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Canada

Proposed multilateral instrument 72-101Smith Lyons Toronto

The Ontario Securities Commission (OSC) has published for comment a multilateral instrument on distributions outside a local jurisdiction. The proposed instrument effectively combines the Securities and Exchange Commission's (SEC) Regulation S and the system for Shorter Hold Periods with an Annual Information Form, known as the SHAIF system of the Alberta and British Columbia securities commissions. For issuers with Ontario as their primary jurisdiction, the proposed instrument will eliminate the infamous interpretation note under former OSC Policy 1.5.

The key definition in the proposed instrument is 'qualifying issuer', which means an issuer that:

  • is a reporting issuer (or equivalent) in at least one of Alberta, British Columbia, Nova Scotia, Ontario, Quebec, Saskatchewan or Manitoba;
  • is an electronic filer under System for Electronic Document Analysis and Retrieval (SEDAR);

  • has an Annual Information Form (AIF);
  • has a class of equity securities listed or quoted on the Toronto Stock Exchange (TSE), Canadian Venture Exchange (CDNX) (Tier 1 or Tier 2), Montreal Exchange (ME), American Stock Exchange (AMEX), Nasdaq (National or Small Cap), New York Stock Exchange (NYSE) or the London Stock Exchange; or securities outstanding that have received an approved rating from an approved rating organization; and
  • if it is not qualified to file a short form prospectus and is a natural resource issuer, has filed with its AIF, technical reports as if the AIF were a prospectus.

Under the proposed instrument, the prospectus requirement does not apply to a distribution if, among other things, the purchasers are outside the local jurisdiction and the certificates representing the securities bear a legend stating that they cannot be traded before the expiration of 40 days from the distribution date for securities distributed in the Eurobond market, four months for securities of qualified issuers and 12 months for securities of other issuers (the "restricted period"). Any resale of securities so distributed will be subject to the prospectus requirement unless, among other things, the restricted period has expired.

The biggest problem plaguing the Canadian securities regulatory system is the "watertight compartment" nature of its provincial securities laws. This is because they set out a "closed system" by imposing indefinite hold periods on privately placed securities of issuers that are not "reporting issuers" in the particular jurisdiction. The proposed instrument effectively abolishes these watertight compartments through "back door" mutual recognition although, unfortunately, Québec will not implement the system even though its reporting issuers will be recognized by the other jurisdictions.

Leslie Gord

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