Rule MI 51-105 in Canada. These articles examine the effect of Rule MI 51-105 on OTC securities. It's dull reading, I grant you, but it does show how Canadian regulators have been trying hard in the last several years to protect Canadian investors from getting burned by US OTC companies which, in far more cases than not, are controlled by shysters. There's an e-mail address there of an expert specializing in cross border US/Canadian securities law.
Canadian OTC Shell Companies:
How They Differ From a U.S. OTC Shell
By: Alixe Cormick, July 20, 2012
At one time there was very little difference between a Canadian OTC shell company and a U.S. OTC shell company. Potential shell purchasers were indifferent as long as the company had a symbol, was cleared for trading by DTC and the sellers were able to deliver the number of shares they were looking to acquire. It goes without saying the shell also had to be “clean” of any issues. This changed in September of 2008 when the BC Securities Commission adopted BC Instrument 51-509 Issuers Quoted in The U.S. Over-the-Counter Market (“BCI 51-509”). BCI 51-509 imposed continuous disclosure obligations and new fees on issuers who were quoted on the OTC market in the U.S. that had a British Columbia connection as defined by the instrument. It also removed a number of the exemptions that the BC Securities Commission believed OTC issuers were using in an abusive fashion. The goal was to make British Columbia a less desirable place to do business by shell makers and pump and dump promoters. Overall the British Columbia Securities Commission believes the instrument has had the desired effect. Other regulators in Canada during the four year period since BCI 51-509 was adopted have noticed a significant uptick in the number of problem OTC issuers in their own jurisdictions. As of July 31, 2012, a new OTC rule is became effective in every province and territory in Canada, except for Ontario, called Multilateral Instrument 51-105 Issuers Quoted in The U.S. Over- the- Counter Market (the “OTC Rule” or “MI 51-105”).
The OTC Rule effects Canadian OTC shell companies quoted on the OTC Bulletin board, OTC Market (Pink Sheets), and grey market in four distinct ways. Firstly, it limits the way a deal may be structured to acquire control of the shell. Secondly, it limits the method securityholders may use to sell their securities. Thirdly, it adds additional regulatory disclosure and liability to the shell company and all its insiders. And, fourthly, it limits the ability of non-Canadian resident acquirers of a shell from quickly eliminating the shell’s status as a Canadian OTC reporting issuer.
If you are thinking of acquiring a Canadian OTC shell company here is what you need to know.
1. Deal Structure Limitations
BCI 51-509 and MI 51-105 block the following structures to acquire control of an OTC Reporting Issuer in Canada:
Non- Reporting Issuer Exemption. You cannot rely on the takeover bid exemption that allows you to acquire stock of a private issuer in a private transaction in Canada if there are less than 50 securityholders;
Private Agreement Exemption. You cannot rely on the takeover bid exemption that allows you to acquire stock of an issuer in a private transaction in Canada if there are less than 5 securityholders involved until two years have passed from the date a ticker symbol was original issued to the issuer;
Accredited Investor Resale. Securityholders cannot rely on the accredited investor exemption to sell their securities.
Unlisted Reporting Issuer Exemption. Securityholders cannot rely on the exemption that allows a control person to sell their securities to an employee, executive officer, director or consultant of the issuer.
MI 51-105 allows only the following structures:
Takeover Bid. Transactions may be structured as a takeover bid or issuer bid in a jurisdiction in Canada;
Amalgamation, Merger, Reorganization, or Arrangement. Transactions may be structured as an amalgamation, merger, reorganization, or arrangement that is under a statutory procedure or court order; or
Registered Broker Sales. Sales are allowed by individual securityholders through a registered broker subject to certain volume, price and other restrictions similar to SEC Rule 144. (This is unsuitable except for acquiring a small individual block up to 10%.)
The most common deal structure post BCI 51-509 is one where new shares are issued out to the new control group for their asset/business and the pre-existing founders or control block shares are then cancelled. It is likely this will continue to be the deal structure used in other parts of Canada once MI 51-105 is in effect.
