Notice and National Policy: NP - 47-201 - Trading in Securities using the Internet and Other Electronic Means
Notice and National Policy: NP - 47-201 - Trading in Securities using the Internet and Other Electronic Means
NOTICE OF POLICY UNDER THE SECURITIES ACT
NATIONAL POLICY 47-201
TRADING SECURITIES USING THE INTERNET
AND OTHER ELECTRONIC MEANS
Notice of Policy
The Commission has, under Section 143.8 of the Act, adopted National Policy 47-201, Trading SecuritiesUsing the Internet and Other Electronic Means ("NP 47-201" or the "Policy"). NP 47-201 is an initiative ofthe Canadian Securities Administrators ("CSA") and has been or is expected to be implemented as apolicy in all jurisdictions represented by the CSA. NP 47-201 is being adopted concurrently with NationalPolicy 11-201 ("NP 11-201") Delivery of Documents by Electronic Means.
On June 13, 1997, the CSA published a Concept Proposal Respecting Delivery of Documents by IssuersUsing Electronic Media (1997), 20 OSCB 3075 and solicited comments in connection therewith. As aresult of the CSA's consideration of the comments received, on December 18, 1998, the CSA publishedfor comment NP 11-201 and NP 47-201 at (1998), 21 OSCB 7782 (the "1998 Draft Policies").
During the comment period on the 1998 Draft Policies, which ended on February 17, 1999, the CSAreceived a number of submissions. The comments provided in these submissions have been consideredby the CSA, and the final version of NP 47-201 being published with this Notice reflects the decisions ofthe CSA in this regard. Appendix A to Notice of National Policy 11-201 lists the commenters on the 1998Draft Policies and Appendix B provides a summary of the comments received and the responses of theCSA.
After reviewing the comment letters received in connection with its request for comments, the CSAdecided to make a number of changes to NP 47-201. The changes made were not material and the CSAconsequently are not republishing NP 47-201 for comment.
NP 11-201 and NP 47-201 are effective January 1, 2000.
Substance and Purpose of NP 47-201
The substance and purpose of NP 47-201 is to provide the CSA's views on certain issues relating to theuse of electronic media in the distribution of securities. NP 47-201 discusses the jurisdictional issues thatarise when a document is posted on the Internet, and sets out the CSA's view that an offering documentthat is accessible by residents of a local jurisdiction will constitute a trade and/or offering in that localjurisdiction unless the offering document identifies the jurisdictions for which the document is intended andreasonable steps are taken not to transact with residents of jurisdictions in which the offering is notintended to be sold. NP 47-201 also provides guidance on jurisdictional issues relating to trading activitiesthrough the use of electronic media.
NP 47-201 further sets out the CSA's views on compliance with other requirements under securitieslegislation (as defined in NP47-201), such as the requirement to maintain distribution lists and the rulesregarding the electronic distribution of information during the "waiting period". CSA recommendationsregarding procedures for the posting of roadshows on the Internet are included. While section 2.7provides guidance for using the Internet to post roadshows, it does not change the requirement ofsecurities legislation that such communications must be in compliance with the "waiting period"requirements of securities legislation.
Summary of Changes from Prior Publication
The changes made to NP 47-201 are as follows:
a) a number of drafting changes were made to sections 2.2, 2.4, 2.5, and 2.7.
b) the wording of subsection 2.5(3) has been amended to clarify that a person or company isonly required to maintain a record of the names and addresses of those persons orcompanies who received (which includes viewed) an electronic version of a preliminaryprospectus from the first-mentioned person or company;
c) paragraphs 2.2(3)(b) and (c) were amended to add the phrase "in the local jurisdiction";
d) additional clarification regarding jurisdictional matters has been added to section 2.3;
e) a definition of "roadshow" has been added to subsection 2.7(1); and
f) references to "downloading" have been deleted from paragraph 2.7(2)3.
Text of Policy
The text of NP 47-201 follows. Apart from minor changes described above under the heading "Summaryof Changes from Prior Publication", the Policy remains unchanged from the version published at (1998),21 OSCB 7782.
DATED: December 15, 1999.
APPENDIX B to Notice of National Policy 47-201
The following is a summary of comments received and the CSA's responses thereto.
General Comments
Comments
One commenter suggested changing the title of NP 47-201 from "Trading Securities Using theInternet and Other Electronic Means" to "Distribution of Securities Using the Internet and OtherElectronic Means".
Response
The name of NP 47-201 has not been changed because the CSA are of the view that the Policycovers matters in addition to the distribution of securities using the Internet and other electronicmeans.
