The challenging economic conditions brought on by the COVID‑19 pandemic have further highlighted the need to support the growth of Ontario’s issuers and intermediaries. The Taskforce heard from stakeholders that cost and access to capital are barriers for Ontario’s capital market participants. Changes are needed to facilitate capital formation for businesses, especially for smaller issuers. Market participants are in favour of reducing regulatory burden and streamlining regulatory requirements, without compromising investor protection.

We strongly support the Taskforce’s efforts to reduce the regulatory burden on capital markets participants… Regulatory requirements that are no longer necessary or no longer serve their intended purposes impose costs on firms and the economy in the form of reduced resources to allocate to growth opportunities, reduced competition and reduced efficiency. All of these costs are ultimately borne by investors.

Investment Funds Institute of Canada

Based on stakeholder feedback, the Taskforce included recommendations that: reduce and streamline regulatory requirements where appropriate; support a continuous disclosure model; and transition towards an “access equals delivery” model of information dissemination. To ensure that investors are being protected, the Taskforce is also recommending that the OSC be given additional tools to ensure that issuers are appropriately providing disclosure to the markets.

Our recommendations include measures to enhance our exempt market, allow for greater flexibility for public issuers, both large and small, and address specific policy issues such as short selling. Moreover, these reforms will incubate a thriving and diverse intermediary sector that better assists in capital formation, while reducing regulatory burden to save businesses time and money and enhancing investor protection. Collectively, these recommendations will improve capital access and increased liquidity in both public and private markets.

Supporting Ontario’s Issuers and Intermediary Market

12. Mandate that securities issued by a qualified reporting issuer using the accredited investor prospectus exemption should be subject to a reduced hold period of 30 days, and be eliminated within two years

Currently, securities issued by a reporting issuer under certain prospectus exemptions, such as the accredited investor (AI) exemption, are subject to a four-month restricted period before becoming freely tradable. This hold period timeframe was originally put in place to reflect the time required for the dissemination of news in a non-digital capital markets environment.

We are supportive of the proposal to remove the four-month hold period… When securities are subject to a four-month hold period, the security is effectively illiquid for that period, which may limit how much of an issue can be purchased by institutional investors, and introduces administrative burden for institutional investors relating to tracking additional restricted securities of the same issuer.

CFA Societies Canada

Through the Taskforce’s consultations, multiple stakeholders have indicated that given the sophistication and knowledge of AIs, this four-month hold is an unnecessary regulatory burden that reduces liquidity for investors. Reducing this hold period would increase flexibility for the purchaser of the securities and reduce the administrative burden for all market participants involved, with a reduced need for tracking these securities. While this recommendation may create greater incentives for private placements rather than public prospectus offerings, many of the Taskforce’s other recommendations would support ease of access to the public markets and enhanced continuous disclosure to the public.

The Taskforce notes that the CSA has an ongoing alternative offering model project that is considering allowing freely tradeable securities to be issued. We recommend that the CSA adopt this recommendation to further harmonize Canada’s capital markets.

Recommendation:

Securities distributed under the AI prospectus exemption by all reporting issuers that have developed a continuous disclosure record of at least 12 months after filing and obtained a receipt for a prospectus or the filing of a filing statement in the case of a reverse-takeover transaction (RTO) or Capital Pool Company (CPC), should be subject to a reduced hold period of 30 days. Reporting issuers with a continuous disclosure record of less than 12 months or that have not filed a prospectus or filing statement would still be subject to a four-month hold period. Additionally, reporting issuers that file their disclosure on a semi-annual basis should be excluded from the reduced hold period.

After this change has been in effect for a period of two years, and its impacts reviewed by the OSC, the 30-day hold period should be eliminated.

The recommendation is limited to those issuers that have developed an adequate disclosure record after their initial prospectus disclosure for secondary investors to rely upon. The increased liquidity resulting from this recommendation would invigorate the secondary market and provide such issuers with additional capital-raising opportunities.

No change is being proposed to the dealer and underwriter registration requirements or related compliance obligations. Reducing, rather than eliminating, the hold period would help to prevent indirect underwritings to investors who are not accredited. The issuer and any dealer involved in the distribution would still be required to take reasonable steps to ensure that the initial purchaser is properly relying on the AI exemption and is purchasing as a principal and not with a view to further distribution. Such reasonable steps could include representations and warranties in the purchasers’ subscription agreements that they are purchasing the securities with investment intent and not with a view to distribution, provided that such representations and warranties are reasonable in the circumstances. The OSC should develop guidelines regarding these reasonable steps to provide greater clarity to market participants.

This recommendation, together will others in this report, represents a shift towards greater reliance on continuous disclosure and greater capital-raising options that do not involve a prospectus. The OSC should continue to prioritize continuous disclosure in its compliance review; new tools for this purpose are described in Recommendation 13 below.

13. Provide OSC with additional tools for continuous disclosure and exemption compliance

Continuous disclosure by reporting issuers is fundamental to the efficient operation of the capital markets. Modernizing the securities regulatory regime involves an increased emphasis on continuous disclosure over prospectus disclosure. This trend is increasing as alternative forms of financings in the exempt market are adopted and the number of traditional prospectus offerings declines. However, many of the OSC’s compliance tools are focused on the review and receipt of a prospectus. As continuous disclosure becomes more important, it will continue to be an increasing focus of the OSC’s compliance efforts. New compliance tools will enable the OSC to resolve compliance issues quickly and effectively.

Similarly, as prospectus exempt offerings become an increasingly significant part of the Canadian markets, including potential expanded exemptions proposed in this report, compliance with the terms of those exemptions becomes much more important.

These tools would not be appropriate for serious breaches of securities law, which should be addressed through enforcement processes. However, they would facilitate improved issuer disclosure and exemption compliance that would benefit markets and enhance investor protection.

Recommendation:

To enhance the OSC’s compliance efforts related to issuer disclosure and exemption compliance, the OSC’s Director of Corporate Finance should have the ability to impose terms and conditions on issuers in connection with compliance reviews. The scope of the terms and conditions should be flexible so that they may be tailored to circumstances but should specifically include orders related to the cease trading of distributions or the continued trading of securities and the ability of an issuer to rely on prospectus exemptions.

In order to ensure fairness for issuers, there should be an opportunity to be heard before the Director makes a decision and an appeal to the Tribunal.

