CHAPTER 04 Financing a Business Operation
The most useful exemptions from the prospectus requirements for a foreign entity financing a business in Canada are the following: – The accredited investor exemption permits certain qualified investors, including institutional investors and persons or companies that meet income or asset tests, to acquire securities on a prospectus-exempt basis. – The substantial purchase exemption permits a person (other than an individual) to acquire securities on a prospectus-exempt basis whereby each purchaser invests cash in an amount of $150,000 or more. These two prospectus exemptions do not require purchasers to be provided with a disclosure document. However, in Canadian provinces other than British Columbia, Québec and, in respect of the accredited investor exemption, Alberta (where a disclosure document is “voluntarily” provided to purchasers), a purchaser will have a right of action against the issuer or selling securityholder for rescission or damages if the disclosure document contains a misrepresentation. There may also be a right of action against the directors of the issuer or selling securityholder or the dealer, if any, through which the sale was made. If a disclosure document is provided to a purchaser in connection with a trade under these two prospectus exemptions, a copy of the disclosure document generally must be filed with, and fees paid to, the securities regulator in the jurisdiction where the purchaser is located. Canadian securities legislation requires continuous disclosure of any material changes in the affairs of reporting issuers and also includes provisions relating to insider trading and takeover bids.
Several key steps have been taken to grant foreign issuers easier access to the Canadian financial markets. In 1991, a cooperative effort between Canadian provincial securities regulators and the U.S. Securities and Exchange Commission (SEC) resulted in a system known as the multijurisdictional disclosure system (MJDS). Under the northbound MJDS, securities may be offered by a U.S. issuer in Canada primarily in accordance with SEC rules. Rights offerings, takeover and issuer bids, business combinations, offerings of debt and preferred shares that have received an approved rating, as well as offerings of equity and other securities by certain large issuers, are included in the MJDS. Qualified Canadian issuers can similarly access U.S. capital markets via the southbound MJDS rules. Under the southbound MJDS, securities may be offered by a Canadian issuer in the United States using a prospectus prepared in accordance with Canadian securities rules with certain additional disclosure. A Canadian “foreign private issuer” (other than an “investment company” under U.S. legislation) may use the southbound MJDS if it has been subject to the continuous disclosure requirements of any provincial securities regulator for 12 calendar months and the aggregate market value of the equity shares of the issuer is at least US$75 million. The primary benefit for a Canadian issuer of using the southbound MJDS is that the review is conducted by Canadian securities regulators, not the SEC (though the SEC reserves the right to review when it has reason to believe that there is a problem with the filing or the offering). In addition, the applicable regulatory review periods are those prescribed by Canadian securities laws, which tend to be considerably shorter than those under U.S. securities laws.
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