NIN 92/04 - Draft National Policy Statement No. 46 Index and Commodity Warrants and Other Derivative Securities [NIN - Rescinded]
| Published Date: | 1992-03-06 |
|---|---|
| Effective Date: | 1992-03-05 |
Each jurisdiction will issue whatever blanket rulings or orders are necessary to give effect to the final form of this policy.
The CSA recognize that the introduction of derivative securities, including Warrants (as defined), to the Canadian retail marketplace has provided investors with opportunities that were not previously available to satisfy certain investment and hedging objectives. However, many prospectus, continuous disclosure, trading and sales requirements of securities legislation in Canada do not adequately address the novel regulatory issues raised by public offerings of Warrants.
To address these deficiencies, the Draft Policy prescribes prospectus, continuous disclosure, trading and sales requirements that are based on the unique attributes of Warrants and speculative investment nature of certain Warrants. The Draft Policy also provides that (i) the issuer of Warrants must meet or exceed net asset and working capital thresholds and satisfy hedging requirements; (ii) novel underlying interests must satisfy certain criteria and (iii) certain calculations, valuations and determinations relating to Warrants must be made by an independent and qualified entity.
Scope of the Draft Policy
The provisions of the Draft Policy apply to distributions of Warrants by prospectus and, in the case of Warrants offered by the government of Canada or a province or territory of Canada, distributions by offering circular.
In the Draft Policy, Warrants are defined as: (i) certain put or call options the value of which is based upon the market price, value or level of one of more underlying interests and (ii) debt-like securities (as defined), which include as a substantial component either an obligation to pay to the holder a contingent amount based on the market price, value or level of one or more underlying interests or a right to convert or exchange the security for the underlying interest or to purchase the underlying interest.
The Draft Policy does not apply to: (i) rights, warrants, options or other securities exercisable or exchangeable for, or convertible into, securities issued by the issuer of the Warrant or by its affiliates or (ii) options issued by a clearing corporation.
Issuer
The issuance of Warrants may create a theoretically unlimited contingent liability for the issuer. Even where an issuer is hedged, the hedge may not be effective for credit or other reasons and/or hedge proceeds may not be for the sole benefit of Warrant holders. Under these unique circumstances, the CSA does not believe it is in the public interest for issuers without significant liquid capital to issue Warrants. Accordingly, the Draft Policy requires that an issuer or, if applicable, guarantor of Warrants has minimum net assets of $10 million, maintains minimum working capital of $10 million and hedges the Warrant offering to the extent necessary to be able to satisfy its obligations. The net asset and working capital thresholds are not intended to ensure that an issuer will be able to satisfy all of its obligations under the Warrants but simply to ensure that the issuer is of substance having regard to the nature of Warrant offerings.
Underlying Interest
When exchanges propose to list a new clearing corporation future or option, they are required to obtain approval of the underlying interest from the securities regulatory authorities. This is to ensure that the underlying interest is visible and liquid, and that market price is easily and objectively determinable. In the view of the CSA, the underlying interest of Warrants should meet similar criteria. Accordingly, the Draft Policy establishes criteria for underlying interests.
Terms, Conditions and Mechanics
The Draft Policy sets out a number of requirements pertaining to the terms, conditions and mechanics of Warrants, including requirements regarding adjustments to underlying interests, physical settlement, minimum exercise, delay between exercise and valuation, early termination, automatic exercise at maturity and the required form of Warrants.
Liquidity
The Draft Policy requires that Warrants be listed unless pre-approved alternative arrangements have been made to ensure sufficient market liquidity.
Trading and Sales Requirements
Because Warrants closely resemble clearing corporation options, the Draft Policy adopts many of the requirements applicable to clearing corporation options, including all retail purchases of Warrants must have an account to trade in Recognized Market Options; persons trading in and/or rendering advice with respect to Warrants must have successfully completed the Canadian Options Course or an alternative education program acceptable to the CSA; and Warrants, other than debt-like securities, may not be purchased on margin.
