The Changing Exempt Securities Market Climate in British Columbia: Part 1
Note: The rules and law may have changed since this article was first published. It is provided for archival purposes but you should consult with your lawyer for the current state of the law
Recent regulatory changes by the British Columbia Securities Commission (the “BCSC”) reflect a shift in the weather for exempt market financings in BC. It seems that while a large part of the rest of the country is attempting to find more harmony in securities regulation, the BCSC has taken steps in the other direction. This post, which is Part 1 of a 3-part blog, will explore one of those steps.
By way of background, the “exempt market” provides companies with an alternative to costly and complicated prospectus offerings by allowing them to raise capital pursuant to certain statutory exemptions from the prospectus and registration requirements. These exemptions are found in National Instrument 45-106 (“NI 45-106”), which has been adopted in all provinces and territories across Canada. According to NI 45-106, the company selling its securities (the “Issuer”) must file a form or “report of exempt distribution” (“Form 45-106F1”) in each province where it raised money, which sets out, among other things, the exemption relied upon by each subscriber.
Form 45-106F1 was used universally across Canada until recently when the BCSC adopted a new form called Form 45-106F6: British Columbia Report of Exempt Distribution (“Form 45-106F6”). This new form requires Issuers seeking to raise capital in BC by way of prospectus exemption to provide additional disclosure regarding insiders, promoters, registrants and finders, which is not required by Form 45-106F1 (note that investment funds and certain foreign public reporting companies have received an exemption from this new form and may continue to use Form 45-106F1).
In addition to the new form, the BCSC proposed that the content of each Form 45-106F6 be published on the BCSC website. In response to privacy complaints, the BCSC tapered this proposal somewhat, but certain information is still available to the public and the media. More will be said about this in Part 3.
Form 45-106F6 is the result of an initiative by the BCSC to try and improve investor protection. Securities sold in the exempt market are high-risk investments and the increased disclosure now required by the BCSC is an attempt to mitigate those risks on behalf of BC residents.
Arguments can be made that the more information obtained, the better protected investors will be; however the new form 45-106F6 may have two notable consequences:
- First, if an Issuer sells its securities to residents of BC and residents of any other province or territory in Canada, it will now have to complete two different forms and file 45-106F6 in BC and 45-106F1 everywhere else. While this may be seen as more of an annoyance than anything, it may cause delays (it may take time for the Issuer to gather and provide its counsel with the additional information required by form 45-106F6) and additional costs (as the Issuer’s counsel has to complete a second form).
- Second, private companies are now required to disclose a level of information about insiders and promoters (which will thereafter be made available to the public) that is similar to that required of public companies. These additional requirements may be perceived as too onerous for a private company to satisfy or, more likely, an undesirable level of disclosure for a private company to make. Either way, the new form may result in private companies looking outside BC to raise capital.