Specific Comments
1. Distribution Lists
Comments
In connection with the provision in subsection 2.5(3) of NP 47-201 that any person or company whomakes disclosure materials available electronically record the name of all persons or companiesthat receive or view a copy of a preliminary prospectus by electronic means, one commenter notedthat section 67 of the Act only requires a dealer to maintain such a record and that NP 47-201should not impose a more onerous obligation on market participants than found in the Act. Further,another commenter noted that section 67 of the Act requires that both the names and addresses bekept of all persons or companies to whom a preliminary prospectus has been forwarded. Thecommenter suggested that compelling persons or companies to provide name and addressinformation prior to merely viewing a preliminary prospectus on a website is unduly onerous andwould deter individuals from using electronic methods of communication. Additionally, twocommenters questioned whether the Act prescribes that a record be maintained of the names andaddresses of persons who merely view a preliminary prospectus. These commenters suggestedthat a name and address list should be maintained only for those persons who download aprospectus, not those who merely view it on a website. Other commenters recommended that therequirement to maintain a list of persons who have received a preliminary prospectus be eliminated,particularly as anyone is now able to access a preliminary prospectus through SEDAR.
Response
The CSA reiterate that NP 47-201 only represents guidelines, not a mandatory change of anysubstantive requirements. Market participants are free to determine how best to comply with thesubstantive requirements of securities legislation. The CSA are of the view that it is appropriate tokeep a record of the names and addresses of those persons and companies who download or viewan electronic version of a preliminary prospectus so that such persons and companies can beprovided with amendments to such prospectus, if any. In the CSA's view, maintaining such a recordis not onerous, particularly where persons wishing to view or download a prospectus from a websiteare first required to provide the necessary name and address information electronically. The CSA donot agree with the suggestion that it is appropriate to eliminate the requirement to maintain such arecord, although it is acknowledged that some persons may download a prospectus directly fromSEDAR, for example, without having their name and addresses recorded in accordance with section67 of the Act or the guidelines provided in NP 47-201.
2. Jurisdictional Issues and "Safe Harbour" Provisions
Comments
One commenter favoured the approach taken by the SEC on jurisdictional issues, stating thatregulators in Canada should only assert jurisdiction where Internet communications are directed topersons in a Canadian jurisdiction and further, that regulators should provide guidelines as to whenelectronic communications would be considered to be directed to Canadians. The commenter alsonoted that NP 47-201 currently states that only British Columbia, Alberta and Quebec will assertjurisdiction over persons operating within those provinces who distribute securities outside of thoseprovinces through the Internet. The concern raised was that the Ontario Securities Commission(the "Commission"), for example, would not exercise its jurisdiction over persons distributingsecurities from Ontario to persons outside of Ontario through the use of the Internet. Thecommenter submitted that NP 47-201 as currently drafted would have the effect of revising section25 of the Act because, as regards to more "conventional" types of solicitation, the Commission hasin the past asserted its jurisdiction over such operations (e.g., telephone "boiler rooms" operatingfrom Ontario). Another commenter raised concerns regarding the potential conflict between "safeharbour" provisions in subsection 2.2(2) and section 2.3 of NP 47-201, which appears to take awaythat "safe harbour" protection in the provinces of British Columbia, Alberta and Quebec.
Another commenter suggested that subsection 2.2(2) of NP 47-201 be revised such that it could notbe implied that a registrant, for example, could be responsible for the conduct of any other party withrespect to taking reasonable precautions not to sell to anyone resident in a jurisdiction in whichsecurities are not qualified for sale. Secondly, the commenter stated that issuers should not berequired to specify in a prospectus both the Canadian and the foreign jurisdictions in which anoffering is to be made, particularly if this is not currently required under securities legislation.Likewise, in order to avoid any discrepancy in the content of documents, the commenter suggestedthat disclosure of the jurisdictions in which an offering is to be made should be made at the Internetsite at which the prospectus is posted rather than in the prospectus itself.
The commenter also suggested minor revisions to subsection 2.2(3) of NP 47-201 to make it clearthat all inquiries from a particular jurisdiction should be referred to a registered dealer in thatjurisdiction.
