1. CANADIAN SECURITIES REGULATORY REGIME
The regulation of the sale and distribution of securities in Canada is a matter of provincial and territorial jurisdiction. In Canada (unlike in the U.S.), there is no national or federal securities statute, although there is a push towards a federal system. Each of the 10 provinces and three territories is responsible for and has its own system of securities regulation, and its own securities regulatory authority (e.g., the Ontario Securities Commission).
Despite the fact that securities regulation in Canada is not centrally governed, the Canadian Securities Administrators (CSA), an umbrella organization of Canada’s provincial and territorial securities regulators whose objective is to improve, coordinate and harmonize regulation of the Canadian capital markets and protect Canadian investors from unfair, improper or fraudulent practices has developed a number of initiatives to harmonize the different rules and policies in effect in the various jurisdictions relating to publicly-traded companies. Such uniform national mandates include mutual reliance procedures for filing and clearing prospectuses, timely disclosure, electronic filings under SEDAR+ (the Canadian equivalent to EDGAR), shareholder communication, and continuous disclosure.
Both the securities which are distributed and the persons and companies, such as dealers, who participate in the distribution, are governed by securities legislation. For example, any person who is in the business of trading in securities or provides securities advice, or acts as an investment fund manager in Canada must meet certain registration requirements, unless there is an available registration exemption. Further, certain prospectus requirements must be met for distributions of securities. There are certain exemptions from these requirements. The most commonly utilized prospectus exemptions are: (1) the accredited investor exemption, whereby an investor who qualifies as an “Accredited Investor” pursuant to certain asset or income thresholds may purchase securities on a prospectus-exempt basis; (2) the friends, family and business associates exemption, whereby certain investors may purchase securities on a prospectus-exempt basis based on their relationship with the issuer or its directors and officers; and (3) the minimum amount investment exemption, whereby a person that is not an individual (and is not created for the sole purpose of making the investment) may purchase securities on a prospectus-exempt basis if they are investing a minimum of $150,000 in cash at the time of distribution.
2. CANADIAN STOCK EXCHANGES
The Toronto Stock Exchange (the “TSX”) and the TSX Venture Exchange (the “TSXV”) are two of the largest stock exchanges in Canada. The TSX is intended to be used by senior issuers and the TSXV is primarily used by more junior issuers that have not met certain requirements for listing on the TSX. A third Canadian exchange is the Canadian Securities Exchange (the “CSE”) which offers an opportunity for micro-cap and emerging growth companies to list their shares with a reduced barrier to listing and reduced ongoing listing requirements as compared against both the TSX and TSXV. All companies listed on the TSX, TSXV and CSE are required to complete a listing application to the respective exchange which allows the exchange to assess whether the applicant company meets its specific listing criteria. In addition, any company seeking to go public in Canada must file audited consolidated financial statements for two to three years preceding the listing date, which generally must be prepared in accordance with Canadian IFRS.
While the TSX, TSXV and CSE each have differing threshold requirements for accepting an application to list on the respective exchange, certain factors considered by the exchanges include, a record of successful operations, sufficient experience and expertise of the management of the applicant company, whether the company has or has access to capital sufficient to operate the company and its business plan for the subsequent 12 months, and whether there are sufficient outstanding securities in order for there to be a viable market in the trading of the company’s listed securities. There are typically additional listing requirements and levels of scrutiny for companies whose principal business operations or operating assets are primarily located in or conducted from a jurisdiction outside Canada, the United States, Australia, New Zealand or Western Europe.
Once a company is listed, each exchange will have ongoing listing requirements related to corporate governance, ongoing disclosure (in addition to corporate and securities laws requirements) and approvals for certain share issuances or amendments to certain organizational and other key corporate documents. Failure to meet such ongoing listing requirements may lead to, among other things, the issuer being delisted from the exchange.
3. MULTIJURISDICTIONAL DISCLOSURE SYSTEM
The multijurisdictional disclosure system (the “MJDS”) is a cooperative effort between the U.S. Securities and Exchange Commission (the “SEC”) and Canadian provincial securities regulators. It was established to facilitate cross-border securities offerings between the two countries.
Under the MJDS, there are two directions of offerings: northbound and southbound. The northbound MJDS enables U.S. issuers to offer securities in Canada following SEC regulations. It encompasses various activities such as rights offerings, takeover and issuer bids, business combinations, approved debt and preferred share offerings, as well as securities offerings by specific large issuers. Similarly, qualified Canadian issuers can access U.S. capital markets through the southbound MJDS rules. With the southbound MJDS, Canadian issuers can offer securities in the United States using a prospectus prepared in accordance with Canadian securities rules, while also incorporating specific additional disclosures. To qualify for the southbound MJDS, a Canadian “foreign private issuer” (excluding “investment companies” as defined by U.S. legislation) must have complied with the continuous disclosure requirements of any provincial securities regulator for a period of 12 calendar months and the issuer’s aggregate market value of equity shares must be at least US$75 million.
4. PUBLIC COMPANY MERGERS AND ACQUISITIONS
In general, mergers and acquisitions of public companies are regulated under Canadian securities law, general corporate law, and precedent set by courts of competent jurisdiction. Procedural and substantive fairness requirements must be satisfied for many transactions. There are additional requirements for certain transactions involving publicly-traded companies, namely related-party transactions, that include requirements for formal valuations and/or approval of majority of the minority shareholders, subject to certain exemptions.
5. INSIDER TRADING
In Canada, securities laws prohibit insiders of a publicly-traded company and other individuals with privileged access to undisclosed material facts or material changes from engaging in trading securities of that issuer while possessing such knowledge.
To the extent any reporting insider of a public company trades the securities of the issuer of which they are an insider during a period where no material non-public information is in their possession, they are required to file an insider report within five days of the change in their beneficial holdings. A “reporting insider” encompasses various persons such as significant shareholders (including those who have beneficial ownership of, or control or direction over, whether direct or indirect, more than 10% of the voting rights associated with the issuer’s outstanding voting securities on a post-conversion basis for any convertible securities), the CEO, CFO, COO, directors of the issuer, or significant shareholders of the reporting issuer or its majority subsidiary.