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Unless a prospectus has been filed and a receipt has been issued by the relevant security regulatory authorities or an exemption exists from the prospectus requirement, securities legislation prohibits issuers and underwriters from distributing securities. National Instrument 45-106 Prospectus Exemptions (“NI 45-106”) provides for a range of exemptions from the prospectus requirement. Part 6 of NI 45-106 requires issuers or underwriters relying on prospectus exemptions specified in Part 6 to file reports of exempt distributions, and sets out the form required to be filed and the deadlines for filing. Compliance with NI 45-106 rests with the issuer or underwriter purporting to rely on the applicable exemption(s) and the use of a prospectus exemption under NI 45-106 is subject to regulatory oversight and monitoring.
On June 25, 2015, the Canadian Securities Administrators (“CSA”) published CSA Staff Notice 45-308 Guidance for Preparing and Filing Reports of Exempt Distributions under National Instrument 45-106 Prospectus Exemptions Revised (the “Notice”), which highlighted deficiencies identified in various reports of exempt distributions (“Form F1”) filed under NI 45-106. The Notice also provides guidance to issuers, underwriters and their advisors for preparing and filing the Form Fl and replaces a prior notice issued in April 2012.
The Notice highlights certain areas where there were common deficiencies in the Form F1. These include:
1. Failing to use the correct form. The required form for a report of exempt distribution is the Form F1, except in British Columbia (“BC”), which introduced a new form of report of exempt distribution, Form 45-106F6 British Columbia Report of Exempt Distribution (the “Form F6”) in October 2011. There have been many instances of issuers or underwriters filing the Form F6 outside of BC. If a distribution occurs in BC and elsewhere, the issuer or underwriter is required to file the Form F6 with the British Columbia Securities Commission and file the Form F1 in the other applicable jurisdictions.
2. Failing to file the F1 on time. Part 6 of NI 45-106 requires issuers or underwriters relying on certain prospectus exemptions to file the Form F1, generally 10 days after the distribution, in each applicable jurisdiction where the distribution takes place. Investment funds have the option of filing the Form F1 on an annual basis, within 30 days of their financial year-end, when relying on section 2.3 – accredited investor exemption, section 2.10 – minimum amount investment exemption or section 2.19 – additional investment in investment funds exemption of NI 45-106. This option is not available for investment funds using the OM exemption (in jurisdictions where such exemption is available). Many issuers or underwriters have incorrectly filed the Form F1 late or not at all.
3. Failing to pay the required fee. Issuers or underwriters must pay the applicable fee in each jurisdiction in which a distribution is made, when the report is filed. Some issuers or underwriters have erroneously filed the Form F1 with an incorrect fee or with no fee.
4. Failing to include a complete list of purchasers in the Form F1. If distributions are made in more than one jurisdiction, the issuer or underwriter must complete a single Form F1 identifying all purchasers, including purchasers that reside in the jurisdiction and those that do not, and file that report in each of the jurisdictions in which the distribution is made. Some Form F1s filed by issuers or underwriters incorrectly only identified purchasers from the jurisdiction in which the Form F1 was filed, even though the distribution included purchasers from other jurisdictions.
5. Failing to reconcile information in the Form F1. Information in items 5, 6, and 7 of Form F1 must reconcile with the information in Schedule I of Form F1 (“Schedule I”). Issuers or underwriters have frequently incorrectly reported a different total number of securities distributed, total dollar value raised, number of purchasers and/or exemptions used in items 6 and 7 of Form F1 when compared to Schedule I.
6. Incorrectly identifying the number of purchasers. Item 7 of Form F1 requires the total number of purchasers in each jurisdiction to be reported. The number of purchasers refers to the number of investors and not to the number of securities each purchaser purchased.
7. Relying on unavailable exemptions. Issuers or underwriters should be aware that not all exemptions are available in all jurisdictions. In certain instances, issuers distributing in more than one jurisdiction have incorrectly reported in the Form F1 distributions under an exemption that is not available in one of the jurisdictions. An issuer or underwriter should indicate in Schedule I the appropriate exemption for each purchaser. This may require the issuer or underwriter to report multiple exemptions relied on for the same purchaser in circumstances where the distribution is made in more than one jurisdiction and the same exemption is not available in those jurisdictions.
8. Failing to disclose all commissions and finder’s fees. Item 8 of Form F1 requires an issuer or underwriter to disclose compensation received or to be received by any person in connection with the distribution. Compensation includes commissions, discounts or other fees or payments of a similar nature, which result from a distribution of securities, regardless of what the payment is called. For example, a « brokerage fee » or « finance fee » for a syndicated mortgage is compensation in connection with a distribution. Compensation does not include payments for services incidental to the distribution (such as clerical, printing, legal or accounting services). Some issuers or underwriters are incorrectly not reporting compensation paid in connection with a distribution. In some of these cases, the payment was erroneously not disclosed because it was not called a « commission » or a « finder’s fee ».
9. Failing to provide complete information regarding convertible or exchangeable securities distributed. Item 6 of the Form F1 requires information regarding the security distributed. If the security is convertible or exchangeable into an underlying security, the Form F1 states that the issuer or underwriter must include: (i) a description of the underlying security, (ii) the terms of conversion or exercise, and (iii) any expiry date.
10. Improperly reporting distributions under the minimum amount exemption. In order to rely on the prospectus exemption in section 2.10 – minimum amount investment exemption of NI 45-106, among other conditions, the purchase price must be at least $150,000 by a purchaser other than an individual. If an issuer or underwriter relies on this exemption, it should ensure that the purchase price reported is at least that minimum amount. The CSA also reminds issuers or underwriters that it is not permitted to distribute securities under this exemption to multiple purchasers acting in concert or as a « syndicate » in order to pool separate purchases and reach the $150,000 minimum amount investment.
11. Failing to certify the Form F1. An issuer or underwriter must include the date and the signature of the person identified as signing the Form F1 in the certificate section of the form Fl. Some issuers and underwriters have incorrectly filed reports with unsigned certificates.
The Notice will be helpful in reminding issuers and underwriters of their obligations when preparing and filing the Form F1 and Form F6. For more information, please refer to the CSA Staff Notice 45-308 Guidance for Preparing and Filing Reports of Exempt Distributions under National Instrument 45-106 Prospectus Exemptions Revised at https://www.bcsc.bc.ca/Securities_Law/Policies/Policy4/PDF/45-308__CSA_Staff_Notice___June_25_2015/.