Resale of foreign securities by Canadian investors facilitated by new prospectus exemption

The Canadian Securities Administrators (CSA) have introduced a new prospectus exemption that facilitates the resale of foreign securities by Canadian investors who originally acquired such securities pursuant to a prospectus exemption. The new exemption takes effect on June 12, 2018, and allows investors to resell securities of a foreign issuer that is not a Canadian reporting issuer on a market outside of Canada. It will facilitate the participation by Canadian investors (particularly institutional investors) in global security markets.

New exemption

The new exemption provides that a securityholder will be exempt from the prospectus requirement in respect of the resale of securities (and underlying securities) of a foreign issuer acquired pursuant to a prospectus exemption if:

• the resale is made on a market or exchange outside of Canada or to a person or company outside of Canada; and

• the issuer of the securities is not a reporting issuer in Canada.

A foreign issuer is an issuer not incorporated or organized under the laws of Canada or a jurisdiction of Canada provided that the issuer does not have its head office in Canada or a majority of its executive officers or directors do not ordinarily reside in Canada. Whether an issuer is a foreign issuer is determined as of the date of the distribution to the Canadian investors.

Why is a new exemption needed?

The current prospectus exemption often relied upon by Canadian investors selling foreign securities on a non-Canadian market is contained in section 2.14 of NI 45-102. The existing exemption (which will continue to remain available after the new exemption is introduced) allows a Canadian securityholder to resell securities (and underlying securities) of a non-reporting issuer on a market outside Canada or to a person outside Canada provided that Canadian residents:

• do not own more than 10 percent of the securities of the issuer; and

• do not represent more than 10 percent of all securityholders of the non-reporting issuer (collectively, the Thresholds).

In practice, determining whether an issuer falls below the Thresholds is often difficult for investors, foreign issuers and underwriters to determine. As a result there may be a lack of certainty as to whether such securities are freely tradeable on a non-Canadian market. This potential lack of liquidity makes offerings of foreign securities less attractive to Canadian investors and in turn, has deterred foreign issuers from extending foreign securities offerings into Canada.

In an effort to assist investors with global portfolios, the new exemption contains no limits on the number of Canadian resident securityholders or the percentage of securities Canadian residents own of the foreign issuer. It allows Canadian investors who own securities of foreign issuers that exceed the Thresholds or have difficulty determining whether the Thresholds have been met to be assured they will be able to resell such securities on a foreign market. This resale certainty will enhance the attractiveness of offerings of foreign securities to Canadian institutional investors.

Implementation

The new prospectus exemption will be available for investors in all Canadian jurisdictions. It is being introduced in all Canadian jurisdictions except Ontario and Alberta by amendment to National Instrument 45-102 – Resale of Securities and its Companion Policy. In Ontario the new exemption will be contained in OSC Rule 72-503 – Distributions Outside Canada (OSC Rule 72-503), which came into force on March 30, 2018. In Alberta the new exemption will be contained in Alberta Securities Commission Blanket Order 45-519 Prospectus Exemptions for Resale Outside of Canada.