Capital Markets in Canada: What You Need To Know in 2016January 25th, 2016
A newsletter from our lawyers specialized in securities.
As market participants begin 2016 bracing for what appears likely to be another year of challenging market conditions, the new year ushers in new rules and new efforts to revitalize Canadian capital markets. The TSX Venture Exchange (TSXV) has announced its intention to introduce changes to help support and grow its marketplace and, on the regulatory side, certain amendments to Canadian securities laws respecting capital raising and disclosure obligations will fully come into effect in 2016.
The amendments include the introduction of an offering memorandum exemption in Ontario; harmonizing changes to the existing offering memorandum exemption available in Quebec, Alberta, Saskatchewan, New Brunswick and Nova Scotia; and streamlined and simplified disclosure obligations for venture issuers.
REVITALIZATION OF THE TSXV
On December 17, 2015, the TSXV released a whitepaper entitled Revitalizing TSX Venture Exchange: Canada’s Public Venture Market, which outlines a number of proposed changes intended to reduce compliance costs and address other factors impeding the success of TSXV-listed issuers.
Some of the highlights of the proposed changes include:
• eliminating the general requirement for sponsorship;
• revising the TSXV’s shareholder approval requirements so that they will generally no longer apply to inactive companies completing an arm’s length transaction, such as a reverse take-over or change of business;
• extending the period of validity of a Personal Information Form (PIF) from 3 years to 5 years;
• expanding the availability of options to complete transaction filings online (currently only available for private placements);
• eliminating TSXV escrow requirements in favour of applying only national escrow requirements under Canadian securities laws;
• revising the Capital Pool Company (CPC) policy to make the program more flexible and attractive to companies in all industry sectors; and
• tailored TSXV policies to address the needs of non-resource companies.
The TSXV is holding a series of town hall meetings across Canada in early 2016 to encourage ongoing dialogue with market participants on the proposed changes and other ways to improve its marketplace. While the TSXV has stated its intention to implement the proposed changes as soon as possible, a number of them, particularly those relating to TSXV policies and significant changes to TSXV practices, remain subject to security commission approval.
CHANGES TO THE OFFERING MEMORANDUM EXEMPTION
On October 29, 2015, the securities regulatory authorities in Quebec, Alberta, Saskatchewan, Ontario, New Brunswick, and Nova Scotia (collectively, the “participating jurisdictions”) published a notice of amendments to the offering memorandum exemption under National Instrument 45-106 – Prospectus Exemptions. The amendments will introduce an offering memorandum prospectus exemption in Ontario and will modify the existing offering memorandum exemption available in Quebec, Alberta, Saskatchewan, New Brunswick and Nova Scotia in order to generally harmonize the existing exemption with the new Ontario exemption and strengthen investor protection measures.
The key investor protection measures introduced in the new offering memorandum exemption include the following:
• Non-reporting issuers will be required to provide investors with audited annual financial statements and an annual notice detailing how the proceeds raised under the offering memorandum exemption were used;
• All marketing materials will be required to be incorporated by reference in the offering memorandum, so that any misrepresentation in the materials will trigger the same liability as a misrepresentation contained in the offering memorandum disclosure;
• Investors relying on the offering memorandum exemption that are individuals will be subject to the following investment limits: (i) non-eligible investors may invest up to $10,000 in reliance on the exemption in any 12-month period; and (ii) eligible investors may invest up to $30,000 in reliance on the exemption in any 12-month period or up to $100,000 in any 12-month period if a registered portfolio manager, investment dealer, or exempt market dealer advises the eligible investor that an investment above $30,000 is suitable; and
• All investors will be required to sign a risk acknowledgement form.
The amendments to the offering memorandum exemption in the participating jurisdictions came into force in Ontario on January 13, 2016 and will come into force in Quebec, Alberta, New Brunswick, Nova Scotia, and Saskatchewan on April 30, 2016.
As a result of the amendments, an offering memorandum exemption will now be available in all jurisdictions of Canada. Unfortunately, however, certain differences will remain in the non-participating jurisdictions, which will result in three principal forms of the offering memorandum exemption being available in Canada: the new form of exemption in the participating jurisdictions, which has been mostly harmonized; a second form of exemption in British Columbia and Newfoundland and Labrador; and a third form of exemption in Manitoba, Prince Edward Island, Northwest Territories, Yukon, and Nunavut.
REDUCED DISCLOSURE OBLIGATIONS
The changes summarized above are in addition to the streamlined disclosure rules for venture issuers introduced last year (the “Amendments”). The Amendments are intended to reduce the regulatory burden of compliance for venture issuers and to better reflect the informational needs and expectations of venture issuer investors. Except as otherwise noted below, the Amendments came into effect on June 30, 2015. Some of the most significant changes, however, apply only to financial years beginning on or after July 1, 2015. For issuers with a December 31st year end, the disclosure filings to be completed for Q1 2016 and the upcoming proxy season will therefore be their first opportunity to take advantage of a number of the new rules.
The key changes introduced under the Amendments include the following:
• Option to use quarterly highlights in place of full interim MD&A: Venture issuers may opt to file an interim MD&A in a “quarterly highlight” format, including a short discussion of all material information about the issuer's operations, liquidity, and capital resources, including an analysis of the issuer's financial condition, and such other requirements in accordance with an amended Form 51-102F1. The option to provide quarterly highlights is available in respect of issuers’ financial years beginning on or after July 1, 2015.
• Deadline for filing executive compensation disclosure: For venture issuers that have not filed a management information circular containing the information, the filing of a statement of executive compensation is nevertheless required within 180 days after the issuer's financial year end. Non-venture issuers must file their executive compensation disclosure within 140 days after the issuer's financial year end. The new filing deadline for venture issuers applies in respect of financial years beginning on or after July 1, 2015.
• Changes to named executive officer (NEO) compensation reporting: The Amendments introduce a new Form 51-102F6V for venture issuers, which reduces the number of NEOs for which reporting is required and the length of the reporting period. Under the amendments, only the compensation of the CEO, CFO and next highest paid executive officer will be required to be disclosed by venture issuers and only for a period of two years.
• Changes to business acquisition report (BAR) disclosure requirements: Venture issuers are now only required to file a BAR if they acquire a business or group of related businesses in which their consolidated share, investment, or advances represent more than 100% of the value of the consolidated assets of the venture issuer prior to the acquisition. This represents a change to the thresholds found in the existing significant asset and investment tests, which have been increased from 40% to 100%, thereby reducing the number of instances where BARs will be required. In addition, BARs filed by venture issuers no longer need to include pro forma financial statements.
• Reduced obligations for initial public offering (IPO) prospectus disclosure: The number of years of audited financial statements that must be included in an IPO prospectus of an issuer that will become a venture issuer upon completion of the IPO was reduced from three years to two years. Additionally, certain disclosure mandated in prospectuses for public offerings by venture issuers will also be scaled back as a result of the above-noted rule changes (i.e., reduced interim MD&A and executive compensation disclosure).
Together, the changes summarized above should provide companies with greater access to capital from exempt market investors in the province of Ontario and enable venture issuers to reduce compliance-related costs and focus greater resources on the growth of their businesses. The changes represent positive developments for Canadian capital markets during a time when many venture issuers and other companies continue to face significant challenges as a result of ongoing tough market conditions.