14. Streamline the timing of disclosure (e.g., semi-annual reporting)

Publicly listed companies in Ontario are currently required to provide quarterly financial reporting of interim financial results and accompanying Management Discussion and Analysis (MD&A).

However, issuers incur significant costs and allocate substantial resources to producing quarterly financial statements and MD&A. While quarterly financial statements provide timely information to investors and intermediaries, there can be instances in which the regulatory and internal cost of preparing such frequent reporting exceeds the benefit. This is particularly true for smaller issuers and issuers that are developing towards generating revenue that may not experience significant changes to their operations that would be reflected in the financial statements.

Through its public consultations, stakeholders agree that smaller issuers face a disproportionate burden through ongoing quarterly reporting requirements but have raised concerns over eliminating quarterly reporting due to the reduction in timeliness of disclosed information to investors and the market. Stakeholders also expressed concern about Ontario’s disclosure requirements not being aligned with other Canadian jurisdictions and the U.S.

Recommendation:

To minimize regulatory burden, the Taskforce is recommending changing the requirement for quarterly financial statements to allow for an option for publicly listed reporting issuers to file semi‑annual reporting. Reporting issuers would be eligible for this option if the issuer:

  • has developed a continuous disclosure record of at least 12 months after filing and obtaining a receipt for a final prospectus or filing a filing statement in the case of an RTO or CPC;
  • has annual revenue of less than $10 million, as shown on the audited annual financial statements most recently filed by the reporting issuer; and
  • is not currently, and has not recently been, in default of their continuous disclosure obligations.

If an issuer that has adopted semi-annual filing achieves revenue of $10 million or greater, it would be required to resume quarterly filing following the filing of its audited annual financial statements.

Once the impact of the semi-annual filing by the eligible issuers that take advantage of this option has been assessed over a period of two years, the OSC should consider whether the range of issuers that may file on this basis should be expanded.

In addition, the decision to file on a semi-annual basis must be approved by holders of a majority of shares entitled to vote, excluding any related parties of the issuer, prior to adopting this option and reconfirmed at least every three years.

Issuers that adopt semi-annual filing would not be eligible to take advantage of the exemption proposed in the recommendation related to an alternative offering model, which would allow issuers to distribute freely tradeable securities primarily based on their continuous disclosure record. In addition, since semi-annual filing would increase the importance of material change reporting, the OSC should continue to prioritize continuous disclosure in its compliance review; new tools for this purpose are described in a different Recommendation.

Given the need for a harmonized approach, the OSC should implement this recommendation in consultation with the CSA, to ensure harmonization across Canadian jurisdictions.

15. Create a dealer registration “safe harbour” for issuers and their Associated Persons

Under the current securities regime, if an issuer distributes its own securities with regularity and without the involvement of a registered dealer, the issuer and/or officers, directors, employees or agents of the issuer (collectively, “Associated Persons”), in some circumstances, may be considered in the business of trading securities. This then trips the business trigger and requires registration. There is currently some uncertainty among market participants as to when an issuer or its Associated Persons may be considered in the business of trading securities.

Recommendation:

The Taskforce recommends creating a dealer registration “safe harbour” exemption for issuers and their Associated Persons through an OSC blanket order or rule change that would allow an issuer to engage in certain passive “permitted investor relations activities” (PIRA) without requiring registration. Passive activities may include:

  • Preparing offering documents and subscription agreements;
  • Passively offering shares of the issuer to investors through the issuer’s website; and
  • Passively accepting subscription requests that have not been solicited by the issuer or Associated Persons.

The OSC should also be designated the authority to publish guidance on the comprehensive list of what constitutes PIRA.

This recommendation would improve the capital-raising process. Issuers could conduct some capital-raising activities with regularity and without needing to employ the services of a registered dealer. This would particularly help smaller issuers that find it difficult to access capital.

This recommendation intends to reduce regulatory uncertainty by providing a clearer test of which activities may be conducted by an issuer and its Associated Persons without being registered. The OSC’s ability to take compliance and enforcement action against bad actors would be strengthened, as boiler rooms and issuers that engage in active selling activities should be registered, resulting in enhanced investor protection.

16. Introduce an alternative offering model for reporting issuers

The existing prospectus system functions well for larger issuers that can absorb the costs of conducting a public offering. However, the high costs associated with preparing and filing a prospectus can prove to be a barrier to capital-raising for smaller issuers. Placing greater reliance on a reporting issuer’s continuous disclosure record to support investment decisions rather than the filing of a prospectus for ordinary course financings would provide capital at a lower cost to these companies.

Through its public consultations, the Taskforce heard from issuers and investors that there is a need to provide more efficient access to the capital markets for public issuers, while balancing the need to ensure that investors receive sufficient information to inform their investment decisions. Reporting issuers with an established continuous disclosure record can benefit from access to capital at a lower cost through reduced offering requirements, without diminishing investor protection.

Recommendation:

The Taskforce recommends introducing an alternative offering model prospectus exemption for all reporting issuers, with securities listed on an exchange that are in full compliance with their continuous disclosure requirements to allow them to offer freely tradeable securities to the public.

The exemption would include conditions such as:

  • The issuer must have been a reporting issuer for 12 months; and must be up to date with its continuous disclosure and not be in default; securities offered under this prospectus exemption must be of a class that is listed on an exchange;
  • The offering must be subject to an annual maximum; and
  • Issuers must file a short disclosure document with the appropriate regulator to update the continuous disclosure record for recent events (including information regarding the use of proceeds) and certify its accuracy. Both the disclosure document and certificate would be required to be filed on the System for Electronic Document Analysis and Retrieval (SEDAR) or an updated system.

This exemption allows issuers to raise capital based on their continuous disclosure record and a short offering document, rather than a prospectus filing. Investors would assume the same level of risk as purchases of the same securities in the secondary market.

The annual maximum for offerings under this exemption should be set at 10 per cent of market capitalization as of the beginning of a set annual period. For smaller issuers with a market capitalization under $50 million, the annual maximum should be the lesser of $5 million or 100 per cent of the issuer’s market capitalization, which caps the amount these issuers can offer under these reduced reporting requirements. This annual maximum is recommended to reflect the issuer’s increased reliance on continuous disclosure and limited civil and statutory protections while ensuring appropriate investor protection. Offerings beyond such limits would continue to require a prospectus filing.

