Capital Markets

Brendan Reay, Ernest ​McNee, David Valentine and Gord McKenna


  • changes to clarify and streamline prospectus rules and codify certain previously-granted prospectus relief
  • changes to personal information forms of directors and officers and a requirement that non-Canadian directors attorn to Canadian jurisdiction
  • additional disclosure regarding use of proceeds of best efforts offering
  • additional disclosure requirements for investment funds
  • the changes are largely the same as amendments proposed in July 2011
  • the amendments will be effective on May 14, 2013

The Canadian Securities Administrators (CSA) have approved final amendments to the prospectus requirements under Canadian securities laws, as well as certain consequential amendments to other rules. The amendments result from proposed amendments that were published for comment in July 2011 (the July 2011 Proposals), and are very similar to those proposals – see our July 2011 Blakes Bulletin: CSA Publishes Proposed Amendments to Prospectus Requirements.

The amendments are intended to clarify certain provisions of the current prospectus rules, address gaps in the current rules, modify certain requirements to enhance their effectiveness, remove or streamline certain requirements that are burdensome and of limited utility for securityholders, and codify certain types of prospectus relief that have been granted by the CSA in the past. The most significant changes remain those relating to the provision of personal information forms (PIFs) by officers and directors and a new requirement that all non-Canadian directors of an issuer filing a prospectus attorn to Canadian jurisdiction and appoint a Canadian agent for service in connection with the prospectus filing. As a result of comments received, the CSA have decided not to proceed at this time with a requirement that had been proposed for non-Canadian experts (such as lawyers, auditors and geologists) to also attorn to Canadian jurisdiction and appoint a Canadian agent for service in connection with a prospectus filing.

This bulletin summarizes the significant amendments.

Amendments Generally Applicable to Issuers
Best Efforts Offerings With No Minimum Offering Amount. The amendments will require additional disclosure in a prospectus about the use of proceeds raised in an offering where it is a best-efforts offering, completion is not subject to the issuer raising a minimum amount and the issuer faces significant short-term non-discretionary expenditures or significant short-term capital or contractual commitments, and may not have other readily accessible resources to satisfy those expenditures or commitments.

In such circumstances, the prospectus will be required to disclose the use of proceeds with reference to various potential thresholds of proceeds raised. The prospectus will also have to disclose the impact of raising each threshold amount on the issuer's liquidity, operations, capital resources and solvency. Examples of the type of disclosure that may be required are contained in amendments to the Companion Policy to National Instrument 41-101 General Prospectus Requirements (NI 41-101).

In addition, issuers will be required to disclose on the cover page of the prospectus that they may complete the offering even if only a small proportion of the offering amount set out in the prospectus is raised.

Amendments to the Companion Policy to NI 41-101 state the CSA's position that a regulator may require an issuer to specify a minimum offering amount in a prospectus where the regulator has concerns that a minimum amount of proceeds must be raised in order for the issuer to achieve its stated objectives or about an issuer's ability to continue as a going concern.

Personal Information Form Reforms. The amendments will require issuers to deliver a PIF for each director and executive officer, and each promoter of the issuer and each director and executive officer of a promoter that is not an individual, at the time a preliminary prospectus is filed (subject to a limited exemption, described below, where PIFs have been delivered within the preceding three years). Individuals will no longer be able to satisfy PIF delivery requirements by relying on PIFs that are more than three years old, and will have to complete new PIFs at least every three years.

The amendments provide that an issuer will not be required to deliver a PIF for an individual if the issuer, or another issuer (or the fund manager or another investment fund manager, in the case of an investment fund) has delivered a PIF of that individual to the regulator within the previous three years, provided that (1) the issuer confirms that the responses to certain key questions in the PIF have not changed, and (2) if the PIF was delivered by another issuer, the issuer delivers a copy of it or "alternative information that is satisfactory to the regulator". Amendments to the Companion Policies to the prospectus rules indicate that satisfactory alternative information, for a PIF delivered by another issuer, will generally be the SEDAR project number for the related prospectus filing and the name of the other issuer. This exemption requires that issuers obtain confirmation of the specified responses in previously delivered PIFs, or any changes, from the relevant individuals every time they file a prospectus.

The form of PIF has also changed and the new form will be required after May 14, 2013. The amendments contain transition provisions that will allow PIFs that have been filed before May 14, 2013 in the current form to be referenced for the next three years.

Contractual Rights of Rescission. Canadian securities laws provide statutory remedies to investors where a prospectus is found to have contained a misrepresentation. If an investor wishes to exercise a statutory right to rescind the purchase of a security under a prospectus, typically the investor must commence an action for rescission of the purchase within 180 days of the purchase.

As proposed in the July 2011 Proposals, the CSA have amended the Companion Policy to NI 41-101 to clarify that, in certain circumstances, where convertible securities are offered under a prospectus, they will expect issuers to provide purchasers with a contractual right to receive return of the purchase price for the convertible security where there is a misrepresentation in the prospectus, and the conversion, exchange or exercise of the original security for an underlying security occurred shortly after (generally within 180 days) the purchase of the original security under the prospectus. The CSA are concerned that, in the absence of such a contractual right, a conversion, exchange or exercise of a security issued under a prospectus, within the period when the statutory rescission remedy could be available, will deprive the investor of the rescission rights it would otherwise have since the investor will no longer hold the original purchased security.

The amendments indicate that the CSA would not normally have this concern for purchase warrants that are issued under a prospectus as part of a "unit" together with a common share. In most cases, the CSA would view such warrants as incidental "sweeteners", with the true investment decision being made in relation to the common share component of the unit.

