Not being shy about
demonstrating my stunning command of the blindingly obvious, I will share with
you the startling insight that cross-border trading and ownership of securities
will only continue to increase as markets globalize. The world keeps getting
smaller. As comedian Steven Wright observed, everything is within walking
distance if you have the time.
This is reflected in the challenges to the
regulation of international securities transactions in dynamically changing markets.
When activities appear to be unregulated, the regulators can take heat, and
when they get involved and try to direct matters, they can be faulted for
getting in the way and adding costs. It is like the classic question — is it
better to ask permission or seek forgiveness, and why in marriage the answer is
Addressing these challenges, two recent
regulatory developments provide some clarity in steering securities
transactions across international borders. The first, Ontario Securities Commission
Rule 72-503, deals with distributions of securities to non-local investors.
Prior to the adoption of the new rule, the principal source of guidance was a
regulatory interpretation note. That note expressed the regulators’ views that
there is no benefit to Canadian regulators becoming overly involved in foreign
capital raises. That meant our laws would generally not be applied so long as
“reasonable precautions” were taken to ensure that the securities “came to
rest” out of the province. These objectives are understandable. It is unlikely
that foreign investors would expect Canadian laws to protect them.
Nevertheless, they were often difficult to apply. For example, it was
challenging to know when things “come to rest,” the only certainty being that after
considering the question I myself would need to rest.
Under the new rule, distributions of
securities to non-Canadians can be completed on a prospectus exempt basis if
certain black and white conditions apply, specifically if the offering is
qualified in the United States or another specified foreign jurisdiction, if
the distribution is part of an offering concurrently qualified by prospectus in
Ontario or if the distribution is being made to a non-Canadian (or, if through
an impersonal stock exchange, if the issuer/seller has no reason to believe
that the purchaser is Canadian) and there are restrictions on resale.
There are still some judgment calls to be
made. The “come to rest” test, for example, will apply to determine if there is
a distribution in Canada in the first place. Ultimately, however, there are
generally clear exemptions on which reliance can be placed.
The other regulatory development is the
initiative to reform (by amending National Instrument 45-102) the principles
that determine when Canadian securities laws apply to resales of securities.
The policy rationale for these rules is clear: There is no reason for Canadian
rules and regulators to be involved in trades where there is minimal connection
to Canada and little or no likelihood of a market for the securities here.
Under the current rules, securities that are not freely tradable can be resold
if, among other things, the trade is made outside Canada and Canadians do not
own more than 10 per cent of the securities or constitute more than 10 per cent
of the security holders of the issuer. The principal problem with this standard
is that often issuers themselves do not have great visibility on their security
holders, so it is burdensome at best to expect security holders to know when they
can rely on the exemption — not to mention that the availability of the
exemption could change back and forth, complicating any sales efforts.
If adopted, the proposed amendments would
create an exemption for resales of shares of non-reporting issuers if, among
other things, the trade is made to a person or on a market outside Canada and
if at the time of the original distribution the issuer was a “foreign issuer”
(essentially an entity organized under foreign laws that does not have its head
office or a majority of its assets in Canada or for which Canadian residents
are a majority of the board or the executive suite).
In contemporary times, it is important that
we have coherent and practical rules for securities to cross borders, as one
bad review on TripAdvisor and travelling securities may choose to go elsewhere.
practises securities, M&A and corporate finance at Goodmans LLP in Toronto.
The opinions expressed in this article are his alone.