Response
Section 2.3 of NP 47-201 is included to clarify the position of securities regulators in BritishColumbia, Alberta and Quebec that a person or company located within those jurisdictions that isdistributing securities outside of those jurisdictions through the Internet will nevertheless beconsidered to be trading within those jurisdictions. While other securities regulatory authorities (asdefined in NP 47-201) have not explicitly adopted this position, it was not the intent of Part 2 of NP47-201 to suggest that the other securities regulatory authorities would not assert jurisdiction overmarket participants who breach securities legislation in their jurisdiction through the use of electronicmedium. Jurisdiction will be asserted on a case by case basis, with due regard to the legal testsordinarily applied in such circumstances. For example, the Ontario Securities Commission wouldcontinue to review the nature of parties' conduct in Ontario to determine if it should assertjurisdiction and, in appropriate circumstances, will do so even if the investors are located outside ofOntario. Section 2.3 has been amended to clarify this point. Minor revisions have also been madeto paragraphs 2.2(3)(b) and (c) to take into account the comments made in respect thereof.
The CSA do not consider there to be a conflict between subsection 2.2(2) and section 2.3 of NP 47-201 as the latter section can be viewed as an anti-avoidance provision; for instance, a personoperating out of a local jurisdiction and perpetrating a fraud on investors outside of that localjurisdiction may still be subject to the regulatory authority of the local jurisdiction from which suchperson physically operates.
The CSA do not consider that subsection 2.2(2) of NP 47-201 requires a person to be liable for theconduct of any other person unless such liability is otherwise imposed by law. The CSA are also ofthe view that it is not burdensome for an offering document to state the jurisdictions in which theoffering is to be made.
3. Roadshows
Comments
One commenter agreed that issuers and underwriters should attempt to control electronic access toroadshows transmitted over the Internet, but noted that issuers and underwriters do not have theability to control how an electronic roadshow is used or distributed once it has been received by theintended recipient and do not have the ability to ensure that all viewers are identified as is currentlyrequired by paragraph 2.7(2)2 of NP 47-201. The commenter suggested that the reference to"viewer" be changed to "intended recipient". Further, several commenters submitted that paragraph2.7(2)2 and the roadshow guidelines in general are potentially inconsistent with current securitieslegislation and should be revised because:
a) anyone who can access an Internet roadshow can also get a copy of the preliminaryprospectus from the SEDAR website;
b) the requirement for password protection and controlled access will effectively result inonly institutional investors being able to view a roadshow since retail investors will likelyfind out about the offering after the deal has been priced and the final prospectus filed;
c) there is no requirement currently to identify every person at a conventional roadshow;
d) there is no requirement currently to provide a prospectus before one's attendance at aroadshow; and
e) there is no restriction on how widely an investor may circulate a printed version of a"green sheet" or a printed prospectus after a roadshow.
In summary, several commenters were of the view that the guidelines fail to encourage the use ofelectronic roadshows to broaden audiences and democratize distributions and that the guidelinescould effectively restrict the use of electronic roadshows to the same "favoured few" who arecurrently invited to conventional roadshows.
Two commenters also recommended the deletion of the references to "download" and"downloading" in subsection 2.7(2) of NP 47-201 because, in their view, the only way to viewelectronic transmissions via the Internet is by downloading such files from the remote server toone's personal computer. One commenter suggested deleting paragraph 2.7(2)3 altogether. Finally,another commenter suggested that a definition of the term "roadshow" be added to NP 47-201.
Response
The CSA have incorporated the definition of "roadshow" suggested by one of the commenters, witha minor modification, as subsection 2.7(1) of NP 47-201. References to "downloading" in paragraph2.7(2)3 have also been deleted. Otherwise, the CSA are satisfied that the roadshow guidelines arenot only appropriate but encourage greater use of roadshows when compared to the manner inwhich roadshows are currently conducted. The CSA understand that issuers and underwriterscannot necessarily control how the information presented at a roadshow is used and cannot becertain that all viewers are identified. The intent of NP 47-201 is to encourage issuers andunderwriters to take all reasonable steps to comply with the guidelines and to use their best effortsto ensure that the principles set out therein are followed. Finally, the CSA note that the guidelinesare not more restrictive than those in other jurisdictions and, in the CSA's view, strike a reasonablebalance between the needs of issuers and underwriters on the one hand and investor protection onthe other hand.
4. Advertising
Comments
One commenter raised concerns about section 2.6 of NP 47-201 which states that the posting ofnew information on one's website during a distribution may be construed as advertising and besubject to the rules restricting advertising during a distribution. The commenter referred to therecommendations in the Allen Report that prospectuses and continuous disclosure requirements beintegrated in one seamless disclosure system. The commenter suggested that NP 47-201 shouldfocus on which components of an issuer's or dealer's website would be deemed to be part of aprospectus and thereby caught by the civil liability provisions. The commenter further stated that ifsection 2.6 is retained, it should clarify that the posting of material information on one's website(e.g., new releases, quarterly reports, etc.) will not be construed as advertising. This commenteralso raised the concern that an issuer's ongoing updating of its website to maintain the currency ofthe information on its website could come into conflict with the "no advertising" commentary in NP47-201 and asked for clarification of this matter.
