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Canadian provincial securities
laws apply anytime a company issuing securities is located in Canada or the
individual receiving or selling securities is located in Canada.
I f you purchased securities of a company in a private placement those
securities will have one or two restrictive legends on the back or front of
the share certificate you received; a Canadian legend and sometimes a US
legend. Regardless of what legend appears on the share certificate you must
comply with Canadian resale rules if you or the issuing company resides in
Canada.
What are the Canadian resale rules and what do you
need to do to resell those private placement securities you purchased? The
answer to that question depends on what type of company you purchased these
securities from. There are essentially four different categories of companies
you may have purchased those private placement securities from:
- Canadian Reporting Issuers;
- Private Non-Reporting Canadian Companies;
- Non-Reporting in Canada but US Reporting Issuers;
and
- Foreign Non-Reporting Issuers.
This article will briefly discuss the resale rules
set out by the Canadian securities regulators in each of the foregoing
category of issuers after first providing a brief over-view of the regulatory
framework.
Legal Framework.
Securities issued in a private placement
transaction is required to be stamped with a legend describing the restrictions
on resale. This legend makes it clear to everyone who comes into contact with
that share certificate that the underlying securities may not be sold or
transferred unless the terms of the restrictive legend have been met or the
sale or transfer is made pursuant to an available exemption from the
registration and prospectus requirements of all applicable securities laws.
National Instrument 45-102 - Resale of
Securities ("NI 45-102") has been adopted by all of the provinces
and territories in Canada, with some limitations to its application in
Manitoba and the Yukon. In general, NI 45-102 imposes an indefinite
hold period on stock issued by non-reporting issuers and a seasoning period
of four months on stock issued by reporting issuers in a private placement.
A "reporting issuer" is an entity that has filed a registration
statement or a prospectus with at least one provincial securities regulator
and who as a result files continuous disclosure documents with that
regulator. The securities of such entities may or may not be listed for
trading on a recognized exchange.
NI 45-102 also provides two special resale
exemptions for United States SEC reporting issuers ("US Reporting Issuers")
and for foreign non-reporting issuers ("Foreign Non-Reporting Issuers").
1) Canadian Reporting Issuers.
The restrictive legend found on
The Restricted Period’s primary requirements are:
1) that the issuer is and has been a reporting
issuer in Canada for the four months immediately preceding the trade;
2) that at least four months have elapsed from the stock’s distribution date;
3) that the trade is not a "control distribution;"
4) that no unusual effort has been made to prepare the market for the trade;
and
5) that no extraordinary commission is paid to a person or company in respect
of the trade; and
6) if the seller is an insider or officer of the issuer, the selling security
holder has no reasonable grounds to believe that the issuer is in default of
securities legislation.
In order to comply with the Restricted Period
requirements you must 1) hold the security for at least four months after you
purchased it; 2) ensure that the issuer has been a reporting issuer in a
Canadian jurisdiction for at least four months before you make the sale; 3)
avoid using an "unusual effort" to prep the market for your sale; and 4)
avoid paying an "extraordinary" commission to anyone in respect of your sale.
Once you have made sure that your sale will comply with the restricted
period requirements, you can begin the physical process of having the legend
removed from the securities. Basically, you take the securities to a share transfer
agency such as Computershare, and present them with 1) a letter of
instruction (include legend removal instructions, a SIN, and the name(s) of
the transferee(s)); 2) the original share certificates; and 3) an assignment
and irrevocable power of attorney in regards to the certificates. In
addition, all signatures must be medallion guaranteed. Process complete.
The Seasoning Period and Restricted Period provisions do not apply in
Manitoba and the Yukon because those jurisdictions do not impose restrictions
on first trades of securities distributed under an exemption from the
prospectus requirements in those jurisdictions.
In Manitoba, for instance, there are no restrictions on the resale of
securities obtained under a prospectus exemption and there are no
registration requirements for investments of over $97,000. Therefore, if you
are Manitoba-based and holding over $97,000 in securities obtained in a private
placement, then you merely need to fill out Manitoba’s Form 8A and file it,
along with a $25 filing fee within 10 days of your stock sale in order to
conform to that province’s resale requirements. You then would simply proceed
with the standard legend removal process. The resale process in the Yukon is
equally simple.
NI 45-102’s Control Distribution provisions, on the other hand, apply in
all the provinces, including Manitoba and the Yukon. A Control Distribution
is a trade in previously issued securities of an issuer from the holdings of
a Control Person. A Control Person is defined as a person or combination of
persons and/or companies acting together by virtue of an agreement who hold
sufficient voting rights in an issuing company to materially affect the
control of the company–otherwise defined as twenty percent of the voting
rights in the absence of evidence to the contrary.
If you are a Control Person in regards to the company in which you hold
stock, then you need to comply with NI 45-102 § 2.8 Exemption for a Trade
by a Control Person. In order to sell your stock as a Control Person you
must 1) have held the stock for at least four months; 2) ensure that the
issuer of the stock is and has been a reporting issuer in a jurisdiction of
Canada for the four months before you plan to sell the stock; 3) avoid making
an "unusual" effort to create a demand for your stock; 4) avoid paying an
"extraordinary" commission to a person or company in respect of the trade;
and 5) make sure that you have no reasonable grounds to believe that the
issuing company is in default of securities legislation.
