March 2, 2014
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:
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:
“Significant Connection”. A “significant connection” exists between an issuer and a Canadian jurisdiction if, on or after July 31, 2012:
Minimum Compliance Period. If the Instrument applies, the OTC issuer must comply with the Instrument for at least one year after:
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.
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:
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:
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 member of the McInnes Cooper’s Corporate Finance and Securities Team to discuss this topic or any other legal issue.
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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