The remedies for investor losses in secondary market trading for misrepresentations in its continuous disclosure record are much more limited than the remedies for a misrepresentation in a prospectus. Since the proposed alternative offering exemption is a primary offering by the issuer and the issuer would receive the proceeds of the offering, an investor should have the right to an effective remedy against the issuer if the offering document contains a misrepresentation. The Taskforce recommends that offerings under this exemption be designated as having the same liability as under a prospectus offering. Imposing the same level of liability would provide incentives for the issuer to take steps to avoid misrepresentations.

The Taskforce notes that the CSA’s ongoing alternative offering model project is considering several proposals regarding different offering models for issuers and recommends that the CSA adopt this recommendation to further harmonization across Canada’s capital markets.

17. Develop a well-known seasoned issuer model

In the U.S., a well-known seasoned issuer (WKSI) allows certain issuers to be subject to a less burdensome shelf registration process. WKSI issuers must be above a certain public float or have issued debt securities above a set amount in a specified time period and have established an appropriate disclosure record. WKSIs can register their securities offerings on shelf registration statements that become effective automatically upon filing.

Stakeholders were very supportive of introducing this regulatory model in Canada. The new model reduces the regulatory burden on large issuers that meet prescribed thresholds, making it more cost-efficient and attractive for such issuers to raise capital in Ontario’s capital markets.

The Taskforce notes that the CSA’s ongoing alternative offering model project is considering the WKSI model and recommends that the CSA adopt this recommendation to further harmonization across Canada’s capital markets.

Recommendation:

It is recommended that the OSC develop a WKSI model in Ontario to issue shelf prospectus receipts automatically for issuers that are above a certain public float or have issued debt securities above a set amount in a specified time period and have established an appropriate disclosure record. The Taskforce recommends that the appropriate threshold for an issuer to qualify for the WKSI classification is a public float of a minimum of $500 million. This threshold is reflective of the size of Ontario’s capital markets and will apply to issuers that are already well-known and followed by market analysts.

The WKSI model would not result in a change to the current approval requirements for novel derivatives offered under a shelf prospectus supplement, such as linked notes or similar investment products.

The OSC, together with the CSA, should also consider implementing additional changes to the shelf prospectus system to provide similar accommodations to those available to WKSIs in the U.S., which would assist in capital formation.

This would streamline the shelf prospectus process for such large issuers that meet the prescribed thresholds and make it more cost-efficient for such issuers to raise capital in Ontario’s capital markets.

18. Introduce a finder category of registration and provide the OSC with rulemaking and designation authority to modernize and provide greater certainty regarding application of “promoter” status

Issuers regularly use finders to conduct non-brokered private placements. The prominent use of finders suggests that certain types of issuers, primarily smaller issuers such as start-ups, small businesses, and venture issuers, may be experiencing difficulties in accessing capital through EMDs and investment dealers.

Under the current regulatory framework, acting as a professional finder is generally considered to be a registerable activity since it involves trading in securities with regularity for a business purpose (i.e., the business trigger for registration). However, requiring individual finders to register as an EMD may not be well‑tailored and may be too onerous for individual finders.

Furthermore, the definition of a “promoter” in the Securities Act is outdated. In addition, there is no specific recognition that a person’s status, in terms of whether they are a promoter, may change over time. Interpretative issues with the current definition frequently arise in prospectus reviews and are a source of uncertainty for market participants.

Recommendation:

The Taskforce recommends introducing a finder registration category, that would be less burdensome than the current registration regime for EMDs and updating the promoter definition.

1. New Finder Registration Category

The finder registration category would:

  • Impose fewer obligations compared to those imposed on EMDs or investment dealers (such as lower capital requirements), while maintaining the integrity and proficiency standards that are the cornerstones of investor protection;
  • Permit finders to engage in solicitation and client-facing conduct and receive transaction-based compensation, while ensuring that sales of securities would be executed through a registered dealer; and
  • Eliminate the need for a finder to have an ultimate designated person or chief compliance officer since finders would, in substance, perform these functions themselves.

Finders would have to comply with conflicts of interest and compensation disclosure requirements to maintain fair and efficient capital markets. However, other EMD requirements would be modified such as:

  • Reduced minimum capital;
  • Reduced insurance since the finder should be precluded from having access to or custody of client assets; and
  • Reduced client relationship disclosure.

A proportionate registration regime for finders would help protect investors by encouraging the use of registered finders (who meet integrity and proficiency standards and have been found to be fit for registration) over unregistered finders (some of whom may raise integrity and proficiency concerns and may be acting unlawfully). As finders are merely involved in the introduction of investors to issuers, this recommendation may stimulate growth in the intermediary market because issuers would still be required to utilize EMDs or investment dealers in connection with the ultimate sale of securities.

2. Updating the Definition of Promoter

The Taskforce recommends a legislative amendment to enable the OSC to designate and make rules regarding promoter status, including:

  • Defining whether a person or class of persons is or is not a promoter;
  • Prescribing circumstances in which status as a promoter ends; and
  • Varying the definition of promoter in specified circumstances to address different organizational structures.

19. Introduce greater flexibility to permit reporting issuers, and their registered advisors, to gauge interest from institutional investors for participation in a potential prospectus offering prior to filing a preliminary prospectus

Stakeholders have noted that publicly listed companies increasingly rely on financing through private placements rather than prospectus offerings. One reason for this trend is the limited ability to “test the waters” prior to a prospectus offering. Although the bought deal exemption provides for the ability to solicit expressions of interest prior to the filing of a preliminary prospectus, it requires the underwriters to take on the risks of the offering. The risk of a failed transaction leads to less use of the short form prospectus structure, apart from the most senior issuers.

In 2019, the U.S. Securities and Exchange Commission enabled all issuers to engage in test-the-waters communications with qualified institutional buyers and institutional accredited investors regarding a contemplated and registered securities offering prior to, or following, the filing of a registration statement related to such offering.

Issuers should have the ability to “test the waters” with institutional investors ahead of filing a preliminary prospectus… It would be useful for institutional investors to communicate interest in potential offerings to issuers and their advisors if such communication results in the availability of more offerings in which to invest.

