Accessing Foreign Capital Markets Just Got Easier for Issuers in British Columbia
On October 31, 2017, the British Columbia Securities Commission (BCSC) published a blanket order granting new exemptions to the prospectus requirement to British Columbia issuers seeking to access foreign capital markets. The order revokes and replaces BC Instrument 72-503 Distribution of Securities outside British Columbia (BCI 72-503).
The new BCI 72-503 introduces three exemptions – (i) the private placement exemption, (ii) the public offering exemption and (iii) the testing of the waters exemption – that eliminate the need to file a Canadian prospectus in connection with most distributions to investors outside British Columbia and aim to reduce the administrative burden and costs traditionally associated with complying with British Columbia securities laws in connection with such distributions.
With the new BCI 72-503, British Columbia follows similar initiatives implemented in Ontario and Alberta to modernize provincial securities laws relating to certain cross-border and international offerings.
In British Columbia, when an issuer with sufficient connections to the province distributes its securities to investors, the distribution is considered to have taken place in British Columbia even if none of the investors reside in the province. British Columbia securities laws therefore apply to the distribution, which means that the issuer must comply with the prospectus requirement under the Securities Act of British Columbia (Act) or rely on a prospectus exemption. BC Interpretation Note 72-702 provides guidance on the factors considered in determining sufficient connection to British Columbia, such as the issuer’s head office or key officers and directors being located in British Columbia or the issuer being a reporting issuer in British Columbia.
The extraterritorial application of British Columbia’s securities laws has caused headaches for British Columbia issuers in their foreign offerings. For example, British Columbia issuers looking to conduct a foreign public offering, whether it be an IPO or a follow-on offering, have had to either (i) file a Canadian prospectus regardless of whether there were any Canadian investors or whether the issuer was, or planned to be, listed on a Canadian exchange or (ii) find a prospectus exemption that they can rely on. The old BCI 72-503 provided for a private placement exemption for foreign offerings to issuers listed on a qualified stock exchange, but issuers were often unable to rely on this exemption in connection with a foreign public offering because the filing and form requirements (including the requirement to get prescribed certification and representations in a subscription agreement from foreign investors) and resale restrictions under this exemption were impractical and incompatible with market practices and expectations thereof of investors and dealers alike in the country where the foreign public offering was being conducted. Also, the limited application of the private placement exemption under the old BCI 72-503 meant that private issuers or issuers listed or quoted on a non-qualified stock exchange, such as the OTC or the Canadian Securities Exchange, could not rely on the exemption.
The New Prospectus Exemptions
Under the new BCI 72-503, British Columbia issuers can now rely on the following three exemptions when accessing foreign capital markets. All of the exemptions require that issuers comply with the securities laws of the jurisdiction where the investor resides.
1. Foreign Private Placement Exemption
This private placement exemption is a streamlined version of the same exemption that was in the old BCI 72-503 and is now available to all British Columbia issuers, regardless of whether they are listed on a qualified stock exchange.
Criteria: The exemption applies to foreign private placements that meet the following conditions:
- the investor does not reside in British Columbia;
- the investor purchases the issuer’s securities as a principal;
- the issuer complies with the securities laws of the jurisdiction where the investor resides; and
- the issuer is not relying on Multilateral Instrument 45-108 Crowdfunding in the jurisdiction where the investor resides.
A separate prospectus exemption exists for foreign crowdfunding distributions under BC Instrument 72-505 Exemption from prospectus requirement for crowdfunding distributions to purchasers outside British Columbia.
Resale Restrictions: The first trade of a security purchased in reliance on this exemption is subject to resale restrictions in section 2.5 of National Instrument 45-102 Resale of Securities.
Reporting Requirements: Within 10 days of the date of distribution, all British Columbia issuers who relied on this exemption must:
- file with the BCSC a trade report in Form 45-106F1 Report of Exempt Distribution (Form 45-106F1), including a completed Schedule 1 to Form 45-106F1 which lists all of the investors and information such as their addresses and details of securities purchased; and
- deliver to the BCSC a copy of any offering material that was filed with, or delivered to, securities regulators in the jurisdiction where the investor resides.
2. Foreign Public Offering Exemption
This new public offering exemption allows British Columbia issuers to conduct a foreign public offering, including an IPO, without filing a Canadian prospectus and extends to foreign at-the-market distributions. For those issuers that are not a reporting issuer in British Columbia, a brief, streamlined trade report omitting information previously required on each investor will need to be filed in connection with the foreign public offering.
Criteria: The exemption applies to foreign public offerings that meet the following conditions:
- the distribution is made (i) to an investor that is not a Canadian resident or (ii) on or through an exchange or market outside Canada provided that the issuer or selling securityholder has no reason to believe that the investor is a Canadian resident;
- for U.S. public offerings, the issuer has an effective registration statement under U.S. securities laws; and
- for non-U.S. foreign public offerings, the issuer has a foreign prospectus that has been approved by the securities regulators in the country where the public offering is conducted.
Resale Restrictions: None.
Reporting Requirements: For British Columbia issuers who are reporting issuers, as soon as practicable, they must file on SEDAR (i) the U.S. registration statement for U.S. public offerings or (ii) the foreign prospectus and any supplement thereto for non-U.S. foreign public offerings.
For British Columbia issuers who are not reporting issuers, within 10 days of the date of distribution, they must (i) file with the BCSC a trade report in Form 45-106F1, without Schedule 1 to Form 45-106F1, and (ii) deliver to the BCSC a copy of the U.S. registration statement or foreign prospectus and any supplement thereto, as applicable.
3. Foreign Testing of the Waters Exemption
This new testing of the waters exemption allows British Columbia issuers that are emerging growth companies under the U.S. JOBS Act to take advantage of the U.S. testing of the waters exemption and gauge interest in a potential U.S. offering. Previously, these “testing the waters” communications in the U.S. were considered acts in furtherance of a trade and triggered the prospectus requirement under British Columbia securities laws. If the potential investor does not reside in the U.S., then the issuer would have to consider whether the “testing the waters” communications are allowed under the securities laws of the country where the potential investor resides.
Criteria: The exemption applies to “testing the waters” communications that meet the following conditions:
- any oral or written communications by the issuer, or any person authorized to act on behalf of the issuer, with a potential investor are (i) permitted under section 5(d) of the U.S. Securities Act of 1933 and (ii) made with a potential investor that is not a Canadian resident; and
- the issuer complies with the securities laws of the country where the potential investor resides.
Resale Restrictions: None.
Reporting Requirements: None.
The new Companion Policy 72-503CP Distribution of Securities outside British Columbia provides guidance on using BCI 72-503.