2. Resale Restrictions on All Securityholders
BCI 51-509 and MI 51-105 limit how securityholders of OTC reporting issuers may sell their securities. Some of these limitations were mentioned above. Others limitations include:
Legends. Seed stock and securities issued after an OTC symbol has been assigned must carry a specific OTC legend:
Seed Stock OTC legend:
“Unless permitted under section 11 of Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets, the holder of this security must not trade the security in or from a jurisdiction of Canada unless:
(a) the security holder trades the security through an investment dealer registered in a jurisdiction of Canada from an account at that dealer in the name of that security holder, and
(b) the dealer executes the trade through any of the over-the-counter markets in the United States of America.”
Private placement OTC legend:
“The holder of this security must not trade the security in or from a jurisdiction of Canada unless the conditions in section 13 of Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets are met.”
Seed Stock Resale Rule. Seed stock investors may only sell their securities from an account in their own name, through a registered broker in Canada into the OTC market once symbol issued on the same terms as issuers who received their securities in a private placement after an OTC symbol has been assigned.
Private Placement Resale Rule. Private placement stock acquired after an OTC symbol has been assigned may be sold only if:
a four month hold period has passed (6 months for insiders);
no more than 5% outstanding securities over 12 months;
the trade is made through a registered broker in Canada who executes the trade through an OTC market in the U.S.;
no extraordinary commission is paid;
no unusual effort to prepare the market is undertaken;
the required OTC legend is on the securities to be sold; and
if an insider, he or she believes the issuer is not in default.
3. OTC Reporting Issuer Continuous Disclosure Requirements
OTC reporting issuers are subject to the same disclosure obligations as venture issuers with one additional requirement; they are required to file annual information forms. For OTC issuers who are already filing with the U.S. Securities and Exchange Commission this is not as problematic as it may first seem as many of the SEC forms can be filed in Canada to meet the Canadian regulatory filing requirements. In addition they must file:
Canadian certificates with their annual and interim filings;
pay annual filing fees to SEDAR and to the securities regulators in each jurisdiction they are deemed an OTC reporting issuer;
file an advance notice of promotional activities one day before these activities are to begin or within five days after the issuer became an OTC reporting issuer if the promotional activities were already underway;
a business acquisition report when acquiring significant assets or business; and
insider reports on SEDI if they do not otherwise file insider reports with the U.S. Securities and Exchange Commission;
For non-SEC reporting OTC issuers, becoming an OTC reporting issuer in Canada is a heavy burden. They must hire a CPAB registered audit firm, engage a lawyer to assist with setting up the initial filing documents, engage or learn how to file on SEDAR and SEDI and in some cases obtain an oil & gas report or mining technical report for the first time depending on their industry.
4. Ceasing to be an OTC Reporting Issuer in Canada
Being an OTC reporting issuer in Canada can linger for some time after the close of an acquisition or reverse merger transaction. In order to cease to be an OTC reporting issuer in Canada, one year must have passed since the:
business of the issuer was directed or administered from Canada;
last date that promotional activities were carried on from or into Canada;
issuer received its first symbol for OTC trading from FINRA; and
the issuer must file the required notice form;* or,
the issuer must have become listed on a recognized exchange and filed the required form.*
* In Quebec issuer’s must apply to have status formally revoked and cannot revoke their OTC reporting issuer status by simply filing a form.
Closing Comments
Canadian OTC shell companies in Ontario are not subject to any of these requirements unless they also have a connection to another jurisdiction in Canada that makes them into an OTC reporting issuer in that other Canadian province or territory.
Obviously, a purchaser outside of Canada is acquiring a shell company with a few more bells and whistles and limitations on it if that shell company is an OTC reporting issuer in Canada.
If you want to avoid any Canadian connections with your shell make sure you check out any U.S. or non-Canadian shell company you identify for any Canadian connections (other than Ontario) that would make that shell a ticking time bomb for Canadian regulators to come after it and you for failing to file as an OTC reporting issuer. Any OTC issuer, regardless of where it was incorporated, will be deemed an OTC reporting issuer in Canada if any of the following are true:
The OTC issuer’s business is directed or administered in Canada; or
“Promotional activities” in or from Canada, are carried out to promote the OTC issuer’s securities; or
Securities of the OTC issuer were on or before the ticker symbol date distributed to a person resident in Canada (it only takes one Canadian resident investor).
