True harmonization remains elusive

Youmay not have heard of National Instrument 45-106 Prospectus and RegistrationExemptions (NI 45-106), but if you or your clients want to raise money by sellingsecurities in Canada, you should get to know it well.

Hypothetically, let's say Don Terry walks into your office tomorrow. Don's a diehard hockey fan and, after spending last season watching the Star Wars trilogy on CBC instead of his beloved Hockey Night in Canada, Don, like many of his fellow Canadians, can't wait for his favourite team to hit the ice this season.

Then along comes the CBC lockout and Don spots a potential business opportunity. Without Coach's Corner on the air Don figures there will be a real thirst for insightful and entertaining hockey commentary so he wants to produce his own television hockey commentary together with a sidekick, his old roommate Ross MacLean. There's only one small problem, Don doesn't have enough seed capital to get his television production company, Hockey Night In Kanata Productions Inc. (HNIK), off the ground, so he and Ross want to raise money by selling shares in their production company. Don's counting on you for your wise counsel.

Unfortunately for you, Don's the type of the guy who seeks legal counsel the way Kramer takes food from Jerry Seinfeld's refrigerator — frequently and without ever paying for it. Don is familiar with the concept of the closed system under which distributions of securities in Canada must be issued under a prospectus and through a registered dealer unless otherwise exempt, but he's not that knowledgeable about what exemptions he should be relying upon to distribute HNIK shares without having to prepare and file a prospectus or register with the applicable securities regulatory authorities.

Thankfully for you and Don, some of the answers can be found in NI 45-106, which came into force on Sept. 14. According to the Canadian Securities Administrators' press release, "In addition to harmonizing the various exemption regimes across Canada, NI 45-106 is more straightforward and user-friendly."

In the past, advising on distributions in each of the provinces and territories has meant having to advise on 13 different legislative regimes. Despite some measure of harmonization in recent years through Multilateral Instrument 45-103 Capital Raising Exemptions (MI 45-103), trying to determine which prospectus and registration exemptions could be relied on in multiple offering jurisdictions has not been a simple task.

Some exemptions could be found in the various securities acts, while others were found in the rules or regulations adopted by local securities regulators. For instance, s. 72 of Ontario's Securities Act (OSA) sets out a number of prospectus exemptions; however, it's only by reviewing Ontario Securities Commission Rule 45-501 Prospectus Exempt Distributions that one was able to ascertain that several of these exemptions were no longer available or that new exemptions, such as the "accredited investor" exemption, had been adopted.

Then there were the jurisdictional inconsistencies, as in the case of the minimum purchase or investment amount where the minimum amounts varied from $97,000 to $150,000 (and since 2001 there has been no such exemption in Ontario) or the differences between "accredited invest-ors" in Ontario and "acc-redited investors" in MI 45-103 jurisdictions such as British Columbia and Al-berta (and let's not forget the "sophisticated purchasers" in Quebec).

NI 45-016 doesn't quite live up to the CSA's hype. For example, in Ontario you can still find prospectus exemptions in the OSA, OSC Rule 45-501 and NI 45-106 (although the prospectus exemptions in the OSA are not available pursuant to OSC Rule 45-501) and in Manitoba exemptions subsist in its Securities Act, the Securities Regulation, and NI 45-106.

Regrettably, "onestop shopping" for exemptions has not yet arrived. Although the CSA faced a difficult task in trying to harmonize and consolidate different exemption regimes under one national instrument, NI 45-106 is not without success as most exemptions are now consolidated under a single instrument.

So we now have a national definition of "accredited investor" and a national exemption for distributions of securities to accredited investors, although in Ontario the sale of an investment fund security to a person managing a discretionary trading account is not exempt.

Similarly, NI 45-106 contains an exemption for investments made by close personal friends of company founders that is available in all jurisdictions except Ontario and, if relied upon in Saskatchewan, requires the purchaser to sign a risk acknowledgment form.

NI 45-106 has been trumpeted as a model of inter-jurisdictional co-operation and perhaps an alternative roadmap to national securities regulation, but one look at the offering memorandum exemption with its hodgepodge of rules for different jurisdictions makes it obvious that true harmonization is as elusive as ever.

Adam J. Segal practises corporate law with an emphasis on securities and capital markets transactions at Borden Ladner Gervais LLP in Toronto. The views expressed are those of the author and do not necessarily reflect the views of Borden Ladner Gervais LLP or its clients.

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