autorisation de procéder au placement des titres des OPC alternatifs. Ces options de formation supplémentaires ont comme objectif de faciliter l’accès des investisseurs individuels aux stratégies de placement alternatives et de leur permettre de tirer profit des occasions de diversification de leur portefeuille par l’entremise de stratégies alternatives.

Nous avons intégré ci-dessous un tableau illustrant les normes de formations actuelles et additionnelles visant les personnes physiques dont les activités sont restreintes et les responsables, ainsi que les modalités prévues dans les décisions générales de dispense. Il est important de savoir qu’un courtier doit fournir à son autorité principale un avis unique avant que l’une de ses personnes physiques dont les activités sont restreintes ou l’un de ses responsables ne se prévalent des décisions générales de dispense.

Pour terminer, il est important de noter que ces décisions générales de dispense sont en vigueur de manière permanente dans toutes les provinces et tous les territoires, à l’exception de l’Ontario, du Nouveau-Brunswick et des Territoires du Nord-Ouest, où les décisions générales de dispense arriveront à échéance le 28 juillet 2022. Nous nous attendons à ce que les décisions générales de dispense soient codifiées avant cette date pour que les normes de formation additionnelles deviennent une solution permanente.

 

 

[1] Une personne physique inscrite à titre de représentant de courtier d’un courtier inscrit et dont les activités sont restreintes au commerce des titres d’organismes de placement collectif.

[2] Voir l’avis de publication des ACVM intitulé « Modernisation de la réglementation des produits de fonds d’investissement – OPC alternatifs » (4 octobre 2018).

 

The Competition Bureau announced the 2021 transaction-size pre-merger notification threshold under the Competition Act is decreasing to C$93 million, effective February 13, 2021. Innovation, Science and Economic Development Canada also announced new, lower foreign investment review thresholds under the Investment Canada Act, effective January 1, 2021.

These thresholds are adjusted annually based on GDP formulas. As a consequence, they generally increase each year. This year’s decrease in merger review thresholds is a consequence of Canada’s economic contraction following from extensive restrictions on economic activity imposed by governments which were intended to slow the spread of COVID-19. If the economy recovers, it is likely these thresholds will increase in 2022.

Competition Act

In general terms, certain transactions that exceed prescribed thresholds under the Competition Act trigger a pre-merger notification filing requirement; such transactions cannot close until notice has been provided to the Commissioner of Competition (the “Commissioner”) and the statutory waiting period under the Competition Act has expired or has been terminated or waived by the Commissioner. Where both the “transaction-size” and “party-size” thresholds are exceeded, a transaction is considered “notifiable”.

Transaction-Size Threshold: the 2021 transaction-size threshold requires that the book value of assets in Canada of the target, (or in the case of an asset purchase, the book value of assets in Canada being acquired), or the gross revenues from sales in or from Canada generated by those assets exceeds C$93 million (down from C$96 million in 2020).

Party-Size Threshold: the party-size threshold requires that the parties to a transaction, together with their affiliates (as defined in subsection 2(2) of the Competition Act), have assets in Canada or annual gross revenues from sales in, from or into Canada, exceeding C$400 million. The party-size threshold remains unchanged from 2020.

It is important to note that regardless of whether a transaction is notifiable (i.e., the applicable thresholds discussed above are exceeded) the Commissioner can review and challenge all mergers prior to or within one year of closing.

Investment Canada Act

Under the Investment Canada Act (the “ICA”), the direct acquisition of control of a Canadian business by a non-Canadian is subject to a pre-closing review and approval process (an “ICA Review”) where a specified threshold is exceeded. The following thresholds for ICA Reviews have increased, effective January 1, 2021:

  • For a direct acquisition of control of a Canadian (non-cultural) business involving either a purchaser or a controlling vendor from Australia, Brunei, Chile, Colombia, the European Union (not including the United Kingdom), Honduras, Japan, Malaysia, Mexico, New Zealand, Panama, Peru, Singapore, South Korea, the United States or Vietnam, the threshold has decreased from C$1.613 billion to C$1.565 billion in enterprise value, provided that the purchaser is not a foreign state-owned enterprise.
  • For a direct acquisition of control of a Canadian (non-cultural) business involving either a purchaser or a controlling vendor that qualifies as a World Trade Organization (WTO) memberinvestor (“WTO Investor”) from a country not listed above, the threshold has increased from C$1.075 billion to C$1.043 billion in enterprise value, provided that the purchaser is not a foreign state-owned enterprise.
  • For a direct acquisition of control of a Canadian (non-cultural) business involving a purchaser that is a foreign state-owned enterprise controlled by a WTO member state, the threshold has increased from C$428 million to C$415 million in asset book value.

If the applicable threshold for a pre-merger review under the ICA is not met or exceeded, the acquisition of control of any Canadian business by a non-Canadian entity is subject to a relatively straightforward notification. In most cases, indirect acquisitions of non-cultural businesses involving WTO Investors, including state-owned enterprises, are not reviewable but are subject to a notification that may be filed before or within 30 days of closing.

All transactions have the potential to be reviewed under the national security review provisions of the ICA.

 

On December 22, 2020, the U.S. Securities and Exchange Commission (“SEC”) filed an action against Ripple Labs Inc. (“Ripple”), Christian Larsen, the company’s co-founder, executive chairman of its board, and former CEO; and Bradley Garlinghouse, the company’s current CEO (together, the “Defendants”) for conducting an unregistered securities offering with a total value of US$1.38 billion.

The Defendants have sold over 14.6 billion units of Ripple’s digital asset known as “XRP” to investors in the U.S. and worldwide for cash or other considerations since the beginning of 2013.