A business is considered to be directed or administered in Canada if:
its head office, or another office where executive functions (president, vice president, secretary, treasurer or GM) take place, is located in Canada;
some or all of its directors are located in Canada; or
any director, officer, consultant or other person who carries out executive functions for the OTC Issuer does so from an office in Canada, or is resident in Canada.
Business is not considered to be conducted in Canada solely because:
an asset, such as a mineral property or distribution or warehouse facility is located in
Canada; or
sales personnel, or an expert, none of whom performs executive functions for the issuer are located in Canada.
Promotional activities are broadly defined and include:
hiring an individual or firm to conduct promotional activities from Canada;
conducing promotional activities into Canada; or
by distributing an investment newsletter or other publication; providing information to potential investors who request information, or to potential private placement investors; or conducting any other activities that promotes the purchase or sale of securities.
If you are looking to acquire an OTC shell company and are resident in Canada, be aware that you will trigger the OTC reporting issuer requirements of MI 51-105 as soon as you acquire control of an OTC shell company, regardless of where it currently resides, by the fact you are located in Canada.
U.S. and Canadian shell purchasers should also be aware that being an “OTC reporting issuer” is not the same as being a “reporting issuer” in Canada. You are not automatically eligible to list on the TSX, TSX Venture Exchange or CNSX in Canada as an OTC reporting issuer. In almost all instances you are required to file and clear a prospectus with at least one securities regulator in Canada before being allowed to list on a recognized exchange in Canada.
Multilateral Instrument 51-105: How Private Placements Can Trigger Public Company Status in Canada
The Canadian Way – Your Guide to Canada’s Securities Laws
Volume 1, Number 7 – October 7, 2013
By Rob Lando
Multilateral Instrument 51-105 (MI 51-105) was adopted in 2012 by most of the provinces in Canada. It can cause an issuer that makes private placements into Canada to become subject to ongoing Canadian public company reporting obligations. In other words, the consequences of making a Canadian private placement can potentially be the same as if the issuer had completed an initial public offering in Canada by filing a prospectus with the Canadian securities regulators. Ontario was the only province that did not adopt MI 51-105, and Québec has created some very generous exemptions; however, the need for caution about private placements into other provinces remains.
What Problem Was MI 51-105 Supposed to Solve?
The Canadian securities regulators wanted to protect Canadians from investing in securities that trade publicly in U.S. over-the-counter (OTC) trading markets without being subject to the regulatory oversight of a Canadian or U.S. stock exchange. To close this gap in oversight, MI 51-105 will in certain circumstances deem the issuer to be a Canadian public company so that investors will have the benefit of ongoing Canadian public company disclosure documents.
When Does MI 51-105 Apply?
MI 51-105 applies only to an issuer that is an OTC issuer, meaning that it has a class of OTC-quoted securities, but does not have any class of securities listed on a Canadian or U.S. stock exchange. OTC-quoted securities include any class of securities that has been assigned a ticker symbol for OTC trading in the United States, including on the OTC Bulletin Board (OTC BB), the pink sheets or grey market trading.
The Three Triggers
Three triggers can result in an OTC issuer becoming a reporting issuer in Canada under MI 51‑105. The first trigger applies if the OTC issuer’s business is directed or administered in or from a province that has adopted MI 51‑105. The second trigger applies if an OTC issuer carries on any promotional activities in or from a province that has adopted MI 51‑105. Promotional activities include any activities or communications by or on behalf of an issuer that promote the purchase or sale of its securities. The third trigger is potentially the most troubling because it can apply with retroactive effect. Under this trigger, an issuer can become a reporting issuer in some circumstances if it distributes securities in a province that has adopted MI 51‑105 and then subsequently the same class of securities is assigned a ticker symbol for OTC trading in the United States. However, the third trigger will not apply if the issuer already had a ticker symbol for any class of its securities, on any stock exchange or market anywhere in the world, before the Canadian private placement took place.
