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Capital Markets Report - December 2016

Published: 12/14/2016

By Alexandra Iliopoulos, Gregory Hogan, Adria Leung Lim, Xi Chen, James Lyle, Alexander Pizale, Stefanie Sebanc

In This Issue

  1. CBB Knowledge Centre
  2. From the Regulators
  3. What We've Been Up To


Managing Editors
Alexandra Iliopoulos and Greg Hogan
Adria Leung Lim


Covering the periods July and August 2016

CBB Knowledge Centre

National Instrument 43-101: Part 7 – What Issuers Need to Know About Promotional Language

By: Gregory Hogan and Alexander Pizale

This is the seventh installment in our periodic series on National Instrument 43-101.

Regulators do not generally look favourably on overly promotional language in a company’s disclosure. Overly promotional language is a red flag to regulators and companies who use it are often the first ones chosen for continuous disclosure reviews. Securities laws require that a company’s public disclosure be factual, complete and balanced and not present or omit information in a manner that is misleading. Unfavourable news must be disclosed just as promptly and completely as favourable news. Sufficient detail must be included in the disclosure to enable investors to understand the “substance and importance” of the disclosure. Thus if promotional language is used, the company needs to very clearly substantiate why it is appropriate. For instance, “world class” is an example of overly promotional language that regulators do not approve but is nevertheless used by many mining companies. If a project truly is “world class,” the explanation on why it is “world class” needs to be included in the disclosure. Arguably, this would only be accomplished by some form of comparison to truly word class projects which is a difficult endeavour because there are many factors that could apply and the term itself is subjective.

For further details click here.

Also in the series:

Part 1: What Issuers Need to Know about Technical Reports
Part 2: What Issuers Need To Know About Terminology
Part 3: What Issuers Need To Know About Historical Estimates
Part 4: What Issuers Need To Know About Economic Analysis
Part 5: What Issuers Need To Know About Disclosure on Exploration Targets
Part 6:
What Issuers Need To Know About Technical Report Triggers


From the Regulators

By Xi Chen, Gregory Hogan, James Lyle, Stefanie Sebanc

National: Proposed Amendments to National Instrument 31-103 and National Instrument 33-109

On July 7, 2016, the Canadian Securities Administrators (CSA) proposed amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations and National Instrument 33-109 Registration Information. The proposed amendments relate to:

  • Custody arrangements;
  • Exempt market dealers;
  • Client Relationship Model Phase 2; and
  • Certain housekeeping amendments.

Custody Amendments

The CSA is proposing to:

  • Require registered firms to ensure that a “qualified custodian” is used to hold securities and cash of a client or an investment fund in certain circumstances;
  • With some exceptions, prohibit self-custody by registered firms and prohibit the use of a custodian that is not functionally independent of the registered firm;
  • Require registered firms to confirm how the securities and cash of a client or an investment fund are being held by a qualified custodian;
  • Require registered firms to disclose to clients where and how client assets are held or accessed; and
  • Exclude IIROC and MFDA members from these custodial requirements on the condition that they comply with the corresponding IIROC or MFDA provisions applicable to them.

EMD Amendments

The CSA is proposing the following changes to NI 31-103:

  • Remove the words “whether or not a prospectus was filed in respect of the distribution” from subparagraph 7.1(2)(d)(i), to clarify that exempt market dealers may not participate in offerings of securities under prospectuses in any capacity, including as underwriters and selling group members, including securities underlying special warrants that are qualified by a prospectus;
  • Revise and clarify the activities that exempt market dealers may engage in with respect to the resale of securities;
  • Expand the exemption from the dealer registration requirement in section 8.6 so that registered advisers may trade in the securities of investment funds (including, as is the case today, those distributed under a prospectus) if the adviser or an affiliate manages the investment fund and certain conditions are met. 

National: CSA Announce Results of Their Continuous Disclosure Review Program for Fiscal 2016

The CSA has released the results of its members’ continuous disclosure (CD) review programs for the previous past fiscal year. The report, CSA Staff Notice 51-346 Continuous Disclosure Review Program Activities for the Fiscal Year ended March 31, 2016 (the Staff Notice), highlights common deficiencies in members’ disclosure and suggests best practices for compliance with CD obligations. It also includes some examples to assist issuers in addressing these deficiencies.

