Ontario Securities Law — OSC Registration, Prospectus Exemptions, and Continuous Disclosure

The Ontario Securities Act and the OSC

Securities regulation in Canada is provincially regulated. Ontario's primary securities statute is the Securities Act RSO 1990 c S.5 (OSA), administered by the Ontario Securities Commission (OSC). The OSC is an independent agency of the Government of Ontario with a mandate to provide protection to investors from unfair, improper, or fraudulent practices, and to foster fair and efficient capital markets and confidence in those markets. The OSC operates alongside the Canadian Securities Administrators (CSA), a council of provincial and territorial securities regulators that harmonizes securities regulation across Canada through National Instruments (NIs), Multilateral Instruments (MIs), and National Policies (NPs).

Most substantive securities regulation in Canada is now implemented through CSA National Instruments, which are adopted by all provinces simultaneously. Key NIs include NI 45-106 (Prospectus Exemptions), NI 51-102 (Continuous Disclosure Obligations), NI 31-103 (Registration Requirements, Exemptions and Ongoing Registrant Obligations), NI 54-101 (Communication with Beneficial Owners), NI 62-104 (Take-Over Bids and Issuer Bids), and NI 52-109 (Certification of Disclosure in Issuers' Annual and Interim Filings). Ontario also implements Multilateral Instrument 11-102 (Passport System) which allows registrants and reporting issuers to rely on decisions made by a principal regulator.

The Prospectus Requirement

The core principle of Ontario securities law is the prospectus requirement. OSA s.53 prohibits any trade in a security unless a preliminary prospectus and a final prospectus have been filed with and receipted by the OSC, or an exemption applies. A prospectus must provide full, true, and plain disclosure of all material facts relating to the security to be distributed (OSA s.56). The prospectus is the primary disclosure document through which investors receive the information they need to make investment decisions.

A long-form prospectus is required for an initial public offering by a non-reporting issuer. A short-form prospectus under NI 44-101 is available to eligible reporting issuers (generally those with 12 months of continuous disclosure history). A base shelf prospectus under NI 44-102 allows reporting issuers to file a base prospectus and then issue securities in tranches over a 25-month period through shelf prospectus supplements. PREP (Prospectus Review and Electronic Submission) procedures and the SEDAR+ electronic filing system govern submissions to the CSA.

Prospectus Exemptions — NI 45-106

National Instrument 45-106 (Prospectus Exemptions) contains the most commonly used exemptions from the prospectus requirement. The exemptions most relevant to Ontario business lawyers include:

• Accredited Investor Exemption (s.2.3): Securities may be distributed to an "accredited investor" as defined in NI 45-106 s.1.1. Individual accredited investors include: net income exceeding $200,000 (or $300,000 joint with spouse) in each of the two most recent calendar years with reasonable expectation of exceeding that amount in the current year; net financial assets exceeding $1,000,000; or net assets of at least $5,000,000. Corporate accredited investors include entities with net assets exceeding $5,000,000. A risk acknowledgement form is required for individual accredited investors in most provinces.
• Minimum Amount Exemption (s.2.10): Available for distributions of securities with an aggregate acquisition cost of not less than $150,000 paid in cash at closing, to a purchaser that is not an individual.
• Offering Memorandum Exemption (s.2.9): Available in most provinces (including Ontario as of 2016). Requires delivery of an offering memorandum in the required form; investment limits apply for non-eligible investors ($10,000 per calendar year in Ontario for retail investors; $30,000 for investors with eligible financial advice; $100,000 for eligible investors — defined by the same thresholds as accredited investors but reduced).
• Family, Friends and Business Associates Exemption (s.2.5):Available for distributions to: (a) a director, officer, control person, or founder of the issuer; (b) a spouse, parent, grandparent, brother, sister, or child of such persons; or (c) a close personal friend or close business associate of such persons. A risk acknowledgement form is required.
• Existing Security Holder Exemption (s.2.1.1): Allows reporting issuers to raise capital from existing security holders without a prospectus, subject to investment limits ($15,000 maximum per fiscal year without an offering document; $30,000 with offering document or eligible investor status).
• Rights Offering Exemption (s.2.1): Available when a reporting issuer distributes rights to existing security holders in proportion to their holdings, subject to compliance with NI 45-106 rights offering procedures.