Ontario and Québec
MI 51-105 was not adopted in Ontario, so none of the three triggers can apply to actions taking place only in Ontario. Québec has adopted a very generous exemption order, which effectively eliminates any concern about MI 51‑105 applying so long as any securities distributed in Québec are distributed only to purchasers who qualify as permitted clients under Canadian securities laws, and the distribution is made by dealers who qualify as international dealers or are registered in Canada as securities dealers.
Exemptions in Other Provinces
Other provinces have adopted less generous exemption orders than the one adopted in Québec. In Alberta, British Columbia, Manitoba and several other provinces, an exemption will be available if the issuer has a “primary listing” (that is, its first-ever listing) of securities on one of the stock exchanges named in the exemption order. Those provinces have also adopted an exemption for non-convertible debt securities.
Ongoing Implications
When MI 51-105 was first adopted, dealers were very concerned about potentially subjecting their issuer clients to the risk of becoming subject to Canadian public company reporting obligations. To address that risk, many dealers adopted very conservative internal restrictions on Canadian private placement sales, often by limiting Canadian sales only to Ontario and Québec more often than actually necessary. However, despite the continuing need to proceed with caution, in many cases an offering can be extended to other provinces because it will not create any risk of tripping one of the three triggers – or, even if it does, it can be sheltered by one of the available exemptions.
Canada and the United States have a lot in common, including the general principles behind their securities laws. But there are some differences you might find surprising. This newsletter will provide answers to some of the most commonly asked questions about Canada’s securities laws. While we hope you find it interesting, we also hope you understand that it is intended only to provide general information and should not be considered legal advice.
Rob Lando is a leading expert on Canadian securities laws and their application in Canada/U.S. cross-border corporate finance and M&A transactions. Rob is a partner in the New York office of Osler, Hoskin & Harcourt LLP and can be reached at (212) 991.2504 or by email at rlando @ osler.com.
Osler, Hoskin & Harcourt LLP is a leading business law firm practising nationally and internationally from offices across Canada and in New York, and is consistently ranked as one of Canada’s top firms.
Osler, Hoskin & Harcourt LLP
620 8th Avenue – 36th Floor
New York, N.Y., 10018
Canadian OTC Shell Companies:
How They Differ From a U.S. OTC Shell
By: Alixe Cormick, July 20, 2012
At one time there was very little difference between a Canadian OTC shell company and a U.S. OTC shell company. Potential shell purchasers were indifferent as long as the company had a symbol, was cleared for trading by DTC and the sellers were able to deliver the number of shares they were looking to acquire. It goes without saying the shell also had to be “clean” of any issues. This changed in September of 2008 when the BC Securities Commission adopted BC Instrument 51-509 Issuers Quoted in The U.S. Over-the-Counter Market (“BCI 51-509”). BCI 51-509 imposed continuous disclosure obligations and new fees on issuers who were quoted on the OTC market in the U.S. that had a British Columbia connection as defined by the instrument. It also removed a number of the exemptions that the BC Securities Commission believed OTC issuers were using in an abusive fashion. The goal was to make British Columbia a less desirable place to do business by shell makers and pump and dump promoters. Overall the British Columbia Securities Commission believes the instrument has had the desired effect. Other regulators in Canada during the four year period since BCI 51-509 was adopted have noticed a significant uptick in the number of problem OTC issuers in their own jurisdictions. As of July 31, 2012, a new OTC rule is became effective in every province and territory in Canada, except for Ontario, called Multilateral Instrument 51-105 Issuers Quoted in The U.S. Over- the- Counter Market (the “OTC Rule” or “MI 51-105”).
The OTC Rule effects Canadian OTC shell companies quoted on the OTC Bulletin board, OTC Market (Pink Sheets), and grey market in four distinct ways. Firstly, it limits the way a deal may be structured to acquire control of the shell. Secondly, it limits the method securityholders may use to sell their securities. Thirdly, it adds additional regulatory disclosure and liability to the shell company and all its insiders. And, fourthly, it limits the ability of non-Canadian resident acquirers of a shell from quickly eliminating the shell’s status as a Canadian OTC reporting issuer.