Scope and Outcomes

The CSA conducted 902 CD reviews during the fiscal year ended March 31, 2016, a slight decline from 1058 during the previous fiscal year. 69 percent of such reviews were issue-oriented rather than a full CD review, meaning they were based on a specific accounting, legal or regulatory issue, an emerging issue, implementation of recent rules or on concerns which the CSA believes may give rise to a greater risk of harm to investors. Of these issue-oriented reviews, 33 percent were focused on mining and oil and gas technical disclosure issues, 12 percent were focused on gender diversity disclosure, nine percent were focused on management’s discussion and analysis (MD&A) disclosures, eight percent were focused on financial statement matters, six percent were focused on non-GAAP financial measures, five percent were focused on press releases and material change reports and the remaining 27 percent were focused on other matters which included corporate governance, management information circulars, material contracts, public complaints and other regulatory requirements.

62 percent of this year’s reviews uncovered deficiencies requiring action on the part of issuers including amendments and improvements to disclosure, referral to enforcement, cease trades or placing the issuer on a default list. The Staff Notice identified numerous deficiencies in Financial Statements, MD&As and other regulatory requirements which resulted in revision and/or refilling of CD documents.

The Staff Notice also provided examples of common deficiencies in financial statements, MD&As, material contracts, management information circulars and annual information forms.

Financial Statement Deficiencies

Issues identified in financial statements included inadequate sensitivity analysis in market risk assessment, failure to identify and account for contingent consideration in business combinations, poor allocation of a purchase price between intangible assets, inadequate explanation of determinations of the useful life of intangible assets during business combinations and aggregation of operating segments into a single segment for reporting purposes without ensuring that the aggregation criteria have been met.

MD&A Deficiencies

Issues identified in MD&As included failure to provide sufficient analysis of liquidity and capital resources, failure to update disclosure relating to forward looking information, inconsistent identification of segments in financial statements and MD&A’s and reliance on the investment entity definition in IFRS 10 Consolidated Financial Statements without providing sufficient information for material investments and related investment and operating activities. The Staff Report also identified giving undue prominence to non-GAAP measures in MD&As as well as failure to discuss the more directly comparable GAAP measure as a deficiency and provided examples of these issues.

Other Regulatory Disclosure Deficiencies

Additional issues were identified in the following deficiencies:

  • Material Contracts. The Staff Report noted the use of prohibited redactions such as redactions of debt covenants and ratios in credit agreements as well as other key terms, failure to provide a description of the type of information redacted and failure to file material contracts on SEDAR as listed in the Annual Information Form.
  • Management Information Circulars. The Staff Report highlighted failure to provide prospectus-level disclosure during situations of a restructuring which will result in a change, exchange or issue of distributed securities.
  • Annual Information Forms. The Staff Report highlighted deficiencies in business descriptions and applicable risk factors.
  • Audit Committee Composition. some venture issuers were highlighted as having failed to meet audit committee composition requirements.

Finally, the Staff Report noted common insider reporting deficiencies including the lack of a SEDI profile for issuers required to file reports under National Instrument 55-104 – Insider Reporting Requirements and Exemptions, failure to provide insider reports on SEDI for acquisitions made pursuant to a normal course issuer bid, failure to file amended issuer profile supplements on SEDI as necessary to reflect changes and failure to report the expiration of certain derivative securities of the issuer within five days of said expiration. The Staff report also noted deficiencies in reports being filed on SEDI including inaccurate transaction codes and dates, inaccurate reporting with respect to ownership, failure to report the name of the registered holder and incorrect security designations created by issuers.

Oil and Gas Reporting

The Staff Report highlighted disclosure deficiencies specific to reporting issuers engaged in oil and gas activities such that they are subject to disclosure standards and annual disclosure requirements under National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities including errors and omissions and potentially misleading information regarding abandonment and reclamation costs, resources other than reserves and type wells, drilling locations and required associated information.

Ontario: OSC Publishes Corporate Finance Branch 2015-2016 Annual Report

The Annual Report summarizes the OSC Corporate Finance Branch's operational and policy work during the fiscal year ended March 31, 2016. Divided into two principal sections – compliance and responsive regulations – the report aims to encourage compliance with regulatory obligations, improve disclosure in regulatory filings and provide informational updates regarding trends, new issues and policy initiatives.


Key highlights of the Annual Report in relation to continuous disclosure compliance include:

  • Specific guidelines for preparing Management's Discussion and Analysis (MD&A);
  • The OSC’s on-going concerns over issuer use of non-GAAP financial measures in press releases, MD&A, prospectus filings, websites and marketing materials;
  • Best practices with regards to the use of forward-looking information; and
  • Guidelines for improving the quality of insider reporting via the System for Electronic Disclosure for Insiders (SEDI).