OMERS

Many stakeholders who provided feedback on the Taskforce’s Consultation Report support rule changes to the pre-marketing prohibitions that would align regulation in Ontario with recent rule changes in the U.S. Further, stakeholders advised that appropriate monitoring of the trading patterns of market participants who have access to confidential advance information is important to detect and deter insider trading or tipping.

Recommendation:

The Taskforce recommends liberalizing the ability for reporting issuers to pre-market transactions to institutional accredited investors prior to the filing of a preliminary prospectus. The ability to communicate with potential investors to gauge the demand for a public offering would minimize the risk of failed transactions. This recommendation should be implemented by making changes to the existing pre-marketing prohibition, instead of creating a new exemption.

A more restrictive testing-the-waters regime in Ontario relative to the U.S. puts Ontario issuers and investors at a disadvantage. Accordingly, the Taskforce recommends allowing pre-marketing of transactions to proceed on a similar basis as under the U.S. regulatory regime while taking into consideration the liquidity of the Canadian market.

The greater flexibility for reporting issuers to pre-market transactions to institutional accredited investors prior to the filing of a preliminary prospectus should be accompanied by increased monitoring and compliance examinations. Regulators should review the trading patterns of any such institutional accredited investors to deter insider trading and tipping. To assist with this, investment dealers should be required to keep a list of contacted investors in their deal file and that it be filed with IIROC in an IIROC prescribed format or provide the OSC with such a list upon request. The filing would allow IIROC to monitor such activities without creating additional regulatory burden, such as non-disclosure agreements being signed by institutional accredited investors. It is expected that premarketing done in relation to private placements of reporting issuers be filed with IIROC in the same format.

20. Transitioning towards an access equals delivery model of dissemination of information in the capital markets, and the digitization of capital markets

As technology advances and digital access increases, the methods companies use to communicate with their investors and stakeholders will also evolve. Allowing companies to provide documents in electronic format, including by posting them on websites, helps to minimize the resources (both time and costs) when compared to physical delivery. The ongoing COVID‑19 pandemic underscores the need for Ontario’s market participants to be able to adapt to a digital-first world.

Many stakeholders commented on the timeliness of electronic delivery and expressed a general preference for less paper-based communication. They also indicated to the Taskforce that reducing the costs of communication by adopting digital delivery is beneficial to all market participants. Digital delivery is operationally simpler for issuers and fund manufacturers and allows investors electronic seamless access to investment documents, which is even more important during the COVID‑19 pandemic. As well, facilitating more digital delivery improves environmental sustainability.

Recommendation:

The Taskforce recommends adopting full use of electronic or digital delivery in relation to documents mandated under securities law requirements (i.e., access equals delivery model) and reducing duplicative and unnecessary regulatory burden.

An access equals delivery model should replace the defaulted delivery of disclosure documents of all issuers and investment funds, including: a prospectus under prospectus offerings, annual and interim financial statements and related Management Discussion and Analysis (MD&A) , and the management report of fund performance (MRFP). For greater certainty, notification that these disclosure documents are available would not be required, and as long as they are accessible on the internet, investors are considered to have received delivery of these documents.

The Taskforce also recommends an electronic delivery model for all other documents that investors receive, including electronic delivery of materials that they rely on in order to vote, such as proxy‑related materials and notices for regular and special meetings. The Taskforce recognizes that this would need to be implemented with a requirement for all investors to provide email contact information and, in the interim, it would apply only to investors who receive actual notice by email. This would help ensure investors have appropriate advance notice regarding the availability of pertinent investment information. Issuers could consider extenuating circumstances on a case-by-case basis for the provision of mailed documents.

The Taskforce recommends that the access equals delivery model be implemented in Ontario within six months following the publication of this report. The Taskforce recognizes that this recommendation would likely be most effective when implemented in a harmonized manner across the country and urges the other members of the CSA to consider also adopting a similar model to reduce the regulatory burden on issuers across Canada.

21. Consolidate reporting and regulatory requirements

As our capital markets regulatory framework modernizes, outdated and duplicative public reporting requirements must also be addressed. Unnecessary costs and resources are borne by companies and shareholders when reporting requirements are not streamlined. Further, duplicative information repeated in multiple disclosure documents adds to the volume and complexity of disclosure that investors must absorb.

Stakeholders are generally supportive of consolidating reporting and regulatory requirements to reduce regulatory burden. The Taskforce heard that issuers would welcome any reduction in costs associated with streamlined reporting and regulatory requirements. Moreover, stakeholders advised that consolidating and clarifying certain disclosures and promoting accessibility may enhance investor protection by improving the quality of disclosure.

Recommendation:

The Taskforce is recommending that in 2021, the following reporting and regulatory requirements be enacted:

1. Combining form requirements

Combining the form requirements for the Annual Information Form (AIF), MD&A, and financial statements. Reporting issuers can still opt to keep their financial statements separate, but they would benefit from having the option of combining them with the AIF and MD&A similar to the approach taken in the U.S., where they can file the equivalent to the AIF, MD&A and financial statements as one package. This would result in less duplication between the MD&A and AIF language, particularly around the description of the business and risk factors.

2. Streamlining the material change report

Streamlining the material change report by allowing instead, at the election of the market participant, the filing of a news release containing the required information about a material change on SEDAR. This would be consistent with existing practices where the material change report wraps the news release that has already been filed on SEDAR.

3. Eliminating the MRFP

Eliminating the interim MRFP, streamlining the contents of the MRFP, and in accordance with the move to access equals delivery recommended above in Recommendation 20, eliminating physical delivery of the MRFP to investors. The Taskforce notes that these changes are overdue as the MRFP was not streamlined when the Fund Facts disclosure requirement was implemented.

4. Investment fund issuers

Streamlining certain reporting and regulatory requirements applicable to investment fund issuers.

5. Prospectus and Annual Information Form

Combine the simplified prospectus and annual information form into one annual disclosure document, eliminating redundant disclosure requirements and updating other requirements.

6. Other changes to financial report requirements

Make changes to financial reporting requirements to eliminate the requirement to include unnecessary non-IFRS items from the financial statements.

7. Personal Information Form

Streamline the Personal Information Form (PIF) filing requirements for all issuers.

