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CSA Staff Notice 45-308
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Guidance for Preparing and Filing Reports of Exempt Distributions Under NI 45-106

By: Brian Koscak, EMDA Chairman and Partner, Cassels Brock & Blackwell LLP

Background

Although it is not a topic that generally garners much interest, issuers must be cognizant of their obligations under applicable securities law to file exempt trade reports in connection with certain prospectus exemptions, including the accredited investor exemption under National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106).

There are consequences for failing or improperly completing and filing a report of exempt distribution under NI 45-106. Here are two recent examples that illustrate the consequences:
  • on May 4, 2012, the British Columbia Securities Commission (BCSC) imposed a $90,000 penalty on a portfolio manager for failing to file exempt distribution reports and for failing to keep updated written compliance policies and procedures in place (1); and
  • on March 13, 2012, the Alberta Securities Commission (ASC) issued a cease trade order against an issuer for failure to fi le Form 45-106F1 (the F1 Report) in respect of a distribution. (2)
There are many other examples one could cite, but the point here is that the securities regulators take these matters seriously which has lead to the Canadian Securities Administrators (CSA) releasing on April 26, 2012, CSA Staff Notice 45-308 – Guidance for Preparing and Filing Reports of Exempt Distributions under NI 45-106 (the Notice).

The Notice sets out 11 common deficiencies that the CSA identified in connection with F1 Reports and they include:

1. Failure to use the correct form – Up until October 1, 2011 issuers only had to worry about properly completing, certifying, fi ling and paying the appropriate fees for the F1 Report. As of October 1, 2011 however, British Columbia introduced a new form of report of exempt distribution – Form 45-106 British Columbia Report of Exempt Distribution (the BC F6 Report). The BC F6 Report is only accepted in British Columbia and if a distribution occurs in BC and elsewhere, the issuer or underwriter is required to file the F6 Report in BC and the F1 Report in the other applicable jurisdictions. (3) The CSA has observed numerous examples of issuers using the wrong form and fi ling the BC F6 Report in jurisdictions where it is not accepted or required.

2. Failing to file the F1 Report on time – The F1 Report must be fi led by issuers and underwriters in connection with some, but not all, prospectus exemptions in each applicable jurisdiction where the distribution takes place. It is required where prospectus exemptions like the accredited investor exemption, the family, friends and business associates exemption, the offering memorandum exemption, the minimum amount exemption and the additional investment in investment funds exemption are relied upon. With the exception of investment funds, the filing deadline for an F1 Report is generally 10 days after the distribution date. The CSA is concerned that many issuers and underwriters have filed the F1 Reports late, and in some cases, haven’t filed them at all.

3. Failing to pay the required fee for an F1 Report – The CSA has noted that many F1 Reports have incorrectly calculated the fee, or submitted no fee at all.

4. Failing to include a complete list of purchasers - F1 Reports must disclose all purchasers from all jurisdictions, not only those identified purchasers from the jurisdiction in which the F1 was filed.

5. Failing to reconcile information in the F1 – Some issuers or underwriters report information that can’t be reconciled, for example, different total number of securities distributed, total dollar value raised, number of purchasers and/or exemptions used in items 6 and 7 of the F1 Report vs. Schedule 1 of the F1 Report. These figures need to be correct, and you need to reconcile before you file.

6. Incorrectly identifying the number of purchasers –The CSA noted that the number of purchasers referred to in the F1 Report needs to correctly identify the number of investors and not the number of securities purchased by each investor.

7. Relying on unavailable exemptions - Issuers distributing in multiple jurisdiction must remember that not all exemptions are available in all jurisdictions. A common mistake here is reporting reliance on the ‘family friends and business associates’ exemption, (4) which is not available in Ontario, although a similar ‘founder, control person and family’ (5) exemption is available in Ontario. Schedule 1 of the F1 Report should include a list of every purchaser and the specific exemption relied upon for the purchaser.

8. Failing to disclose all commission and finder’s fees - Some F1 Reports had incomplete disclosure about commission and finder’s fees. The CSA believes that these fees are sometimes excluded since they were not specifically identified as commissions or finders fees. The CSA reminds capital market participants that all compensation must be disclose and compensation includes commissions, discounts, or other fee or payments which result from a distribution of securities, regardless of what the payment is called by the issuer.

9. Failing to provide complete information regarding convertible or exchangeable securities – Some F1 Reports did not provide proper disclosure of the underlying security where a convertible or exchangeable security was distributed. F1 Reports must include a description of the underlying security, the terms of conversion or exercise, and any expiry date.

10. Improperly reported distributions under the minimum amount exemption – The CSA has observed instances where F1 Reports disclose reliance on the $150,000 or minimum amount exemption however the purchase price was below the minimum threshold amount. This minimum amount musty be met be each investor and cannot be achieved through pooling multiple investors or syndicating an investment.

11. Failing to certify the F1 – Some F1 Reports were unsigned, or lacked the date or name of the person signing the certification.

Readers are encouraged to read the complete Notice which is available on the web sites of various Canadian securities regulatory authorities and on the website of the EMDA at www.emdacanada.com

The contents of this article do not constitute legal advice and is provided for information purposes only. This article does not necessarily reflect the opinions of Cassels Brock & Blackwell LLP or any of its lawyers or clients. The content of this article is not intended to be used as a substitute for specific legal advice or opinions.

For more information contact: Brian Koscak

1. See the settlement agreement between the BCSC and Genus Capital Management Inc. at: http://www.bcsc.bc.ca/comdoc.nsf/comdoc.nsf/webpolicies/F91A395AC432CE4E882579F4005F2532?OpenDocument

2. See cease trade order by the Alberta Securities Commission dated March 13, 2012 against Sundal Resources Limited Partnership#3, Re, 2012 ABASC 100.

3. The BC F6 Report is slightly different than the F1 Report. For example, Item 4 of Form 45-106F6 requires that an issuer that is not a "reporting issuer” in any jurisdiction in Canada disclose detailed information regarding its insiders and promoters. This in effect has created a new insider reporting obligation for private companies that

are located in British Columbia that sell outside of British Columbia, or that sell securities to purchasers located in, British Columbia.

4. Section 2.5 of NI 45-106

5. Section 2.7 of NI 45-106
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