Prospectus exemption proposed for distributions to retail investors relying on investment dealers' advice

April 17, 2015

Securities regulators in British Columbia, New Brunswick and Saskatchewan yesterday proposed a new prospectus exemption that would allow issuers listed on certain Canadian exchanges to distribute securities to retail investors that have obtained suitability advice from an investment dealer.

Currently, in these provinces, the principal prospectus exemptions available to issuers seeking to raise capital from retail investors that are not existing security holders require an offering document. According to the participating regulators, Canadian issuers are not generally using these exemptions due to the time and cost involved in preparing such a document.

Under the proposal, issuers seeking to rely on the new exemption would have to meet certain conditions, including (i) being a reporting issuer in at least one Canadian jurisdiction and having a class of equity securities listed on one of the designated Canadian exchanges (being the TSX, the TSX-V, the CSE and Aequitas Neo Exchange); (ii) having filed all required timely and periodic disclosure documents; (iii) issuing a news release disclosing details of the distribution, including use of proceeds and any material fact not yet generally disclosed and including a statement that there is no material fact or material change about the issuer that has not been generally disclosed; and (iv) providing the investor with a contractual right of action in the event of a misrepresentation in the issuer's continuous disclosure record regardless of whether the investor relied on the misrepresentation.

Although an offering document is not required, if one is provided, investors will have certain rights of action in the event of a misrepresentation in the document. Furthermore, the offering can consist only of a listed security, a unit consisting of a listed security and a warrant to acquire another listed security, or another security convertible into a listed security at the security holder’s sole discretion.

Finally, and as noted above, the investor must obtain suitability advice from a registered investment dealer. The exemption is not available if the dealer is a restricted dealer or an exempt market dealer or if the dealer is exempted from providing suitability advice (such as discount brokers).

The proposed safeguards have been introduced to provide sufficient alternative protections for investors such that the prospectus requirement is not necessary. According to these regulators, this addresses the inconsistency in securities legislation that retail investors can purchase any amount of securities of a reporting issuer through the secondary market based on the issuer’s continuous disclosure but cannot purchase any securities directly from the issuer without obtaining some form of offering document.

The participating CSA members are proposing that the exemption expire after three years during which time its usefulness would be monitored and an extension would be considered. According to the proposal, in developing the proposed exemption, the regulators considered the balance of "fostering fair, efficient and innovative capital markets” with “ensuring appropriate investor protection."

Comments are being accepted until June 15, 2015.

For more information, see Multilateral CSA Notice 45-315 Proposed Prospectus Exemption for Certain Distributions Through an Investment Dealer.

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