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:
- 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.
- 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.
- 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.
- 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.