Following the publication of the Consultation Report, the OSC published in August 2020 a final version of rule amendments to reduce the number of Business Acquisition Reports (BAR). As such, the Taskforce’s view is that further changes to BAR reporting are not warranted at this time. The Taskforce recommends that the OSC reassess periodically whether additional changes are needed to BAR reporting after the current amendments take effect in November 2020.

This recommendation should be implemented in Ontario. However, we recognize that this recommendation would also likely be most effective when implemented in a harmonized manner across the country and urges the CSA to consider adopting a similar model in order to reduce the regulatory burden on issuers across Canada.

22. Allow exempt market dealers (EMDs) to participate as selling group members in prospectus offerings and be sponsors of reverse-takeover transactions

EMDs have traditionally played an important role in assisting smaller issuers and start-ups to raise capital at the pre-IPO stage. However, as smaller issuers grow and seek financing through prospectus offerings, EMDs are often unable to continue supporting these issuers. EMDs are currently prohibited from participating as selling group members in prospectus offerings even though this was previously allowed prior to December 2017. Allowing EMDs to again participate would enable them to maintain their relationships with issuers following an IPO and would open additional channels of financing to issuers, particularly venture issuers. In addition, the current restriction on EMDs participating in prospectus offerings is a barrier to EMDs acting as agents in CPC offerings (used by smaller issuers under the TSXV’s capital-raising framework because the TSXV’s CPC Policy requires at least one agent in the CPC offering to be an IIROC member).

The Taskforce’s consultation has indicated that stakeholders are supportive of the underlying policy objective of enhancing capital raising opportunities for issuers by allowing EMDs to act as selling group members in prospectus offerings and as sponsors of RTOs. This would also provide investors with access to greater investment opportunities and help companies grow with the additional capital raised.

Recommendation:

The Taskforce recommends that the OSC and TMX allow EMDs to act as “selling group members” in the distribution of securities made under a prospectus offering. The recommendation would include initial public offerings and prospectus offerings in connection with a qualifying transaction.

The OSC should set reasonable conditions on EMDs to be eligible to act as “selling group members” in prospectus offerings, such as the following:

  • An investment dealer acts as an underwriter in connection with the distribution and signs an underwriter certificate in accordance with the requirements of Ontario securities law; and
  • The commissions, fees or other compensation paid to the EMD do not exceed 50 per cent of the commissions, fees or other compensation paid to the investment dealer that acts as underwriter.

The above conditions are intended to ensure that investment dealers remain involved in the offering and will be signing an underwriter certificate.

The Taskforce also recommends that the OSC work with stock exchanges to allow EMDs to act as sponsors in RTOs.

This recommendation would improve capital-raising, particularly for smaller issuers that currently find it difficult to access capital through investment dealer channels. Investors may also experience more opportunities to participate in prospectus offerings through established EMD distribution channels. This recommendation recognizes the important role EMDs play in supporting early-stage issuers and allows these players to participate in an issuer’s entire lifecycle (i.e., from early to growth/maturity stage).

The Taskforce recognizes that this recommendation will be most effective when implemented in a harmonized manner across the country and urges the CSA to consider adopting a similar model in order to reduce the regulatory burden on issuers across Canada.

23. Introduce additional Accredited Investor (AI) categories

In 2019, 90.5 per cent of capital raised under prospectus exemptions was raised using the AI exemption.footnote 39 The current definition of AI includes individuals who meet specific income and net financial asset thresholds. Although these criteria may be indicative of an investor’s ability to withstand potential market losses, they are not necessarily correlated with one’s sophistication or ability to understand risks associated with investments, including the potential for losses. In August 2020, the U.S. Securities and Exchange Commission updated the definition of AI under its rules. The expansion of new categories to the definition included, but was not limited to, professional knowledge, experience or certifications (in particular, those with Series 7, 65, or 82 licenses), “knowledgeable employees” (such as executive officers and directors) of a private fund, and “family offices” with at least US$5 million in assets.

Through the Taskforce’s public consultations, many stakeholders were supportive of expanding the AI categories. Stakeholders have noted the importance of capital formation for businesses and the greater access to investments, while maintaining appropriate investor protection. Stakeholders also noted that the AI should be expanded to encompass investors who have the proficiency to understand the potential risks of investments.

Recommendation:

The Taskforce recommends expanding the AI definition to those individuals who have completed and passed relevant proficiency requirements, such as the Canadian Securities Course Exam (in conjunction with another proficiency exam); the Exempt Market Products Exam; the CFA Charter; or those who have passed the Series 7 Exam and the New Entrants Course Exam (as defined in NI 31-103) indicating a high degree of understanding of investments and markets.

If an individual meets the requisite proficiency standard in order to be able to recommend investment products to other investors, that individual should be capable of making similar investment decisions for themselves. Adding criteria based on existing educational proficiency requirements would provide greater investment opportunities for individuals who already have the sophistication required for investment decisions and can adequately quantify and understand the risk of potential investments.

This recommendation addresses the growing importance of the exempt market and the need to increase capital raising options undertaken by issuers. Expanding the definition of AI would lead to increased opportunities for individual sophisticated investors who understand investment risks, as well as greater availability of private capital for issuers.

The OSC should publish guidance to create transparency such that the new categories are easily understood by investors and can be verified by businesses.

24. Expedite the SEDAR+ project

Currently, market participants must navigate six separate technology platforms to file or search various electronic regulatory documentation.

SEDAR+, formerly known as the National Systems Renewal Program, is an initiative of the CSA that aims to replace CSA national systems — the System for Electronic Document Analysis and Retrieval (SEDAR), the System for Electronic Disclosure by Insiders (SEDI), the National Registration Database (NRD), the National Registration System, the National Cease Trade Order Database (CTO) and the Disciplined List (DL)) with a more centralized CSA IT system. CSA members have been working together on the SEDAR+ project since 2016. The SEDAR+ project aims to:

  • Allow for single portal access to all filings;
  • Address cyber security and privacy management;
  • Allow for a larger scope of filings and system users;
  • Provide better functionality through a modernized user interface, with search function improvements and harmonized processes for all filings; and
  • Facilitate better data quality through database consolidation and input standardization.

The target date for Phase I (replacement of SEDAR, CTO and DL) is currently expected to launch in 2021. Phase II will target the replacement of SEDI and NRD.

