Legal Update: Over-The-Counter Issuers With A Canadian Connection - Canadian Securities Rules That Apply
March 2, 2014
By Chris MacIntyre, at McInnes Cooper
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Issuers with securities trading on US over-the-counter (OTC) markets may be subject to the Canadian Securities Administrators’ (CSA) Multilateral Instrument 51-105 – Issuers Quoted in the U.S. Over-the-Counter Markets. Issuers currently listed – or planning to list – on an OTC market to which the Instrument applies need to consider the potential legal implications associated with the Instrument, including:
- Enhanced Disclosure. OTC issuers must make disclosure in accordance with securities laws applicable to Canadian reporting issuers.
- Resale Restrictions. OTC issuers and their security holders will be subject to certain resale restrictions on the sale of seed stock.
- Fees and Compliance Costs. OTC issuers may incur significant costs to comply with the Instrument, particularly if they do not currently have audited financial statements.
MULTILATERAL INSTRUMENT 51-105
Multilateral Instrument 51-105 has been in effect in all Canadian jurisdictions – except Ontario – since July 31, 2012.
Application. The Instrument applies to issuers that have:
- issued a class of securities assigned a ticker symbol for use on an OTC market (including a grey market) in the US, 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
- a “significant connection” to any Canadian jurisdiction other than Ontario – practically, then, any Canadian Province or Territory except Ontario.
“Significant Connection”. A “significant connection” exists between an issuer and a Canadian jurisdiction if, on or after July 31, 2012:
- its business has been directed or administered in or from the Canadian jurisdiction;
- it has carried on “promotional activities” in or from the Canadian jurisdiction. “Promotional activities” are activities or communications by or on behalf of an issuer that promote or could reasonably be expected to promote the purchase or sale of the issuer’s securities (with certain exceptions); or
- it distributed a security in the Canadian jurisdiction on or before the date it was assigned a ticker symbol on an OTC market and the security is in the class of securities assigned a ticker symbol for an OTC market.
Minimum Compliance Period. If the Instrument applies, the OTC issuer must comply with the Instrument for at least one year after:
- it stops directing or administering its business, or carrying on promotional activities, in or from a Canadian jurisdiction, and
- the date on which it was first assigned a ticker symbol for any class of its securities.
The issuer can subsequently file a notice to cease the application of the Instrument or, in Quebec, make application to the securities regulatory authority to cease reporting.
Read Multilateral Instrument 51-105.
If Multilateral Instrument 51-105 applies, so do certain disclosure and filing requirements. The CSA has stated it is appropriate for issuers with a significant connection with a Canadian jurisdiction to make disclosure to the same standard as Canadian reporting issuers under Canadian securities laws. In addition, affected OTC issuers and their insiders are subject to enhanced disclosure requirements.
Canadian Reporting Issuer Requirements. Affected OTC issuers must comply with the disclosure requirements for Canadian reporting issuers and their insiders under National Instrument 51-102 – Continuous Disclosure Requirements (NI-51-02). This includes the preparation and filing of:
- an annual information form (AIF);
- management’s discussion and analysis (MD&A);
- audited financial statements and material change reports; and
- National Instrument 52-109 – Certification of Disclosure in Issuer’s Annual and Interim Filings and related disclosure requirements concerning audit committees and corporate governance.
SEDAR. Affected OTC issuers must also file public disclosure documents electronically using the Canadian System for Electronic Document Analysis and Retrieval (SEDAR).
SEC. An OTC issuer that files disclosure documents with the US Securities and Exchange Commission (SEC) can generally comply with Canadian securities law requirements to file financial statements, material change reports, MD&A and AIFs using the documents filed with the SEC.
Additional Filing Requirements. Affected OTC issuers must also file:
- Notices in relation to the issuer’s promotional activities;
- Insider reports;
- Personal information forms (PIFs) for directors, officers, promoters and control persons. Individuals can file PIFs formerly submitted to the Toronto Stock Exchange and the TSX Venture Exchange so long as the information in the PIF has not changed; and
- For an OTC issuer which becomes subject to the Instrument on the date it is assigned a ticker symbol for an OTC market, the most recent registration statement filed with the SEC within five days of the date of the ticker symbol assignment.
Mining and Oil & Gas Issuers. Mining issuers are relieved from a particularly onerous requirement under Canadian securities law: despite National Instrument 43-101 – Standards of Disclosure for Mineral Projects, mining issuers are not required to file a technical report upon becoming subject to the Instrument. However, affected OTC issuers in the oil and gas sector 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.
The Instrument also imposes restrictions on the sale of “seed stock”, being shares issued prior to the date on which the OTC issuer first received a ticker symbol for any class of its securities:
Legend. Affected OTC issuers must place a legend on the certificates or ownership statements representing the seed stock.
Canadian Registered Dealer. Trades by a Canadian resident who acquired the shares before the OTC issuer obtained a ticker-symbol must be made through an investment dealer registered in Canada and through an OTC market in the United States.
No Private Agreement Take-Over Bid Exemption. The parties are not permitted to use the private agreement take-over bid exemption for two years after the date on which the OTC first received a ticker-symbol for any class of its securities.
Additional Restrictions. For securities acquired after the date the issuer received 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.
Exceptions. The Instrument provides some specified exceptions to the restrictions on trades, including for trades of securities made in connection with take-over or issuer bids, mergers or reorganizations, or the dissolution of the issuer, provided certain specified conditions are met.
FEES AND COMPLIANCE COSTS
Affected OTC issuers and their insiders must pay the same filing fees as other reporting issuers in Canada. This includes SEDAR filing fees and late filing penalties. Further, OTC issuers that are not currently SEC filers may incur significant costs to comply with the Instrument – particularly if they do not currently have audited financial statements.
Please contact any of the following members of McInnes Cooper’s Corporate Finance and Securities Team to discuss this topic or any other legal issue:
Colleen Keyes at firstname.lastname@example.org
Basia Dzierzanowska at email@example.com
Chris MacIntyre at firstname.lastname@example.org
Julie Robinson at email@example.com
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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