The SEC has taken the position that XRP are “investment contracts” and therefore securities under the Securities Act of 1933. Because the Defendants did not view XRP to be a security, they did not seek to register XRP with the SEC and accordingly failed to meet the SEC’s requirements for securities offerings. Similar to the previous enforcement actions against Kik Interactive Inc., the SEC is seeking a permanent injunction, disgorgement of ill-gotten gains, and civil penalties against the Defendants.

This case holds implications for participants throughout the entire crypto asset industry. Issuers of digital assets are faced with yet another conservative interpretation of the Howey Test, a 75-year old test believed by many to be ill-suited for crypto assets. Crypto exchanges and brokerages are left in limbo, uncertain whether to continue supporting a popular and well-performing asset for fear of attracting regulatory scrutiny themselves.  

Background

Ripple was founded in 2012. It developed and manages the XRP ledger, an underlying peer-to-peer database on which the XRP tokens operate. As a digital asset, XRP is different from Bitcoin or Ethereum in that the latter two are minted through an ongoing process called mining. The supply of XRP, on the other hand, was fixed in advance at 100 billion XRP in 2012, 80 billion of which was to be held in reserve for scheduled allotments, and the remaining 20 billion XRP is held by individuals, including the two executives. Since then, Ripple has gradually released XRP pursuant to the alleged unregistered described above.

The SEC alleges that Ripple began its efforts of increasing speculative demand and trading volume for XRP in 2013 and pursued those efforts through multiple avenues: 1) Ripple conducted a “Market Sale” through intermediaries who sold XRP to public investors; 2) Ripple offered and sold XRP to at least 26 institutional investors through its “Institutional Sale”; 3) Ripple distributed and transferred XRP to third parties as compensation, service fee, commission and incentives with no restrictions on the resale of XRP; and 4) Ripple provided incentives in XRP to at least 10 digital asset trading platforms for listing XRP and meeting certain trading volume metrics. According to the SEC, prior to the distribution, Ripple was fully aware that XRP could be considered an “investment contract” (thus a security) and was warned by its lawyers regarding the risk should the SEC made such a finding.

In 2018, Ripple developed a use case for XRP – the “On-Demand Liquidity” (ODL) product. The ODL network enables money transmitting businesses to make cross-border payments through XRP as an intermediary between two local fiat currencies. Ripple issued 324 million XRP to entities associated with ODL.

XRP, sold as a “security”, for “use”, or as “currency”? 

The SEC claims XRP is a security because money was invested in a common enterprise with a reasonable expectation of profit to be derived from the entrepreneurial or managerial effort of others (this analysis is commonly referred to as the “Howey Test”, after the 1946 US Supreme Court case SEC v. W.J. Howey Co.). In its analysis, the SEC highlighted the following aspects of the offering that led to the conclusion:

  • Ripple distributed XRP for cash or other considerations worth over 1.38 billion USD.
  • Purchasers of XRP made an investment into a common enterprise because the gain and loss of XRP were tied to Ripple’s success and failure in driving the demand and price of XRP. Ripple, as an entity, not only manages the public market of XRP, it also shares a common interest with the investors as it holds a significant amount of XRP and uses proceeds from XRP sale to fund its operation.
  • The Defendants promised to undertake significant efforts to develop, monitor, and maintain a public market and a secondary market for XRP with a goal to increase trading volume and resale opportunities. The Defendants made repeated public statements highlighting its business development effort that will drive demand, adoption and liquidity of XRP.
  • Ripple held itself out as the primary source of information regarding XRP. These efforts led investors to reasonably expect that Ripple’s entrepreneurial and managerial effort would drive the success or failure of Ripple’s XRP Project.

After concluding that XRP is an investment contract under the Howey Test, the SEC further argued XRP is not sold for its utility function within the ODL network. According to the SEC, ODL was not commercially available until 2018, and even after its launch, usages of XRP by money transmitters were heavily incentivized by Ripple. XRP was sold and traded in an amount that “far exceeds any potential use of XRP as a medium to transfer value”. Furthermore, the SEC denied the possibility that XRP as “currency” because “using XRP as a ‘bridge’ between two real fiat currencies does not bestow legal tender status on XRP”.

The SEC also alleged that Ripple manually controlled XRP’s trading activity by “selectively disclosing information” to investors. The SEC further alleges that Ripple manipulated the price and liquidity of XRP to maximize the amount of money Ripple could raise.

Implications and Impact

This lawsuit marks another high-profile case in the SEC’s continued enforcement activities against unregistered offerings of crypto tokens. XRP is among the top five most traded cryptocurrency with a market cap of $12.1 billion.[1]. Different from other digital tokens, XRP is held by a large number of institutional investors and money transmitters like banks. According to Ripple’s CEO Brad Garlinghouse, who is also a defendant to the complaint, Ripple will fight back and “prove their case in the court.”[2]. Garlinghouse argued the legal action against the XRP is “an assault on crypto at large” and will have a “snowball effect” on the industry as a whole.[3].

Crypto-asset exchange platforms like CoinDesk have delisted XRP pending the result of this litigation. Given the regulatory uncertainty, Ripple is also considering moving its headquarters outside the US to a country that does not consider XRP as a security.

Industry participants who hold XRP or have business dealing in XRP should proceed with caution and re-evaluate the potential implications of the SEC succeeding with this lawsuit. Industry participants who seek to deal exclusively in assets that are not securities might find themselves subject to securities regulatory requirements in the event the lawsuit is determined in favour of the SEC.

We will continue to monitor the development of this case and encourage issuers and stakeholders to consult advisors and securities commissions for further guidance.

 

[1] CoinMarketCap as of Jan 25: https://coinmarketcap.com/

[2] https://ripple.com/insights/the-secs-attack-on-crypto-in-the-united-states/

[3] ibid.