BCN 2002/39 - Proposed Amendments to Multilateral Instrument 45-103 Capital Raising Exemptions and Proposed Adoption in Additional Jurisdictions [BCN - Rescinded]
Publication for Comment
The Commission and the securities regulatory authorities in each of Alberta, Manitoba, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island and Saskatchewan are publishing the following documents for comment:
- Multilateral Instrument 45-103 Capital Raising Exemptions (Proposed MI 45-103);
- 45-103CP Companion Policy;
- Form 45-103F1 Offering Memorandum for Non-Qualifying Issuers;
- Form 45-103F2 Offering Memorandum for Qualifying Issuers;
- Form 45-103F3 Risk Acknowledgement;
- Form 45-103F4 Report of Exempt Distribution; and
- Form 45-103F5 Risk Acknowledgement - Saskatchewan Close Personal Friends and Close Business Associates.
In Spring 2002, British Columbia and Alberta adopted Multilateral Instrument 45-103 Capital Raising Exemptions (Current MI 45-103). Subsequently, several other jurisdictions expressed an interest in the instrument. Accordingly, we formed a committee of staff from each of the jurisdictions to draft Proposed MI 45-103.
Summary of Proposed MI 45-103
If adopted, Proposed MI 45-103 will provide three largely harmonized exemptions from the prospectus and dealer registration requirements in securities legislation. Those exemptions are as follows:
- private issuer exemption;
- family, friends and business associates exemption; and
- accredited investor exemption.
Proposed MI 45-103 will also provide three variations of the offering memorandum exemption. The differences primarily relate to whether a purchaser must meet certain eligibility criteria before investing. Although the offering memorandum exemption is not uniform, we believe that industry will still benefit because they will be able to look to one rule for multi-jurisdictional offerings. As well, the forms of offering memorandum and risk acknowledgement will be the same in each jurisdiction. The differences in the offering memorandum exemption among the jurisdictions primarily relate to whether a purchaser must meet certain eligibility criteria before investing.
The terms of the proposed exemptions are summarized in Appendix A.
Summary of Proposed Changes from the Current MI 45-103
Current MI 45-103 continues to be in force in British Columbia and Alberta. If Proposed MI 45-103 is adopted, it will replace the Current MI 45-103. The most significant proposed amendments to Current MI 45-103 are:
- the participation of the additional jurisdictions;
- the terms of the proposed offering memorandum exemption to be adopted in each of the additional jurisdictions;
- the proposed restrictions on commissions payable under the private issuer and family, friends and business associates exemption;
- the introduction of a new Report of Exempt Distribution that will replace BC Form 45-902F for issuers reporting distributions under exemptions in Proposed MI 45-103; and
- the addition of the Saskatchewan Risk Acknowledgement for use in Saskatchewan for distributions based on close personal friendship and close business association.
We have made other minor amendments to Proposed MI 45-103 to deal with issues that have been raised by the other jurisdictions or the public since adoption of Current MI 45-103. Generally, the effect of these minor amendments in British Columbia and Alberta is to provide slightly more liberal exemptions and to clarify issues. A summary of each of the proposed amendments to the Current MI 45-103 and the reasons for them are set out in Appendix B.
Securities Amendment Act, 2002
This spring, the Legislature passed the Securities Amendment Act, 2002, which was largely brought into force by Royal Assent on May 9, 2002. The amendments repealed certain of the statutory exemptions that duplicated the exemptions provided in Current MI 45-103. For the full text of the amendments, please see the explanatory note on the Securities Amendment Act, 2002 on our public web site (www.bcsc.bc.ca).
Some of the amendments in the Securities Amendment Act, 2002 were not immediately brought into force. These include:
- the repeal of the $97,000 exemption (sections 45(2)(5) and 74(2)(4)),
- the implementation of liability for misrepresentation in an offering memorandum (section 132.1),
- the implementation of a right of action for failure to deliver an offering memorandum (section 135.1), and
- the implementation of a right to cancel an agreement to purchase securities within 2 days of signing the agreement (section 138.1).
All of these amendments will be brought into force by regulation by the end of September, except for the repeal of the $97,000 exemption.
Alberta and the other jurisdictions are considering whether to introduce similar statutory rights of action as British Columbia.
We intend to retain the $97,000 exemption until we have had an opportunity to assess who is using that exemption and why they are using the $97,000 exemption rather than the accredited investor exemption. We will retain the $97,000 exemption until at least April 2003.
Currently, all of the jurisdictions have an exemption similar to the $97,000 exemption. In some of the jurisdictions, the minimum acquisition cost is $150,000 rather than $97,000. If we determine that it is necessary to retain the $97,000 exemption, British Columbia and the other jurisdictions will consider adopting a uniform exemption.
Request for Comment
Although we are seeking comment on all aspects of Proposed MI 45-103, we also invite you to comment specifically on the following four issues:
1. In Current MI 45-103 and in Ontario Securities Commission Rule 45-501 Exempt Distributions, registered charities are included in the list of accredited investors. However, we are concerned that registered charities do not necessarily have either investment acumen or the ability to withstand the loss of an investment.