Exemption from Incorporation by Reference of Opinions in Proxy Circulars. As proposed in the July 2011 Proposals, the amendments provide an exemption to allow an issuer to exclude from a short form prospectus, reports, valuations, statements or opinions of experts, other than audit reports, that would otherwise be incorporated by reference because they are included in a management information circular for a special meeting, if they were prepared for a specific transaction that is unrelated to the prospectus financing and has been completed or abandoned. Often, expert reports or opinions in an information circular, such as a fairness opinion or tax opinion, are of limited use to prospective investors in a subsequent financing. Currently, these reports and opinions are required to be incorporated by reference in a prospectus, although the CSA have often granted exemptions permitting their exclusion. This amendment codifies this type of exemption in the short form prospectus rules.

Directors' and Others' Submission to Jurisdiction and Agent for Service. Under Canadian prospectus rules, all individuals who are directors of an issuer at the time the issuer files a prospectus are liable for misrepresentations contained in the prospectus. Under the current rules, non-Canadian issuers and selling securityholders, and others who sign a certificate in a prospectus, must file a submission to the jurisdiction of Canadian courts and tribunals and appoint an agent for service of process in Canada, but not all non-Canadian directors of an issuer must do so. The amendments will require all non-Canadian directors of an issuer to submit to Canadian jurisdiction and appoint an agent for service in Canada by filing with the regulator a non-issuer's submission to jurisdiction and appointment of an agent for service whenever the issuer files a prospectus.

In the July 2011 Proposals, the CSA had asked for comment about whether to further extend the requirement to file a submission and appointment form to all foreign experts (such as "qualified persons" or auditors) who have consented to the disclosure in a prospectus of information from a report, opinion or statement made by them. This proposal received the most comment, with 27 of 28 commenters expressing opposition to it. The CSA have decided not to impose such a requirement at this time.

Primary Business Oil and Gas Exemption for Operating Statements. As proposed in the July 2011 Proposals, the amendments extend the exemption available to oil and gas issuers carrying out acquisitions that would be considered acquisitions of a primary business or predecessor entity to rely on operating statements (in lieu of financial statements) when providing financial disclosure about the acquisition. In addition, the amendments exempt an oil and gas issuer from having to provide an audited operating statement for the third year preceding the date of the prospectus filing if a recent independent reserves evaluation (in specified form) has been prepared (and included in the prospectus) with an effective date within six months of the date of the preliminary prospectus.

Notice of Intention to File a Short Form Prospectus – Exemption for Certain Issuers. The amendments to the short form prospectus rules, as proposed in the July 2011 Proposals, will exempt certain successor issuers and issuers proposing to issue debt securities or preferred shares guaranteed by a reporting issuer parent (credit support issuers) from having to wait 10 business days after filing a notice of intention to file a short form prospectus until being able to file their preliminary prospectus. The successor issuer or credit support issuer will still have to file a notice of intention prior to or concurrently with its preliminary short form prospectus, and the predecessor issuer or credit supporter (as applicable) must have previously filed a notice of intention to file a short form prospectus or been deemed to have done so. This refinement of the rule will simplify access to the short form prospectus regime for these types of issuers.

Amendments Applicable to Investment Funds
The amendments include a number of amendments to the prospectus disclosure requirements applicable to investment funds, largely consistent with the July 2011 Proposals, including the following.

Leverage Disclosure for Investment Funds. An investment fund will be required to include in its prospectus disclosure concerning the use of leverage used as an investment strategy by the fund. A fund will be required to disclose:

  • the maximum amount of leverage it may use as a ratio of its maximum total assets divided by its net asset value, any restrictions on the leverage and whether the fund will borrow a minimum amount, if the leverage is created through borrowing or the issuance of preferred securities; and
  • the maximum amount of leverage it may use as a multiple of net assets, any restrictions on the leverage and whether the fund will use a minimum amount of leverage, and explain how the investment fund defines the term "leverage" and the significance of the maximum and minimum amounts of leverage to the fund; this disclosure is required for funds that create leverage through the use of specified derivatives (i.e., options, forwards and swaps) or similar instruments.

This amendment codifies disclosure that the CSA have been requiring for some time.

Trading Expense Ratio Disclosure. The amendments introduce a new requirement that investment funds disclose their "trading expense ratio" for the five years for which annual return and management expense ratio is currently required to be provided. Trading expense ratio is described as the total trading commissions and portfolio transaction costs of the investment fund as an annualized percentage of daily average net asset value.

Organization and Management Details of the Investment Fund. The amendments implement previously proposed requirements for investment funds to include more detailed information concerning certain key persons involved in the management of the fund, including requirements for greater detail as to previous bankruptcies or cease trade orders affecting any issuer with which directors or executive officers of an investment fund or its investment fund manager held a director or executive officer position, and enhanced disclosure of ownership interests in the fund and its manager for directors and executive officers of the fund and its manager and members of the fund's independent review committee.

Principal Distributor for Investment Funds. Principal distributors of investment funds will be required to sign a certificate for an investment fund in the same form as an underwriter, stating that the prospectus contains full, true and plain disclosure of all material facts "to the best of its knowledge, information and belief". This is a change from the July 2011 Proposals, which had proposed requiring principal distributors to sign a certificate in the same form as a fund manager, without the qualification "to the best of its knowledge, information and belief".

For more information, please contact Brendan Reay at 416-863-5273 or brendan.reay@blakes.com, David Valentine at 416-863-2933 or david.valentine@blakes.com, Gord McKenna at 416-863-4017 or gord.mckenna@blakes.com or any member of our Capital Markets Group.

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Brendan Reay, Ern​est McNee, David Valentine and Gord McKenna

Tags: Capital Markets

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