On April 23, 2013, Canadian securities regulators agreed to allow certain dealers selling securities of foreign issuers to make private placement offerings to permitted clients in Canada as part of a global offering without having to add supplemental prescribed Canadian disclosure, usually called a “wrapper”. The intended effect of removing the requirement for a Canada-specific wrapper is to provide sophisticated Canadian investors with increased access to foreign offerings. The relief from Canadian wrapper requirements for certain foreign offerings becomes effective June 22, 2013, and is scheduled to expire in June 2016, by which time it is expected that the relief will be continued through rule-making.
The full text of the decision by Canadian securities regulators is available here on the Ontario Securities Commission website.
Prior to the exemption order being granted, Canadian investors have only had the opportunity to participate in private placements by foreign issuers if the issuer or underwriters prepared a Canadian wrapper in addition to their home jurisdiction offering documents. The wrapper would include: (1) disclosure regarding the status of the issuer or selling securityholder as a “connected issuer” or “related issuer” of an underwriter on the front page and in the body of the offering document; (2) a description of statutory rights of action if the offering document contains a misrepresentation; and (3) notification to investors and authorization with respect to the indirect collection of personal information of purchasers in Ontario and British Columbia.
How the Exemption Works
Eligible Foreign Offerings: The exemptive relief applies to two types of foreign offerings: (1) securities issued by a foreign issuer that is not a reporting issuer in Canada or an investment fund and has its head office or principal executive office outside of Canada; and (2) securities issued or guaranteed by the government of a foreign jurisdiction. In either case, the offering must be made primarily outside of Canada.
Permitted Sellers: The following dealers and their affiliates are authorized to sell securities in reliance on this exemption without preparing supplementary Canadian disclosure documents: Barclays Capital Inc., Citigroup Global Markets Inc., Deutsche Bank Securities Inc., HSBC Securities (USA) Inc., J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets, LLC, Scotia Capital (USA) Inc., and UBS Securities LLC. This list is expected to expand as additional dealers apply for and receive exemptive relief.
Permitted Clients: Only investors who are “permitted clients”, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, and who have delivered a consent form to each of the dealers who seeks to rely on the relief for that investor can have the exemptive relief apply to them. The form of consent is included as Schedule B to the Canadian securities regulators decision available here.
Disclosure of Underwriting Conflicts of Interest: The connected issuer/related issuer portion of the exemption requires that the offering document provided to Canadian investors must comply with U.S. law regarding disclosure of underwriting conflicts of interest as applicable to registered offerings. This will automatically be included if the offering document is a U.S. prospectus. A U.S. or other foreign private placement circular is also acceptable, provided that the disclosure of underwriting conflicts of interest meets the same standard as for a U.S. registered offering. Where securities are offered or guaranteed by a foreign government, if the issuer is a “related issuer” of a dealer (generally meaning a connection through shareholdings of at least 20%), the exemption is only available if the offering document provided to the prospective Canadian investors complies with U.S. law regarding disclosure of underwriting conflicts of interest for registered offerings of Canadian underwriting conflicts disclosure rules. In either instance, the offering does not need to be registered under U.S. law.
Application in Ontario
In Ontario, it remains necessary to provide any purchasers who are individuals with certain prescribed notifications under freedom of information and protection of privacy legislation. The exemption order does not provide any relief from this requirement. Accordingly, if an offering is made to any individuals in Ontario, it will be necessary to either continue to use a conventional wrapper or find some other way to ensure that the prescribed disclosure is provided to those individuals in Ontario.
Other Canadian Requirements that Apply
Although the wrapper exemption provides some relief for foreign issuers, they will still need to comply with other Canadian securities laws that apply to distributions of foreign securities in Canada and, in some cases, a wrapper may still be required. For example, compliance with other Canadian securities laws for foreign issuers will need to be considered in the following situations: (1) an offering in which one of the dealers selling the securities into Canada is not covered by the exemption order; (2) offerings in which the issuer is an investment fund; (3) offerings that may be made to individuals in Ontario, unless the required notifications under freedom of information and protection of privacy legislation are delivered to them in some other manner; (4) distributions of securities of an issuer that is, or may become, traded on a U.S. over-the-counter market, so as to ensure that the issuer does not become subject to public company reporting obligations in certain provinces under Multilateral Instrument 51-105; (5) sales of securities that may be subject to regulation under industry-specific requirements, such as insurance legislation or the Bank Act (Canada); (6) offerings in which the issuer or any selling securityholder is located in Canada, or the issuer is a reporting issuer in Canada; and (7) securities that may have novel tax implications for Canadian investors warranting customized tax disclosure.
If you have questions about wrappers and sale of foreign securities in Canada, contact any member of Clark Wilson LLP’s Corporate Finance & Securities Group.