- Is it appropriate for registered charities to be included in the list of accredited investors?
- Are there additional conditions that should be imposed, e.g., a net asset threshold, to help ensure that a registered charity has the ability to withstand the loss of an investment?
2. The accredited investor and $97,000 exemptions require that a purchaser be purchasing as principal. When portfolio managers, insurers and trust companies purchase securities for accounts that are fully managed by them, they may not, technically, be purchasing as principal. Currently, section 74(1) of the Act deems portfolio managers, insurers and trust companies to be purchasing as principal when purchasing for accounts fully managed by them. Unfortunately, the definitions of portfolio manager and trust company refer only to those registered or incorporated in British Columbia. BCI 45-504 Trades to Trust Companies, Insurers and Portfolio Managers Outside British Columbia extends the exemptions to portfolio managers, insurers and trust companies incorporated in other jurisdictions of Canada. BCI 45-504 also extends the exemptions to foreign portfolio managers if they manage investment portfolios on behalf of clients having a total asset value of not less than $20,000,000 and file an additional undertaking and certification.
Proposed MI 45-103 includes a provision that portfolio managers and trust companies registered or incorporated elsewhere in Canada are deemed to be purchasing as principal when purchasing for accounts fully managed by them.
- Should the instrument be expanded to permit portfolio managers and trust companies registered or incorporated outside of Canada to be deemed to be purchasing as principal when purchasing for accounts fully managed by them?
- If so, given that these foreign entities may not be subject to comparable regulatory regimes, what additional restrictions should be imposed on these foreign entities?
3. Under the comparable legislation in Alberta and the other jurisdictions, insurers are not included in the entities deemed to be purchasing as principal when purchasing for accounts fully managed by them.
- Should Proposed MI 45-103 deem insurers (insurance companies) to be purchasing as principal when purchasing for accounts fully managed by them?
4. At present, when an issuer relies on one of the exemptions in Current MI 45-103 to distribute securities in British Columbia and Alberta, the issuer must file a report of exempt distribution (Form 45-902F) in British Columbia and a report of trade (Form 20) in Alberta. The two reports require different information and follow a different format. Under Proposed MI 45-103, an issuer will be subject to one uniform reporting requirement and the form of report will be largely identical.
Some jurisdictions require additional information in the report of exempt distribution. In Saskatchewan, if an issuer is relying on the family, friends and business associates exemption to distribute securities to a close personal friend or close business associate resident in Saskatchewan, the issuer must identify the name and position of the relevant director, senior officer, founder or control person and describe in detail the nature of the relationship between the purchaser and the relevant director, senior officer, founder or control person.
In British Columbia, an issuer must provide the telephone number and e-mail address of purchasers under the offering memorandum exemption who are resident in British Columbia.
In British Columbia, reports of exempt distribution are available for viewing on our website. The other jurisdictions do not make these reports available on their websites, but they are available for viewing by a member of the public if they attend the offices of the securities commission.
The Commission has concluded that not all the information in the report of exempt distribution should be available to the public. For example, the public does not need to know the names and addresses of all purchasers. However, the public is rightly interested in information about certain purchasers, such as the issuer’s directors, officers, control persons, promoters and insiders. These insiders must report their securities holdings of reporting issuers under insider reporting requirements. These requirements do not apply to non-reporting issuers. The report of exempt distribution is the only public source of information on this important group of purchasers.
The Commission is considering whether to replace our current report of exempt distribution (Form 45-902F) with the proposed Form 45-103F4, so that an issuer distributing securities under any exemption that requires a report will use the same form. None of the other jurisdictions intend to do this.
- Should the information concerning purchases made by an issuer’s directors, officers, control persons, promoters and insiders in the report of exempt distribution be available to the public on our website?
- Should we replace our current report of exempt distribution (Form 45-902F) with the proposed Form 45-103F4? Is all of the information required in Form 45-103F4 easily available to issuers when using other exemptions, such as the arrangement exemption in sections 45(2)(9) and 74(2)(8) or in BCI 45-509 Short Form Offerings of Listed Securities and Units by Qualifying Issuers?
Interested parties are encouraged to comment on Proposed MI 45-103. Comment letters received on or before November 19, 2002 will be considered. Comment letters can be delivered in hard copy, by fax or by e-mail. Please address your submission to:
Senior Legal Counsel, Legal & Market Initiatives
British Columbia Securities Commission
P.O. Box 10142, Pacific Centre
701 West Georgia Street
Vancouver, BC V7Y 1L2
Fax: (604) 899-6814
Tel: (604) 899-6654
or 1-800-373-6393 (in B.C. and Alberta)
We will be sharing comment letters with Alberta and the other jurisdictions and therefore cannot maintain confidentiality of submissions.
September 20, 2002
This Notice may refer to other documents. These documents can be found at the B.C. Securities Commission public website at www.bcsc.bc.ca in the Commission Documents database or the Historical Documents database.