Further, in examining public offerings completed during fiscal 2016, the OSC provides guidance on certain specific issues which the OSC identified in connection with prospectus filings, including:

  • Significant Acquisitions. When issuers are raising funds to finance a material acquisition, the issuer should consider whether the disclosure that is normally required for a significant acquisition is sufficient to contain full, true and plain disclosure;
  • Primary Business. An issuer completing an IPO must include in its prospectus a three-year financial history (two-year for venture issuers) of the business, even if its financial history spans multiple legal entities over the three-year period;
  • Assets vs. Business Acquisitions. Judgment is involved in determining whether an acquisition is an asset acquisition or a business acquisition, and the classification of the same transaction can differ between GAAP and securities laws; and
  • Sufficiency of Proceeds and Financial Condition of Issuer. A critical part of every prospectus review is considering an issuer’s financial condition and intended use of proceeds.

The Annual Report also includes a discussion of the OSC’s program for distributions in the exempt market, applications for exemptive relief reviewed in fiscal 2016, and guidance in relation to insider reporting.

Responsive Regulations

The OSC reviewed a number of regulatory initiatives implemented during the past two fiscal years in relation to the exempt market, including:

  • New capital raising tools (e.g., family, friends and business associates prospectus exemption and the existing security holder exemption);
  • Changes made in collaboration with the CSA to existing capital raising tools (e.g., amendments to the accredited investor exemption);
  • Offering memorandum exemption and crowdfunding exemption;
  • Amendments in collaboration with the CSA to the rights offering exemption; and
  • Adoption of new report of exempt distribution.

Lastly, the Annual Report provides an update on proposed changes in relation to distributions of securities outside of Ontario and amendments to Multilateral Instrument 11-102 – Passport System that came into force in the CSA jurisdictions other than Ontario, which had the effect of expanding the passport system.

Ontario: OSC Proposes Rule to Streamline Distributions of Securities Outside of Canada

On June 30, 2016, the OSC published for comment Proposed Rule 72-503 Distributions Outside of Canada (the Proposed Rule) that would:

  • Provide an exemption from the prospectus requirement in respect of a distribution of securities to individuals or companies outside of Canada subject to certain conditions;
  • Provide an exemption from the dealer and underwriter registration requirement in respect of a distribution of securities to individuals or companies outside of Canada subject to certain conditions; and
  • Require the filing of a report of the exempt distribution through the OSC’s Electronic Filing Portal.

For a more detailed discussion, see our elert here.

Ontario: Securities Act Amendments to Insider Trading Prohibitions

On July 1, 2016, a provision contained in the Jobs for Today and Tomorrow Act (Budget Measures), 2016 (Bill 173) came into force, which amended insider trading rules (the Amendment) in section 76 of the Securities Act (Ontario) (the Act). The Amendment broadens the scope of what constitutes insider trading. It prohibits any person who has knowledge of an undisclosed material fact or material change in respect of a certain issuer from recommending or encouraging another person to purchase or sell securities of that issuer.

The Amendment is codified in the newly added section 76(3.1) of the Act. Prior to the Amendment, the Act’s insider trading prohibitions were limited to situations where, (i) a person in a special relationship with an issuer purchased or sold securities of that issuer with knowledge of an undisclosed material fact or change; or (ii) a person in a special relationship with an issuer informed another person of an undisclosed material fact or change regarding that issuer.

The Amendment closes in on a grey area not caught by (i) and (ii) above whereby a person who has knowledge of an undisclosed material fact or change merely recommends or encourages another person to purchase or sell securities of an issuer. The previous prohibitions required that the person ultimately purchasing or selling the securities have knowledge of the material fact or change at the time of a trade (either through a special relationship or tipping). No such requirement exists under the Amendment.

Exemptions from the Amendment are contained in section 175(1.1) of the Act’s regulations (General, RRO 1990, Reg 1015).

Ontario: OSC Releases 2016 Annual Summary Report for Dealers, Advisers and Investment Fund Managers _____________________________________________________________________________________________________________________

On July 28, 2016, the Ontario Securities Commission released its Annual Summary Report for Dealers, Advisers and Investment Fund Managers. The report is prepared by the Compliance and Registrant Regulation (CRR) Branch of the OSC  and provides information for registered firms and individuals that are directly regulated by the OSC, being exempt market dealers (EMDs), scholarship plan dealers (SPDs), advisers (portfolio managers or PMs), and investment fund managers (IFMs). The CRR Branch registers and oversees firms and individuals in Ontario that trade or advise in securities or act as IFMs.

The CRR Branch intends the report to assist registrants by:

  • Enhancing their understanding of expectations of registrants and interpretation of regulatory requirements;
  • Enhancing their understanding of  the initial and ongoing registration and compliance requirements;
  • Increasing aware of new and proposed rules and other regulatory initiatives; and
  • Providing a self-assessment tool to strengthen their compliance with Ontario securities law, and as appropriate, to make changes to enhance their systems of compliance, internal controls and supervision.