Registration Requirements — NI 31-103

OSA s.25 requires registration to trade in or advise on securities. National Instrument 31-103 (Registration Requirements, Exemptions and Ongoing Registrant Obligations) establishes the registration categories:

• Dealer Categories: Investment Dealer (member of IIROC, now CIRO — Canadian Investment Regulatory Organization); Mutual Fund Dealer (member of MFDA, now CIRO); Scholarship Plan Dealer; Exempt Market Dealer (EMD — most commonly used for private placements and exempt market trades); Restricted Dealer.
• Adviser Categories: Portfolio Manager (manages investment portfolios with discretion); Restricted Portfolio Manager; Investment Fund Manager (manages investment funds).
• Key Registration Exemptions: The accredited investor distribution exemption also provides a registration exemption for the distributor in many circumstances. The "trade for own account" exemption under OSA s.35 exempts persons who trade only for their own account and are not in the business of trading.

Continuous Disclosure — NI 51-102

Reporting issuers (issuers whose securities are held by more than a threshold of securityholders or who have been subject to a prospectus distribution) are subject to continuous disclosure obligations under National Instrument 51-102. Key requirements include:

• Annual Information Form (AIF): Detailed annual disclosure document required for most reporting issuers. Contains description of business, risk factors, description of securities, material contracts, and legal proceedings.
• Annual Financial Statements: Audited annual financial statements within 90 days of fiscal year end (for non-venture issuers) or 120 days (for venture issuers). Must comply with IFRS (International Financial Reporting Standards) for non-investment fund reporting issuers.
• Quarterly Interim Financial Statements: Unaudited interim statements within 45 days (non-venture) or 60 days (venture) of each quarter end.
• Management Discussion and Analysis (MD&A): Required with both annual and interim financial statements. Must discuss results of operations, liquidity, capital resources, and material changes.
• Material Change Reports: OSA s.75 requires a reporting issuer to disclose a material change (a change in the business, operations, or capital that would reasonably be expected to have a significant effect on the market price or value of securities) by issuing and filing a press release, and then filing a material change report within 10 days. A confidential material change report may be filed in limited circumstances.
• Business Acquisition Reports: Required within 75 days after completion of a significant acquisition (based on size tests comparing acquired business to issuer).

Insider Trading and Tipping

OSA Part XXIII.1 (civil liability) and Part VI (administrative proceedings) prohibit insider trading and tipping. An "insider" includes directors and officers of a reporting issuer, persons owning more than 10% of voting securities, and anyone in a "special relationship" with the issuer — including persons who received material non-public information (MNPI) through their relationship with the issuer.

OSA s.76 prohibits an insider or person in a special relationship with a reporting issuer from trading in the issuer's securities with knowledge of an undisclosed material fact or material change. OSA s.76(2) prohibits tipping — disclosing a material fact or material change to another person when the discloser knows or ought reasonably to know that the recipient will trade on that information. The prohibition extends to recommending or encouraging trades without full disclosure.

Civil liability under OSA Part XXIII.1 allows persons who traded contemporaneously with the insider to recover losses. Criminal liability under the Criminal Code s.382.1 provides for fines and imprisonment for insider trading.

Takeover Bid Rules — NI 62-104

A takeover bid occurs when a person acquires or offers to acquire beneficial ownership of, or the power to exercise control or direction over, 20% or more of a class of voting or equity securities of a reporting issuer. National Instrument 62-104 governs takeover bids.

The 2016 amendments introduced significant changes to Canadian takeover bid rules: (1) mandatory minimum bid period of 105 days (the "permitted bid" requirement), which can be reduced to 35 days by the target board with a recommendation or by the bidder with target board consent; (2) a minimum deposit condition requiring that more than 50% of securities not held by the bidder be tendered before the bidder takes up any shares; (3) a mandatory 10-day extension after the bidder first takes up shares. These changes were intended to shift the balance of power in hostile takeovers toward target boards by giving them more time to respond.

OSC Enforcement

The OSC has broad enforcement powers under the OSA. Administrative proceedings before the Capital Markets Tribunal (established 2021 to take over OSC adjudicative functions) may result in: cease trade orders, trading bans, disgorgement of profits, administrative penalties of up to $1,000,000 per contravention, orders requiring compliance, and reprimands. The OSC also refers matters to the Ontario Securities Commission enforcement branch for quasi-criminal prosecution in Ontario Court of Justice under OSA s.122, which provides for fines up to $5,000,000 and imprisonment up to five years.