CSA Simplifies Reports of Exempt Distribution

CSA Simplifies Reports of Exempt Distribution

July 23, 2018

On July 19, 2018, the Canadian Securities Administrators (CSA) published final amendments (the Amendments) to National Instrument 45-106 - Prospectus Exemptions (NI 45-106) to simplify the report of exempt distribution set out on Form 45-106F1 Report of Exemption Distribution (New Report) which must be filed following a distribution of securities in reliance on certain prospectus exemptions under NI 45-106.

Filers must start using the New Report for any filings submitted to the British Columbia Securities Commission or any other Canadian jurisdiction on or after October 5, 2018.

The current version of the report of exempt distribution (Current Report) requires filers to provide substantially more information than previous versions. Since its introduction in 2016, the Current Report has prompted some filers to express concerns and to ask for clarification regarding certain unintended effects of the Current Report.

The Amendments are intended to address concerns expressed by market participants with respect to the unintended effects of the certification requirement and other information requirements in the Current Report.

Here is a summary of the Amendments:

Certification Requirement

The Current Report must be certified by the issuer or the underwriter, but may not be certified “on their behalf” or by an agent. This feature of the Current Report raised concerns that the individual certifying the report was executing in their personal capacity instead of on behalf of the issuer or the underwriter. The Amendments would amend the Current Report certification requirement as follows:

  • Clarify that the individual certifying the New Report is doing so on behalf of the issuer or underwriter.
  • The information provided in the New Report must be certified to be “true and, to the extent required, complete” rather than “true” as is the case under the Current Report. This change is intended to address concerns with certifying completeness when not all parts of the report are applicable, or when filers can only select one form option when multiple options might apply and there is limited ability to include additional notes in the report.
  • Include a knowledge qualifier in respect of the certification statement, which is consistent with other CSA forms and with the due diligence defence available under securities legislation.
  • Permit authorized agents to sign the New Report certification on behalf of the issuer or underwriter, thereby permitting law firms and other filing agents who often prepare and file the report to sign it on their client’s behalf and clarifying how to input the law firm’s information and agent’s information in in the New Report.

Other Information Requirements

The Current Report requires filers to provide a substantial amount of information. The Amendments would reduce the burden on filers by amending the Current Report as follows:

  • Filers will be required to provide only the name of the exchange on which the issuer’s equity securities primarily trade, rather than the names of all exchanges on which the issuer’s securities are listed. This is intended to reduce the burden on filers completing the New Report for issuers with securities listed on multiple exchanges globally and recognizes that identifying where debt securities are listed may be problematic for filers.
  • Filers will be required to select only one applicable exemption category instead of all applicable categories when indicating how they qualify for an exemption from providing certain director, officer and promoter information. This is intended to reduce the time and analysis currently necessary to complete this part of the report.
  • Issuers distributing securities to non-individual permitted clients will no longer be required to specify which paragraph number in the definition of “accredited investor” in section 1.1 of NI 45-106 applied to the purchaser. This is intended to reduce the burden on filers completing Schedule 1 of the report, particularly in circumstances where an issuer is distributing eligible foreign securities only to permitted clients.
  • Filers will be required to provide the North American Industry Classification Standard (NAICS) code that in their reasonable judgment most closely corresponds to the issuer's primary business activity.
  • Filers will be required to select the size of the issuer’s assets based on its most recently available annual financial statements.
  • NI 45-106 requires that a report of exempt distribution must be filed for each distribution of securities. The Amendments would streamline this requirement as follows: an issuer or underwriter is not required to file a report for a distribution of a security if a report has been filed by another issuer or underwriter for the distribution of the same security. Filers would be required to identify the co-issuers of the security on the New Report. This is intended to reduce duplicative reporting where two or more co-issuers are offering the same security.
  • The Amendments would allow the CSA to monitor issuers that invest in cryptoassets by requiring filers to identify an issuer whose primary business is to invest all or substantially all of its assets in cryptocurrencies by including cryptocurrencies as a section option. This would also apply to the type of investment fund.

Note that the schedules to the Current Report are unaffected by the Amendments. 

You can view the CSA notice here.

And here is a link to the New Report. 

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