Through the Taskforce’s public consultations, all commenters voiced concerns over the antiquated systems and universally supported expediting the SEDAR+ project given the benefits. Market participants continue to rely on accurate digital information for regulatory disclosures and filings to evaluate issuers and support their investment decisions. Updating the program would help investors and businesses save time and money.

Recommendation:

The Taskforce supports the goal of the SEDAR+ project and recommends that the OSC work with all CSA jurisdictions and accelerate this initiative. SEDAR+ would modernize how market participants use the centralized system, making it easier to file and access documentation. Given the importance and impact SEDAR+ would have on market participants and their operations, the Taskforce recognizes the need to expedite this project.

Through the consultations, stakeholders called for a centralized system that is user-friendly for all levels of investor sophistication and searchable to expedite access to information. Aside from existing input from market participants on SEDAR+, the Taskforce also recommends that the centralized system be tested with stakeholders prior to launch, such that feedback on the features and functionality can be incorporated and potential risks can be mitigated.

Expediting the SEDAR+ project would facilitate the implementation of the Taskforce’s recommendation of the access equals delivery model. Furthermore, the Ontario government has recently placed a greater emphasis on the digitization of the services it provides, and the Taskforce recommends expediting the SEDAR+ initiative as a means of achieving this policy goal.

25. Modernize Ontario’s short selling regulatory regime

Short selling is an essential part of capital markets activities which provides liquidity and facilitates efficient price discovery. Traditionally, Canadian securities regulators have relied on anti-manipulation and deceptive trading prohibitions to manage the potential adverse impact of short selling on the market. Currently, a market participant in Ontario wishing to engage in short selling must have a reasonable expectation of settling any trade that would result from the execution of a short sale order.

The current requirements under IIROC’s Universal Market Integrity Rules (UMIR) are not stringent enough to ensure that short sellers are taking appropriate steps to confirm that adequate securities are available to them to settle any short sale execution prior to the entry of the order in the marketplace. Ontario’s short selling regime stands in contrast to both the U.S. and the European Union, where there are pre-borrow or locate requirements for short sales as well as mandatory close-out or buy-in provisions.footnote 40 In addition, concerns about “short and distort” campaigns exist and are addressed in the recommendation that outlines a prohibition to deter and prosecute such misleading or untrue statements.

Recommendation:

The Taskforce recommends that IIROC revise its UMIR to require an investment dealer to confirm the ability to borrow securities prior to accepting a short sale order from another person or entering an order for its own account. Securities that are identified as “easy-to-borrow” would not be subject to this requirement.

1. Types of Confirmation

Types of confirmation include:

  • Confirmation that the security has been borrowed;
  • Confirmation that a bona-fide arrangement has been made to borrow the security; or
  • Confirmation that there are reasonable grounds to believe that the security can be borrowed (identified as “easy to borrow”), so that it can be delivered on the settlement date.
2. Mandatory Buy-In

Should a short sale fail to settle, the short seller would be subject to a mandatory buy-in. To allow for fails due to administrative issues, the buy-in requirement would be triggered at settlement date +2 (trading date +4). The obligation to execute the buy-in would rest with the dealer. This would accommodate administrative delays, such as legend removal or delayed corporate actions.

When implementing the rule, IIROC should consider if any additional activities may cause a legitimate settlement delay, thereby warranting a specific exemption from the buy-in requirement. IIROC should inform the OSC if changes to the rules of the Canadian Depository for Securities Ltd. are also required.

When the buy-in requirement is triggered, IIROC should allow the dealer to buy-in at reasonable commercial terms, determined by prevailing market conditions, which include several factors, such as price and liquidity, by a specified date. This would aim to prevent introducing risks to fair and orderly markets.

This recommendation would align Ontario’s short selling regulation with the positive locate model in the U.S. In the interest of harmonization, the Taskforce strongly recommends that the CSA consider implementing these changes to the short selling regime across Canada.

26. Prohibit short selling in connection with prospectus offerings and private placements

The existing prospectus system is generally working effectively for Canadian issuers. However, multiple stakeholders advised that short selling in connection with prospectus offerings and private placements is making pricing and execution of prospectus offerings more difficult. Since prospectus offerings and private placements are generally priced at a discount to the market price, market participants and investors who expect to purchase under the offering may seek to profit through aggressive short selling prior to the offering to depress the price of the offering.

Short selling is particularly problematic where the underwriters are engaged in market stabilization in connection with the prospectus offering. In the U.S., the Securities and Exchange Commission has addressed some of these concerns through the prohibition in Rule 105 of Regulation M: Short Selling in Connection with a Public Offering. Stakeholders noted to the Taskforce that bought deals pre-arranged with hedge funds who are shorting the stock before the bought deal is announced are rife in the Canadian markets, particularly within capital-intensive industries. This harms the company, its shareholders and the uninformed investors trading against the short sellers.

Recommendation:

The Taskforce recommends that the OSC adopt a rule prohibiting market participants and investors who have previously sold short securities of the same type as offered under a prospectus or private placement, from acquiring securities under the prospectus or private placements.

There are current requirements that could potentially apply to short selling in advance of a prospectus offering or private placements, such as:

  • Market participants and investors who have access to material undisclosed information concerning the offering would be precluded from short selling by the insider trading prohibition;
  • The underwriter registration requirement may apply to market participants and investors who sell short in advance of an offering and fill their short position through the offering, since this is a form of indirect distribution;
  • Insiders of the issuer who enter into securities lending arrangements in connection with short sales prior to an offering would be subject to reporting requirements; such transactions may also be limited by the insider trading prohibition and applicable blackout periods; and
  • The prohibition on market manipulation may apply to conduct that artificially depresses the price of the securities.

These requirements, however, would require detailed and contextual analysis.

A simple requirement that does not require regulators to prove intent is preferable. This would prohibit market participants and investors who have a short position arising from a short sale in a security of the same type as offered under a prospectus or through a private placement (or fungible with such securities, such as a warrant, option or convertible or exchangeable security) from acquiring securities in an offering. It would create greater clarity for all market participants and be less complicated from both a conduct and compliance perspective. This recommendation should not apply to trading in exchange-traded funds. Exemptions for activities such as market-making by registered dealers should be considered.

