Canadian Securities Administrators Adopt Rule For Over-The-Counter Issuers
June 1, 2012
Multilateral Instrument 51-105, Issuers Quoted in the U.S. Over-the-Counter Markets will come into effect on July 31, 2012. Once effective, issuers whose securities trade in over-the-counter markets in the United States may become subject to enhanced disclosure requirements and resale restrictions under Canadian securities laws.
With the effective date of the Instrument approaching, issuers who are currently listed or plan to list on an over-the-counter market in the future should consider the implications of the Instrument.
INTRODUCTION AND BACKGROUND
On May 10, 2012, the Canadian Securities Administrators (“CSA”) announced the adoption of Multilateral Instrument 51-105, Issuers Quoted in the U.S. Over-the-Counter Markets (the “Instrument”) by all Canadian securities regulators, with the exception of the Ontario Securities Commission. The Instrument will come into effect on July 31, 2012.
The CSA has stated that it is appropriate for issuers who have a significant connection with a Canadian jurisdiction to make disclosure to the same standard as Canadian reporting issuers. The Instrument, which is based on BC Instrument 51-509, Issuers Quoted in the U.S. Over-the-Counter Markets, is being introduced to meet this objective.
APPLICATION OF THE INSTRUMENT
The Instrument applies to issuers (“OTC issuer”) who have issued a class of securities that has been assigned a ticker symbol for use on an over-the-counter (“OTC”) market, including a grey market, in the United States (except for issuers concurrently listed on designated stock exchanges, including the Toronto Stock Exchange, TSX Venture Exchange, the New York Stock Exchange, the NYSE Amex and the NASDAQ Stock Market) and has a significant connection to a local Canadian jurisdiction that has adopted the Instrument. A “significant connection” will be established if one or more of the following applies:
- On or after July 31, 2012, the issuer’s business has been directed or administered in or from the jurisdiction;
- On or after July 31, 2012, promotional activities have been carried on in or from the jurisdiction. Promotional activities are defined by the Instrument as activities or communications, by or on behalf of an issuer, that promote or could reasonably be expected to promote the purchase or sale of securities of the issuer, with certain exceptions; or
- A security was distributed in the jurisdiction before the date the issuer was assigned a ticker symbol on an OTC market (which date occurs on or after July 31, 2012) and the security belongs to the class of securities that is assigned a ticker symbol for an OTC market.
An OTC issuer and its insiders will be subject to enhanced disclosure requirements and, in some cases, restrictions on trading in the issuer’s securities.
If an issuer becomes an OTC issuer pursuant to the Instrument, it is required to comply with the Instrument for at least one year. Following that year, the issuer may file a notice in order to cease the application of the Instrument, unless the issuer continues to direct or administer its business or carry on promotional activities in a Canadian jurisdiction where the Instrument is in force.
DISCLOSURE AND FILING REQUIREMENTS
An OTC issuer is required to adhere to the disclosure requirements for reporting issuers and their insiders set out in Canadian securities legislation.
Pursuant to the Instrument, OTC issuers must:
- Comply with the disclosure requirements for Canadian reporting issuers set out in National Instrument 51-102, Continuous Disclosure Obligations (“NI 51-102”) (including the preparation and filing of an Annual Information Form (“AIF”), management’s discussion and analysis (“MD&A”), filing of audited financial statements and material change reporting), the certifications required by National Instrument 52-109, Certification of Disclosure in Issuer’s Annual and Interim Filings and related disclosure requirements concerning audit committees and corporate governance; and
- File public disclosure documents electronically using the System for Electronic Document Analysis and Retrieval (“SEDAR”).
Generally speaking, other than the requirement to file an AIF, OTC issuers will be treated as “venture issuers” (as defined in NI 51-102) for the purposes of disclosure requirements.
OTC issuers that file disclosure with the U.S. Securities and Exchange Commission (“SEC”) are able to comply with the Instrument by filing financial statements, material change reports, MD&A and AIFs using documents they file with the SEC.
ADDITIONAL FILING REQUIREMENTS
The Instrument also provides for the filing of:
- Notices in relation to the issuer’s promotional activities;
- Insider reports;
- Personal information forms (“PIFs”) for directors, officers, promoters and control persons. As PIFs are similar to those required by the Toronto Stock Exchange and the TSX Venture Exchange, the Instrument allows individuals to file PIFs formerly submitted to one of those exchanges, so long as the information in the PIF has not changed; and
- For any OTC issuer that becomes subject to the Instrument on the date that it is assigned a ticker symbol for an OTC market, the most recent registration statement filed with the SEC within five days of that date.
While OTC issuers are required to comply with enhanced disclosure requirements, mining issuers are relieved from a particularly onerous requirement under Canadian securities law: despite National Instrument 43-101, Standards of Disclosure for Mineral Projects, they are not required to file a technical report upon becoming subject to the Instrument. OTC issuers in the oil and gas sector, however, must comply with National Instrument 51-101, Standards of Disclosure for Oil and Gas Activities for financial years beginning on or after January 1, 2012.
In order to deter the transfer, for abusive purposes, to buyers of shell companies of the “public float” of such shell companies which has been created from shares sold in private placements to Canadian residents, the Instrument imposes restrictions on the sale of seed stock. In general, the Instrument:
- Provides for a legend to be placed on the certificates or ownership statements representing the seed stock;
- Requires that trades by a Canadian resident who acquired the shares before the OTC issuer obtained a ticker-symbol be made through an investment dealer registered in Canada through an OTC market; and
- Denies the use of the private agreement take-over bid exemption.
For securities that are acquired after the date of receiving a ticker symbol and in reliance on an exemption from prospectus requirements, there are resale restrictions similar to those imposed on the securities of Canadian reporting issuers. In addition, the Instrument includes specified legend requirements, additional holding periods for control persons and a limit on the number of securities that may be traded within a 12-month period.
Despite the restrictions on trades subject to the Instrument, there are specified exceptions to these restrictions, including for trades of securities made in connection with take-over or issuer bids, mergers or reorganizations, or the dissolution of the issuer.
TRANSITION TO THE INSTRUMENT
The Instrument includes limited transition provisions, which apply in all relevant jurisdictions except British Columbia, for financial disclosure by non-SEC filers and for oil and gas disclosure. For remaining OTC issuers (and in British Columbia), there is no transition period and these issuers will be subject to all requirements of the Instrument beginning on July 31, 2012. The first annual and quarterly filings under the Instrument for these OTC issuers will require reporting for periods prior to July 31, 2012.
FEES AND COSTS OF IMPLEMENTATION
OTC issuers and their insiders will be required to pay the same filing fees as other reporting issuers in Canada, which includes SEDAR filing fees and late filing penalties.
COSTS OF IMPLEMENTATION
It is not expected that compliance with the disclosure requirements in the Instrument will be costly for OTC issuers, so long as they are currently SEC filers. However, the CSA has acknowledged that OTC issuers who are not SEC filers may incur significant costs to comply with the Instrument, particularly if these issuers do not currently have audited financial statements.
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