If you are thinking of acquiring a Canadian OTC shell company here is what you need to know.
1. Deal Structure Limitations
BCI 51-509 and MI 51-105 block the following structures to acquire control of an OTC Reporting Issuer in Canada:
Non- Reporting Issuer Exemption. You cannot rely on the takeover bid exemption that allows you to acquire stock of a private issuer in a private transaction in Canada if there are less than 50 securityholders;
Private Agreement Exemption. You cannot rely on the takeover bid exemption that allows you to acquire stock of an issuer in a private transaction in Canada if there are less than 5 securityholders involved until two years have passed from the date a ticker symbol was original issued to the issuer;
Accredited Investor Resale. Securityholders cannot rely on the accredited investor exemption to sell their securities.
Unlisted Reporting Issuer Exemption. Securityholders cannot rely on the exemption that allows a control person to sell their securities to an employee, executive officer, director or consultant of the issuer.
MI 51-105 allows only the following structures:
Takeover Bid. Transactions may be structured as a takeover bid or issuer bid in a jurisdiction in Canada;
Amalgamation, Merger, Reorganization, or Arrangement. Transactions may be structured as an amalgamation, merger, reorganization, or arrangement that is under a statutory procedure or court order; or
Registered Broker Sales. Sales are allowed by individual securityholders through a registered broker subject to certain volume, price and other restrictions similar to SEC Rule 144. (This is unsuitable except for acquiring a small individual block up to 10%.)
The most common deal structure post BCI 51-509 is one where new shares are issued out to the new control group for their asset/business and the pre-existing founders or control block shares are then cancelled. It is likely this will continue to be the deal structure used in other parts of Canada once MI 51-105 is in effect.
2. Resale Restrictions on All Securityholders
BCI 51-509 and MI 51-105 limit how securityholders of OTC reporting issuers may sell their securities. Some of these limitations were mentioned above. Others limitations include:
Legends. Seed stock and securities issued after an OTC symbol has been assigned must carry a specific OTC legend:
Seed Stock OTC legend:
“Unless permitted under section 11 of Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets, the holder of this security must not trade the security in or from a jurisdiction of Canada unless:
(a) the security holder trades the security through an investment dealer registered in a jurisdiction of Canada from an account at that dealer in the name of that security holder, and
(b) the dealer executes the trade through any of the over-the-counter markets in the United States of America.”
Private placement OTC legend:
“The holder of this security must not trade the security in or from a jurisdiction of Canada unless the conditions in section 13 of Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets are met.”
Seed Stock Resale Rule. Seed stock investors may only sell their securities from an account in their own name, through a registered broker in Canada into the OTC market once symbol issued on the same terms as issuers who received their securities in a private placement after an OTC symbol has been assigned.
Private Placement Resale Rule. Private placement stock acquired after an OTC symbol has been assigned may be sold only if:
a four month hold period has passed (6 months for insiders);
no more than 5% outstanding securities over 12 months;
the trade is made through a registered broker in Canada who executes the trade through an OTC market in the U.S.;
no extraordinary commission is paid;
no unusual effort to prepare the market is undertaken;
the required OTC legend is on the securities to be sold; and
if an insider, he or she believes the issuer is not in default.
3. OTC Reporting Issuer Continuous Disclosure Requirements
OTC reporting issuers are subject to the same disclosure obligations as venture issuers with one additional requirement; they are required to file annual information forms. For OTC issuers who are already filing with the U.S. Securities and Exchange Commission this is not as problematic as it may first seem as many of the SEC forms can be filed in Canada to meet the Canadian regulatory filing requirements. In addition they must file:
Canadian certificates with their annual and interim filings;
pay annual filing fees to SEDAR and to the securities regulators in each jurisdiction they are deemed an OTC reporting issuer;
file an advance notice of promotional activities one day before these activities are to begin or within five days after the issuer became an OTC reporting issuer if the promotional activities were already underway;
a business acquisition report when acquiring significant assets or business; and
insider reports on SEDI if they do not otherwise file insider reports with the U.S. Securities and Exchange Commission;
For non-SEC reporting OTC issuers, becoming an OTC reporting issuer in Canada is a heavy burden. They must hire a CPAB registered audit firm, engage a lawyer to assist with setting up the initial filing documents, engage or learn how to file on SEDAR and SEDI and in some cases obtain an oil & gas report or mining technical report for the first time depending on their industry.