27. Amendments to IIROC’s UMIR 6.4 to harmonize with Regulation M for large block trades

In the absence of any exemptive relief, UMIR requires trades to be executed on a marketplace as it relates to cross-border “large in magnitude” bought deals. While IIROC would typically provide an exemption to allow the “take-on” portion of the trade to be executed off-marketplace, it would generally require the unwinding trade (i.e., the trade to be distributed to clients) to be executed on a marketplace, and that better-priced orders are displaced. In the U.S., qualifying bought deals rely on Regulation M (Reg M) exemptions which allow the entire transaction, including the distribution to clients, to be completed away from the market.

The difference in requirements places Canadian dealers at a competitive disadvantage to be able to compete fairly for these deals. There is less complexity under the U.S. requirements in comparison to Canada where “on-market” execution is generally required. This added complexity is seen to reduce the opportunity for Canadian dealers to participate in large cross-border deals. The opportunities are generally only provided to U.S. dealers who can complete the transactions under Reg M with reduced complexity. Further concern rests with the inability of Canadian dealers to participate in these deals, thereby restricting access by Canadian clients, including retail clients. While in some situations, exemptive relief may be available to Canadian dealers, there is some degree of uncertainty about how the exemptive relief process would apply in an efficient and timely manner to these transactions.

Recommendation:

To address these concerns, the Taskforce recommends that IIROC propose rule amendments to UMIR 6.4 that specifically exempt these cross-border bought deal transactions from the requirement to execute on a marketplace. These exemptions should at a minimum be extended to:

  • Securities that are listed both in Canada and the U.S.
  • Transactions that are “large in magnitude”, that are:
    • Greater than 5 per cent of the public float; and
    • For a value greater than $500 million
  • Would qualify as a distribution subject to Reg M and qualify for the block exemption afforded by Reg M under U.S. securities law.

The exemption would require that there is appropriate public transparency, such as a press release. During analysis and implementation, IIROC should consider an exemption for similar-size transactions on Canadian marketplaces, given the smaller market cap, a minimum value threshold should be considered.

The Taskforce recommends that OSC and IIROC, at a later date, assess and consider whether further harmonization with Reg M should be implemented in order to keep Ontario markets competitive.

28. Improve the ability of independent dealers to access capital through sub-debt, new issue letters, rules around capital requirements for bought deals

Current IIROC prudential requirements relating to investment dealers are intended to set and enforce high‑quality regulatory standards, protect investors and strengthen market integrity. However, certain requirements may inadvertently and unnecessarily limit access to or restrict critical sources of liquidity and capital by dealers. The Taskforce heard that increased collateral requirements imposed by clearing agencies in accordance with their risk management frameworks in certain circumstances might restrict critical sources of liquidity for independent dealers. Assisting independent dealers in their role of facilitating capital raising for entrepreneurs and businesses is imperative not only from a public policy perspective, but also to foster economic growth.

Subordinated debt

A subordinated loan is an unsecured debt instrument that is designed to be an efficient vehicle for IIROC dealers to manage liquidity needs and support regulatory capital. IIROC rules require a three-party uniform agreement between a dealer, its creditor and IIROC; and repayment requires IIROC approval. However, the standard agreement also prioritizes claims by chartered Canadian banks as senior to all other creditors, with the exception of customer claims. Stakeholders advised that prioritizing banks over other lenders could be needlessly restricting the pool of available creditors, and thus, dealer access to available sources of liquidity and capital.

Underwriting commitments

One way to obtain IIROC reduced margin requirements for an underwriting commitment is if a dealer obtains a new issue letter with minimum terms acceptable to IIROC. A new issue letter can also be an efficient means of providing a dealer with access to an appropriate underwriting loan facility that can be drawn upon as needed. However, if the new issue letter issuer is an Acceptable Institution as defined by IIROC, we have heard that accessing new issue letters from such entities by independent dealers is onerous at best, or not likely at all. As a result, those dealers would have to seek a new issue letter from a lender that does not meet the Acceptable Institution criteria requiring the lender to fully collateralize the new issue letter with high-grade securities.

Canadian Depository for Securities (CDS) collateral requirements

The Taskforce is also aware that the risk-based collateral requirements of the CDS, which are designed to conform to international standards for clearing agencies. Sometimes, these require dealers to transfer very large sums of cash or other collateral on relatively short notice, in connection with trades where the dealers have the securities on hand for delivery or they are available following purely administrative steps. The Taskforce also understands that the amounts of collateral required can be unpredictable to operational personnel of dealers. In addition, the amounts of collateral required may not reflect the actual risk being assumed.

Recommendation:

The Taskforce recommends that the OSC work with IIROC to review the applicable sections of the standard uniform subordinated loan agreement to assess if a proposal to remove the prioritization of claims by banks is warranted, or to create a level playing field, if other lenders should also receive this prioritization when they lend.

Furthermore, the Taskforce recommends that the OSC work with IIROC in the near term to initiate a working group of industry (including independent dealers) and other stakeholder participants to study applicable existing IIROC rules for underwriting commitments and develop a proposal to resolve any applicable issues identified. IIROC should ensure that consideration is given to making it easier for non-bank affiliated dealers to access capital where identified benefits can be realized while managing applicable risks.

Lastly, the Taskforce recommends that the OSC work with CDS to consider alternatives to manage collateral requirements that might significantly impact critical sources of liquidity for independent dealers in certain circumstances.

29. Permit proceeds from disposition to be reinvested above the investment limit maximums under the Offering Memorandum (OM) prospectus exemption

After the AI prospectus exemption, the Offering Memorandum (OM) prospectus exemption was the second most relied upon prospectus exemption for individual investors. From 2017–2019, the gross proceeds raised in Ontario using the OM prospectus exemption increased from $136 million to $202 million. In comparison, the gross proceeds raised in Ontario using the AI prospectus exemption increased from $81.8 billion to $83.8 billion during that same period. The OM prospectus exemption has been underused since it was introduced in 2016.

Throughout the consultation, stakeholders have commented on the need to increase capital-raising opportunities for companies and allow investors to participate in more financing opportunities, including making changes to prospectus exemptions to widen the investor base.

Recommendation:

To facilitate capital formation and help increase the market’s use of the OM prospectus exemption, the Taskforce recommends allowing the re-investment of proceeds from disposition through the OM prospectus exemption to not be counted towards the 12-month preceding $100,000 investment limitation. In particular, this recommendation would apply to an eligible investor who is an individual having received advice from a portfolio manager, investment dealer or EMD and meets suitability requirements.