Prospectus Disclosure
The Standard Prospectus Form (as defined) is not appropriate for Warrant offerings as it does not provide any guidance with respect to disclosure relating to underlying interests or the terms, conditions and mechanics of Warrants. Accordingly, for offerings of Warrants, other than debt-like securities, the Standard Prospectus Form is being replaced by the Appendix to the Draft Policy which sets out prospectus disclosure requirements for Warrant offerings. For offerings of Warrants that are debt-like securities, the Appendix to the Draft Policy applies to the component linked to the underlying interest and the Standard Prospectus Form is applicable to the debt-like component of the Warrant.
Expedited and Confidential Review Procedures and Post Receipt Pricing Procedures
The Draft Policy establishes expedited prospectus review procedures for offerings that meet certain eligibility requirements. It is the intention of the CSA that the greater consistency in preliminary prospectus disclosure that should result from issuers complying with the Appendix to the policy, together with expedited prospectus review procedures under certain circumstances, will shorten the prospectus review process and thereby address the market timing sensitivity of Warrant offerings.
As well, in recognition of the unique characteristics and the proprietary nature of Warrants, the Draft Policy establishes confidential prospectus review procedures under which the prospectus remains confidential until the comments of the securities regulatory authorities are resolved.
Procedures are also set out for pricing offerings after the issuance of a prospectus receipt.
Continuous Disclosure
The Draft Policy changes certain continuous disclosure requirements for issuers and guarantors of Warrants. The Draft Policy also provides for continuous disclosure of changes relating to the underlying interest or to the Warrants.
Other Derivatives
Subdivided equity securities, corporate strip bonds and certain other debt-like securities ("Other Derivatives") are similar to Warrants in certain respects. The CSA believe it would be helpful to set out fundamental principles applicable to offerings of Other Derivatives because securities legislation in Canada does not adequately address certain regulatory issues raised by these offerings. The CSA are in the process of completing draft policy provisions applicable o offerings of Other Derivatives and expect to publish these provisions for comment in the near future.
Request for Comments
The CSA are requesting comments on the Draft Policy and, in particular: (i) the appropriate length of a transition period to allow those registrants trading in, or rendering advice with respect to, Warrants time to meet the proficiency requirements set out in the Draft Policy; (ii) the Extraordinary Event provisions pertaining to permitted Extraordinary Events, confirmation of the occurrence of Extraordinary Events and the amount to be paid to Warrantholders on termination; (iii) the utility to issuers and underwriters of the confidential review procedure and whether any party's rights could be adversely affected by these procedures; and (iv) the disclosure requirements that must or may be made where the issuer of a Warrant has not had an opportunity to independently verify the accuracy and completeness of the information pertaining to the issuer of the underlying interest.
The Draft Policy does not specifically provide that if the obligations of the issuer are guaranteed, the prospectus contain financial statements of the guarantor as if it were the issuer. However, it is the present intention of the CSA to include this specific requirement in the final form of the policy. If the guarantor is eligible to use the POP System, it is intended that this requirement may be satisfied by incorporating by reference into the prospectus the appropriate documents. Concerns have been advanced that this requirement has the effect of unduly restricting the ability of an issuer to obtain a guarantee. Persons who share this concern should comment on why this requirement is particularly inappropriate for offerings of Warrants.
Written comments on the Draft Policy are invited. Seven copies of the comments should be delivered to the CSA on or before May 29, 1992 at the following address:
Canadian Securities Administrators
Corporate Finance Committee
c/o Secretary, Ontario Securities Commission
8th floor
20 Queen Street West
Toronto, Ontario
M5H 3S8
Comment letters submitted in response to Requests for Comments are placed in the public file and form part of the public record in certain jurisdictions unless confidentiality is requested. Comment letters will be circulated among securities regulatory authorities for purposes of finalizing the Draft Policy whether or not confidentiality is requested. Accordingly, although comment letters requesting confidentiality will not be placed in the public file, freedom of information legislation may require the securities regulatory authorities in certain jurisdictions to make comment letters available. Persons submitting comment letters should therefore be aware that the press and members of the public may be able to obtain access to any comment letter.
DATED at Vancouver, British Columbia on March 5, 1992.
Douglas M. Hyndman
Chairman
Chairman