Once you have ensured that your prospective sale will comply with these
requirements, you can submit your stock to a share transfer agency for legend
removal, using the procedure described above. However, you must also file a
Form 45-102F1 that has been signed within the 24 hours before the form is
filed on SEDAR, at least seven days before the first trade of the securities
that are part of the distribution. You also need to remember that a Form
45-102F1 expires within 30 days of its filing date, and you will need to
refile if your control distribution takes more than a month. You also need to
file, within three days after the completion of any trade, an insider report
prepared in accordance with either Form 55-102F2 or Form 55-102F6 under NI
55-102. |
2) Private Non-Reporting Issuers.
If you hold stock in a private non-reporting Canadian
company that you acquired under a prospectus exemption, then you can only
sell your stock in limited circumstances. Both the Seasoning Period and
Restricted period requirements state that you can only sell stock that was
acquired in a private placement if the issuer has been a reporting issuer in
Canada for the four months immediately preceding your trade. Therefore, by
definition stock in a private non-reporting company cannot be resold and the
legend cannot be removed unless the sale can be made to comply with one of
the exemptions provided by NI 45-102.
“Unless permitted under securities legislation, the
holder of this
security must not trade the security before the date that is 4 months and a
day after the later of (i) [insert the distribution date], and (ii) the date
the issuer became a reporting issuer in any province or territory.”
The relevant exemptions for the resale of stock in a non-reporting issuer
are found in § 2.14 of NI 45-102. In order for your sale of stock in a
non-reporting company to conform to its requirements, you must 1) ensure that
the issuer of your stock was not a reporting issuer in any jurisdiction in
Canada at the stock’s distribution date, and that the company won’t be a
reporting issuer at the date of your trade; 2) ensure that at the
distribution date, Canadians did not hold more than 10 percent of the
outstanding securities of the same class and did not represent in number more
than 10 percent of the total number of owners of the securities of the class;
and 3) make your trade through an exchange or market outside of Canada, or to
a person or company outside of Canada.
If you design your stock sale in a way that will conform to these
requirements, then you are free to proceed with the legend-removal process
and the sale, despite the non-reporting status of the parent company. You
must remember, however, that your trade must also comply with the laws and
regulations of the jurisdiction to which your stock will be sold.
However, the individual provinces may have individual exemptions that
would allow you to resell your stock without complying with the exemptions
laid out in NI 45-102. In B.C., for example, where a person subject to resale
restrictions wants to sell at least $150,000 of securities of an issuer to a
single purchaser, this sale can be made under the exemption in section
74(2)(4) of the Act at any time without regard to the resale restrictions in
NI 45-102.
3) Non-Reporting in Canada but US Reporting Issuers.
The exemption mentioned above for private Canadian companies also applies
to securities in a US-based reporting company that are listed on a recognized
exchange; you may sell the stock so long as Canadians did not own more than
10 percent of the stock, and did not represent in number more than 10 percent
of the total number of owners of the stock at the time that the stock was
distributed. The other requirement, of course, is that the trade be made
through an exchange or market outside of Canada, or to a person or company
outside of Canada. This leads again to the requirement that the sale comply
with the laws and regulations of the stock’s destination jurisdiction.
B.C., has an additional resale exemption available:
BC Instrument 72-502 Distributions of Securities Outside of BC
("BCI 72-502"). BCI 72-102 allows the owner of a legend-bearing security
from a US reporting issuer to sell her stock without regard to NI 45-102’s
Canadian ownership limitations, provided that the sale complies with the
provisions of BCI 72-502, including 1) the requirement that the seller’s
residential address or registered office be in British Columbia; 2) the
requirement that the seller have held her stocks for at least four months; 3)
the Act’s required ceiling on the amount of securities of the same class of
the issuing company that can be sold; 4) the requirement that she sell her
stock through a registered investment dealer; and 5) that the dealer execute
the trade through an exchange or market outside of Canada.
4) Foreign Non-Reporting Issuer.
If the securities that you hold are foreign-based, and are not listed on a
recognized exchange, then NI 45-102 also allows you to sell the stock under
the Non-Reporting Issuer Exemption, subject to the same requirements–that
Canadians did not own more than 10 percent of the stock, and did not
represent in number more than 10 percent of the total number of owners of the
stock at the time that the stock was distributed. The other aforementioned
requirement, applicable to foreign non-reporting issuers, is that the trade
be made through an exchange or market outside of Canada, or to a person or
company outside of Canada. This, of course, leads to the requirement that
your trade comply with the requirements of the jurisdiction(s) in which you
sell your securities, but that, of course, is beyond the scope of this
article.
Closing Comments:
The purpose of this article is to get you familiar with the Canadian resale
rules that may apply to you. Your broker and the transfer agent for the
company whose securities you hold should be able to help you sort out the
details as to how you may resell your private placement securities.
Links:
Check out the following links if you want to do further research on your own
on Canadian Resale Rules.
This
article is provided as a guideline for planning purposes only. You
are advised to contact legal counsel prior to undertaking any resale of
securities. Laws change and there are subtle nuisances to the rules
that may apply in your particular circumstance.
PDF
VERSION
April 18, 2008
Venture Law Corporation
618 - 688 West Hastings Street
Vancouver, BC V6B 1P1
Phone: 604-659-9188
Fax: 604-659-9178
E-mail Us
The Seasoning Period’s requirements are substantially the same as those of
the Restricted Period, but slightly less stringent in that, unlike the
Restricted Period, the Seasoning Period does not require that the stocks be
held for at least four months.
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