This recommendation relates to the $100,000 investment limit set out in the OM prospectus exemption in section 2.9 of NI 45-106. The portfolio manager, investment dealer or EMD would continue to be subject to all obligations to make and document its determination that the re‑investment of proceeds from disposition and any new investment under the OM prospectus exemption continues to be suitable for the investor. Similarly, this recommendation would not limit in any way a registrant’s obligations under the Client Focused Reforms (CFRs) once implemented.

30. Expand the civil liability for offering memorandum misrepresentation to extend to parties other than the issuer

Recently introduced prospectus exemptions, such as the offering memorandum prospectus exemption, and proposed new prospectus exemptions, including those recommended by the Taskforce, provide issuers with greater flexibility to distribute securities to retail investors. The rights of action for misrepresentations in an offering memorandum that contains a misrepresentation are more limited in Ontario than in other Canadian jurisdictions. For example, in Ontario claims may only be made against the issuer, not directors or promoters of the issuer.

Recommendation:

To enhance the integrity of the exempt market, the statutory liability in respect of a misrepresentation in an offering memorandum should also apply to the key actors who are responsible for the issuer’s disclosure, such as its board of directors, promoters, influential persons and experts. This would create incentives for these individuals to take reasonable steps to ensure that the disclosure provided to prospective purchasers is accurate and does not contain misrepresentations. This also increases harmonization with the other major Canadian jurisdictions, such as British Columbia. As under the current legislation, the OSC should have the authority to designate which types of documents and which prospectus exemptions are subject to the rights of action.

31. Provide the OSC with rulemaking authority to adapt prospectus liability to address regulatory gaps resulting from new and evolving financing structures

The rights of action under the Securities Act for misrepresentations in a prospectus are fundamental to investor protection. There are potential regulatory gaps that arise if convertible or exchangeable securities are distributed under a prospectus, in multi-stage financings, in financing transactions involving plans or arrangements or other restructuring transactions or in more complicated financing structures involving multiple related issuers. Currently, these gaps are addressed through undertakings or contractual rights.

Recommendation:

To enhance the integrity of the prospectus system, the Taskforce recommends providing the OSC with rulemaking authority to prescribe: (i) the class of purchasers entitled to benefit from the statutory remedies for misrepresentations in a prospectus; (ii) the parties subject to claims; and (iii) potential defences applicable to such parties, in circumstances where there is uncertainty regarding the interpretation of the liability provisions or legislative gaps that undermine the intent of those provisions.

32. Give the OSC additional designation powers

An expansion of the OSC’s powers to designate novel products as securities would provide regulatory clarity to businesses with unique offerings and appropriate protection to investors.

Digital assets and crypto assets continue to be an emerging area of the capital markets. There are a variety of different types of crypto assets meriting different approaches to regulation. For example:

  • Certain crypto assets, such as Bitcoin and Ether, share many similarities with commodities, and are not currently in and of themselves, securities or derivatives;
  • Other crypto assets, such as digital or tokenized versions of traditional securities or derivatives with crypto assets as an underlying interest, are classified as securities and/or derivatives and are subject to regulatory requirements; and
  • “Crypto-asset contracts” (i.e., contractual rights to receive crypto assets), which in many cases constitute securities as evidence of indebtedness and investment contracts, are currently subject to regulatory requirements and may raise significant investor protection concerns.

As technology evolves, variations to the features of crypto assets give rise to uncertainty around the classification of these assets. Some of these assets or related business models may raise investor protection concerns that are not addressed under the existing regulatory framework. However, designation powers should be exercised with caution. While certain financial assets such as crypto assets may benefit from the OSC’s regulatory oversight, other assets or business models may raise fewer investor protection concerns and would not benefit from regulatory oversight. Jurisdictions, including the U.K. and the European Union, have recently proposed comprehensive frameworks for the regulation of certain types of crypto assets.

Recommendation:

To provide additional regulatory certainty in connection with novel products, including crypto assets, the Taskforce recommends providing the OSC with designation powers.

1. Designate Crypto Assets

As the nature and variety of crypto assets and the related business models are still evolving, the ability to designate crypto assets would be useful in addressing any issues that may arise, provided that the OSC’s regulatory oversight would be appropriate. Given the transformative impact on the capital markets, providing the OSC powers to designate certain crypto assets as securities and/or derivatives would alleviate market uncertainty.

2. Other Designation Powers

The Taskforce also recommends giving the OSC expanded designation powers to align with the proposed draft legislation under CCMR and other legislation such as the British Columbia Securities Act , to provide the OSC with the authority to make an order designating:

  • A derivative, or a class of derivatives, to be a security;
  • A security, or a class of securities, to be a derivative;
  • A contract or instrument, or a class of contracts or instruments, to not be a derivative; and
  • A security, or a class of securities, to not be a security.

33. Provide an exemption from the disclosure of conflicts of interest in connection with private placements to institutional investors

Ontario institutional investors routinely participate in international securities offerings involving a wide range of issuers and dealers. However, Ontario and Canadian securities regulations require institutional investors to receive disclosure requirements above and beyond other foreign jurisdictions. The Taskforce heard in the consultation from institutional investors that this disclosure does not provide additional benefit to sophisticated investors, who perform their own due diligence in participating in international deals. Furthermore, these additional Canada-specific requirements may create a disincentive to include Ontario institutional investors in transactions — as the dealer or issuer has to spend additional time and resources for the added disclosure. This can leave Ontario’s institutional investors at a disadvantage to their global peers. While this disclosure may be appropriate for investors generally, it is not necessary where the investor is a sophisticated institution, such as a pension fund.

Recommendation:

In order to improve access to international investments and reduce unnecessary red tape, the OSC should provide an exemption from disclosure requirements to facilitate investments by Canadian institutional investors, where securities law requirements may act as a barrier to participation in international offerings and investors who benefit from those requirements do not require the protection. As well, the exemption should not prejudice any other party or negatively impact the market oversight by the OSC. The OSC should provide such an exemption to the disclosure requirements under NI 33-105 and conduct a review of other requirements for similar potential exemptions.

Footnotes