Some of the highlights of the report include guidance for firms seeking registration to operate online portals and trading platforms and an overview of current trends in deficiencies for firm registration filings (details below).

Guidance for Firms Seeking Registration to Operate Online Portals and Trading Platforms

Firms should consider submitting a pre-file application where the portal/platform has a unique or complex business model or will require discretionary relief from registration requirements. These applications may require more time to review and may take longer than the OSC's service standards. The OSC may also request a demonstration of the online portal/platform as part of the pre-registration interview. Regulatory requirements apply to all business models, including online advisers, crowdfunding portals and lending platforms. Typical registration deficiencies include:

  • The firm has not applied for registration in all of the appropriate registration categories based on its business plan and proposed business activities (e.g., if the firm will be advising investors, PM registration will likely also be required);
  • The firm has not established appropriate policies and procedures that are tailored to its business operations, including policies and procedures to address aspects of an online portal;
  • The firm has not identified conflicts of interest that exist or could arise with its directors, officers and employees, or has not determined how such conflicts will be controlled or avoided; and
  • The firm has not established standard agreements and other documentation, such as documentation to facilitate the collection of know-your-client (KYC) and know-your-product (KYP) information.

The report reminds current EMDs and investment dealers that want to rely on the crowdfunding exemption, you will need to notify their regulator of this change in by filing Form 33-109F5 -- Change of Registration Information (Form 33-109F5) to update the business activities in Form 33-109F6 -- Firm Registration (Form 33-109F6).

An Overview of Current Trends in Deficiencies for Firm Registration Filings

Common deficiencies for firm registration filings were identified in section 3.2 of OSC Staff Notice 33-746. Additional themes that that were identified include.

  • New Firm Registration Filings -- Form 33-109F6. New business submissions that are incomplete generally result in delays as the SC is not able to start the review of the application. New firm applications are pre-screened to ensure that they are substantially complete before assigning these applications to a Corporate Registration Officer. The OSC's registration service commitment does not apply until a substantially complete application is received. All supporting documents required by Form 33-109F6 must be submitted through the OSC's filing portal as part of the application in order to avoid delays.
  • Annual Notification Requirement and Capital Markets Participation Fees -- Unregistered Capital Markets Participants. A number of unregistered firms identified as relying on an exemption from registration requirements on the NRD system did not pay the required annual fees. A firm that relied on any of the following registration exemptions in the 12 months preceding December 1 of a year must notify the regulator of that fact by December 1 of that year and the firm must comply with the relevant annual filing and fee payment requirements applicable to these exemptions under OSC Rule 13-502 -- Fees:

o the international dealer registration exemption;

o the international adviser registration exemption; or

o the international investment fund manager registration exemption.

If a firm is no longer relying on any of the aforementioned registration exemptions, and has no intention on utilizing the exemptions(s) in the future, confirm in writing that your firm has no securities business of any kind in Ontario and also confirm the date your firm ceased to rely on the exemption(s) in order for the firm's reliance to be removed from the NRD system. 

  • Jurisdictions. An advising or dealing representative and his/her sponsoring firm should be registered in the jurisdiction where he or she resides and conducts the majority of business activities. The OSC questions how an advising or dealing representative would be able to fulfill their obligations to their clients without conducting registerable activities from the jurisdiction in which they reside and conduct the majority of their business activities.

Ontario: OSC Approval of Fifth No-Contest Settlement Confirms Regulatory Commitment To Efficient Resolution Of Enforcement Cases

On July 29, 2016, the Ontario Securities Commission approved its fifth no-contest settlement. The OSC’s approval of five no-contest settlements over the past two years confirms the regulator’s commitment to cautious use of this enforcement tool and dispels the floodgates concerns raised by detractors. “No-contest” settlements were introduced in 2014 through OSC Staff Notice 15-702: Revised Credit For Cooperation Program in an effort to achieve more timely and efficient resolution of enforcement matters. Such settlements do not require respondents to admit facts alleged by enforcement staff, a contravention of the Securities Act (Ontario) or that the alleged conduct is contrary to the public interest. The OSC’s approach in this case demonstrates a firm recognition that no-contest settlements are an effective tool which offer the flexibility needed to achieve finality in settlement negotiations.

For a more detailed discussion, see our elert here.

For more information on the OSC’s approval of previous no-contest settlements see Securities Litigation Outlook: Trends to Watch for Capital Markets Participants.