4. Ceasing to be an OTC Reporting Issuer in Canada
Being an OTC reporting issuer in Canada can linger for some time after the close of an acquisition or reverse merger transaction. In order to cease to be an OTC reporting issuer in Canada, one year must have passed since the:
business of the issuer was directed or administered from Canada;
last date that promotional activities were carried on from or into Canada;
issuer received its first symbol for OTC trading from FINRA; and
the issuer must file the required notice form;* or,
the issuer must have become listed on a recognized exchange and filed the required form.*
* In Quebec issuer’s must apply to have status formally revoked and cannot revoke their OTC reporting issuer status by simply filing a form.
Closing Comments
Canadian OTC shell companies in Ontario are not subject to any of these requirements unless they also have a connection to another jurisdiction in Canada that makes them into an OTC reporting issuer in that other Canadian province or territory.
Obviously, a purchaser outside of Canada is acquiring a shell company with a few more bells and whistles and limitations on it if that shell company is an OTC reporting issuer in Canada.
If you want to avoid any Canadian connections with your shell make sure you check out any U.S. or non-Canadian shell company you identify for any Canadian connections (other than Ontario) that would make that shell a ticking time bomb for Canadian regulators to come after it and you for failing to file as an OTC reporting issuer. Any OTC issuer, regardless of where it was incorporated, will be deemed an OTC reporting issuer in Canada if any of the following are true:
The OTC issuer’s business is directed or administered in Canada; or
“Promotional activities” in or from Canada, are carried out to promote the OTC issuer’s securities; or
Securities of the OTC issuer were on or before the ticker symbol date distributed to a person resident in Canada (it only takes one Canadian resident investor).
A business is considered to be directed or administered in Canada if:
its head office, or another office where executive functions (president, vice president, secretary, treasurer or GM) take place, is located in Canada;
some or all of its directors are located in Canada; or
any director, officer, consultant or other person who carries out executive functions for the OTC Issuer does so from an office in Canada, or is resident in Canada.
Business is not considered to be conducted in Canada solely because:
an asset, such as a mineral property or distribution or warehouse facility is located in
Canada; or
sales personnel, or an expert, none of whom performs executive functions for the issuer are located in Canada.
Promotional activities are broadly defined and include:
hiring an individual or firm to conduct promotional activities from Canada;
conducing promotional activities into Canada; or
by distributing an investment newsletter or other publication; providing information to potential investors who request information, or to potential private placement investors; or conducting any other activities that promotes the purchase or sale of securities.
If you are looking to acquire an OTC shell company and are resident in Canada, be aware that you will trigger the OTC reporting issuer requirements of MI 51-105 as soon as you acquire control of an OTC shell company, regardless of where it currently resides, by the fact you are located in Canada.
U.S. and Canadian shell purchasers should also be aware that being an “OTC reporting issuer” is not the same as being a “reporting issuer” in Canada. You are not automatically eligible to list on the TSX, TSX Venture Exchange or CNSX in Canada as an OTC reporting issuer. In almost all instances you are required to file and clear a prospectus with at least one securities regulator in Canada before being allowed to list on a recognized exchange in Canada.
Multilateral Instrument 51-105: How Private Placements Can Trigger Public Company Status in Canada
The Canadian Way – Your Guide to Canada’s Securities Laws
Volume 1, Number 7 – October 7, 2013
By Rob Lando
Multilateral Instrument 51-105 (MI 51-105) was adopted in 2012 by most of the provinces in Canada. It can cause an issuer that makes private placements into Canada to become subject to ongoing Canadian public company reporting obligations. In other words, the consequences of making a Canadian private placement can potentially be the same as if the issuer had completed an initial public offering in Canada by filing a prospectus with the Canadian securities regulators. Ontario was the only province that did not adopt MI 51-105, and Québec has created some very generous exemptions; however, the need for caution about private placements into other provinces remains.