TSX Venture: TSX Venture Exchange to Launch New Market Making Service called TSXV LiquidityPro™

In an effort to enhance liquidity for public venture companies, the TSX Venture Exchange (the TSXV) announced the launch of a new issuer-sponsored market making service called TSXV LiquidityPro™.

Market making offers several benefits to growing companies, such as those listed on the TSXV. Market makers can promote market stability, mitigate price volatility, and enhance the trading experience for investors. According to the TSXV, companies who received market maker services from a TSXV Member experienced a $0.02 decline in their average spread, an 18 percent increase in the number of days when a trade occurred, and a 6 percent decline in price volatility measured by the closing price against the 10 day moving average price.

In this optional program, TSXV companies have the opportunity to select from a pool of pre-qualified TSXV LiquidityPro Providers (LPPs) that can provide quotation services, facilitate price discovery, and increase overall liquidity for an issuer under the governance of the TSXV. Each LPP submits a bid across a standardized set of market making metrics, along with their related monthly fee. Companies can then select a market maker based on their specific and individual needs, and establish clear expectations regarding their desired service level.

Key features of the LiquidityPro service include:

  • Centrally managed competitive bidding process for pre-qualified and experienced TSXV LLPs.
  • Standardized agreement and terms managed by TSXV, with a flexible framework to facilitate more customized marking making needs of issuers.
  • Monthly reporting to issuers, providing full transparency around the performance and activity of their LPPs.
  • TSXV quality governance and administration of the service.

For more information or to sign up for the service, contact the TSXV at issuer.services@tsx.com or at 1-888-873-8392.

For information on becoming an LPP, contact TSXV at trading_sales@tsx.com or at 1-877-421-2369. 

United States: SEC Proposes Modernization of Mining Disclosure Rules

The SEC recently proposed revisions to the property disclosure requirements for mining companies and related guidance, currently set forth in Item 102 of Regulation S-K under the Securities Act of 1933 and the Securities Exchange Act of 1934 and in Industry Guide 7 with the objective of modernizing the US disclosure rules to bring them closer to those of other jurisdictions.

For a more detailed discussion, see our elert here.


What We've Been Up To

In The  Press

An opinion piece on Ontario's new Office of the Whistleblower by Wendy Berman and Lara Jackson - titled "Will the OSC Whistle-blower Program Change the Game, or Just Get Played?" – was recently published by The Globe & Mail:

"The recently announced program mimics the regime established by the U.S. Securities and Exchange Commission several years ago, and will pay out substantial awards for credible, actionable, original information that leads to convictions and/or the recovery of funds from wrongdoing in Canadian capital markets."

However, "the OSC program is not without criticism and concern from public companies and their advisers," note the authors, who go on to explore the possible risks of the program in this article.

Read the full article here.

Recent Transactions

For a list of recent transactions, including these transactions from July and August 2016, please click here. Highlights include representing:

  • NGEx Resources Inc. in a spin out of its Filo del Sol project
  • Hecla Mining Company in its takeover bid for Dolly Varden Silver Corporation
  • Thompson Creek in its US$1.1 Billion acquisition by Centerra Gold Inc.
  • Sandstorm Gold Ltd. in a US$57.5 million bought deal financing
  • Dundee Precious Metals in a $54.65 million bought deal financing
  • Nightingale Informatix Corporation in the sale of its Canadian assets
  • True North Commercial Real Estate Trust in its $9.25 million private placement
  • The underwriters in Lundin Gold Inc.'s $94.9 million bought deal financing
  • Guyana Goldfields in a $130 million bought deal financing
  • Kirkland Lake Gold Inc. in a $15 million private placement
  • The agents in Nemaska Lithium Inc.’s $69 million financing
  • The underwriters for NYX Gaming Group Limited filing of a prospectus qualifying the conversion of special warrants
  • TMAC Resources Inc. in its $92 million bought deal financing
  • The agents in Pure Energy Minerals Limited’s $6.16 million financing
  • Firmex Inc. in its acquisition by Novacap
  • Tamarack Valley Energy Ltd. in $85 million of strategic asset acquisitions
  • Belo Sun Mining in a $75 million bought deal financing
  • Planet Paper Group in its acquisition of Tricor LLC
  • Yamana Gold Inc. in the sale of its Mercedes Mine in Mexico
  • Silver Wheaton in its US$800 million acquisition of a gold stream from Vale's Salobo Mine
  • The underwriters in OrganiGram Holdings Inc.'s $23 million bought deal financing
  • Luna Gold in a $7 million private placement of Units
  • Centurion Apartment REIT in its acquisition of a Multi-Unit Residential Building in Guelph for $15.1 million