What Problem Was MI 51-105 Supposed to Solve?
The Canadian securities regulators wanted to protect Canadians from investing in securities that trade publicly in U.S. over-the-counter (OTC) trading markets without being subject to the regulatory oversight of a Canadian or U.S. stock exchange. To close this gap in oversight, MI 51-105 will in certain circumstances deem the issuer to be a Canadian public company so that investors will have the benefit of ongoing Canadian public company disclosure documents.
When Does MI 51-105 Apply?
MI 51-105 applies only to an issuer that is an OTC issuer, meaning that it has a class of OTC-quoted securities, but does not have any class of securities listed on a Canadian or U.S. stock exchange. OTC-quoted securities include any class of securities that has been assigned a ticker symbol for OTC trading in the United States, including on the OTC Bulletin Board (OTC BB), the pink sheets or grey market trading.
The Three Triggers
Three triggers can result in an OTC issuer becoming a reporting issuer in Canada under MI 51‑105. The first trigger applies if the OTC issuer’s business is directed or administered in or from a province that has adopted MI 51‑105. The second trigger applies if an OTC issuer carries on any promotional activities in or from a province that has adopted MI 51‑105. Promotional activities include any activities or communications by or on behalf of an issuer that promote the purchase or sale of its securities. The third trigger is potentially the most troubling because it can apply with retroactive effect. Under this trigger, an issuer can become a reporting issuer in some circumstances if it distributes securities in a province that has adopted MI 51‑105 and then subsequently the same class of securities is assigned a ticker symbol for OTC trading in the United States. However, the third trigger will not apply if the issuer already had a ticker symbol for any class of its securities, on any stock exchange or market anywhere in the world, before the Canadian private placement took place.
Ontario and Québec
MI 51-105 was not adopted in Ontario, so none of the three triggers can apply to actions taking place only in Ontario. Québec has adopted a very generous exemption order, which effectively eliminates any concern about MI 51‑105 applying so long as any securities distributed in Québec are distributed only to purchasers who qualify as permitted clients under Canadian securities laws, and the distribution is made by dealers who qualify as international dealers or are registered in Canada as securities dealers.
Exemptions in Other Provinces
Other provinces have adopted less generous exemption orders than the one adopted in Québec. In Alberta, British Columbia, Manitoba and several other provinces, an exemption will be available if the issuer has a “primary listing” (that is, its first-ever listing) of securities on one of the stock exchanges named in the exemption order. Those provinces have also adopted an exemption for non-convertible debt securities.
Ongoing Implications
When MI 51-105 was first adopted, dealers were very concerned about potentially subjecting their issuer clients to the risk of becoming subject to Canadian public company reporting obligations. To address that risk, many dealers adopted very conservative internal restrictions on Canadian private placement sales, often by limiting Canadian sales only to Ontario and Québec more often than actually necessary. However, despite the continuing need to proceed with caution, in many cases an offering can be extended to other provinces because it will not create any risk of tripping one of the three triggers – or, even if it does, it can be sheltered by one of the available exemptions.
Canada and the United States have a lot in common, including the general principles behind their securities laws. But there are some differences you might find surprising. This newsletter will provide answers to some of the most commonly asked questions about Canada’s securities laws. While we hope you find it interesting, we also hope you understand that it is intended only to provide general information and should not be considered legal advice.
Rob Lando is a leading expert on Canadian securities laws and their application in Canada/U.S. cross-border corporate finance and M&A transactions. Rob is a partner in the New York office of Osler, Hoskin & Harcourt LLP and can be reached at (212) 991.2504 or by email at rlando @ osler.com.
Osler, Hoskin & Harcourt LLP is a leading business law firm practising nationally and internationally from offices across Canada and in New York, and is consistently ranked as one of Canada’s top firms.
Osler, Hoskin & Harcourt LLP
620 8th Avenue – 36th Floor
New York, N.Y., 10018