Response
As stated previously, NP 47-201 does not change any substantive requirements of securitieslegislation. The CSA note that section 2.6 is not intended to prohibit issuers from posting materialchange reports, press releases, interim financial statements and other forms of disclosure on theirwebsites. Section 2.6 simply states that in certain circumstances, posting information on a websiteduring a distribution could constitute a breach of current advertising restrictions. It is not possible todetail in NP 47-201 every potential circumstance that could arise in connection with the posting ofinformation on a website. Issuers, underwriters and their counsel will need to consider this matter ona case by case basis and, where appropriate, develop policies regarding the use and maintenanceof issuers' and underwriters' websites.
The CSA will provide the comments received on the issue of advertising restrictions to thecommittee which will be reviewing the current advertising restrictions and the proposed integrateddisclosure regime.
5. Security Issuer Registration
Comments
One commenter noted the growing popularity of direct public offerings over the Internet south of theborder and stated that the rules in the U.S. allowing smaller issuers to raise funds under Form SB-2through the Internet without the use of an underwriter are being used by Canadian companies aswell. The commenter stated that it is now easier for a Canadian company to raise funds in the U.S.in this fashion than it is in Canada and recommended that the "security issuer" dealer category beeliminated, thereby allowing Canadian companies to sell their securities directly without first havingto be registered.
Response
The purpose of NP 47-201 is to provide guidance regarding offerings using the electronic medium inthe context of the current regulatory regime. However, the issue of registration categories will bereferred to staff involved in currently ongoing regulatory initiatives to streamline and harmonize theregistration system.
6. Electronic Signatures
Comment
One commenter asked that the CSA consider clarifying the circumstances in which the use ofauthentication technologies will be permitted in order to eliminate the need for manual signatures.
Response
The CSA intend to review the possibilities available for the use of authentication technologies asresources permit.
TRADING SECURITIES USING THE INTERNET
AND OTHER ELECTRONIC MEANS
TABLE OF CONTENTS
PART TITLE
PART 1 GENERAL
1.1 Purpose of this Policy
1.2 National Policy 11-201
PART 2 USE OF THE INTERNET FOR TRADING IN SECURITIES
2.1 General Jurisdictional Issue
2.2 Trading in a Jurisdiction
2.3 Trading from a Jurisdiction
2.4 Application of Securities Laws of Foreign Jurisdictions
2.5 Distribution Lists
2.6 Advertising
2.7 Roadshows
PART 3 EFFECTIVE DATE
3.1 Effective Date
TRADING SECURITIES USING THE INTERNET
AND OTHER ELECTRONIC MEANS
PART 1 GENERAL
1.1 Definitions
In this Policy
"securities legislation" means the statutes and other instruments listed in Appendix B of NationalInstrument 14-101 Definitions;
"securities regulatory authorities" means the securities commissions and similar regulatory authoritieslisted in Appendix C of National Instrument 14-101 Definitions;
1.2 Purpose of this Policy
(1) In recent years, market participants have begun using the Internet and other electronic meansof communication to offer and sell securities and to facilitate distributions of securities. Whilethe use of these methods of communication can be beneficial to market participants, enablingthem to provide and access information in a timely, cost-efficient and user-friendly manner, thesecurities regulatory authorities recognize that the use of the Internet and other electronicmeans of communication in this context can raise investor protection concerns and issuesconcerning the application of securities legislation.
(2) The purpose of this Policy is to state the views of the securities regulatory authorities on anumber of matters relating to the use of the Internet and other electronic means ofcommunication in connection with trades and distributions of securities.
1.3 National Policy 11-201 - Market participants are referred to National Policy 11-201 Delivery ofDocuments by Electronic Means for a discussion of the views of the securities regulatory authoritiesconcerning the use of electronic means to satisfy the delivery requirements of securities legislation.
PART 2 USE OF THE INTERNET FOR TRADING IN SECURITIES
2.1 General Jurisdictional Issue - Information on the Internet may reach both intended recipients andanyone else in the world who has access to the Internet. The interjurisdictional nature of the Internetmakes it important for issuers and other market participants to consider how they will satisfy theregistration and prospectus requirements contained in securities legislation and similar requirementsunder the securities laws of foreign jurisdictions.
2.2 Trading in a Jurisdiction
(1) The securities regulatory authorities generally consider a person or company to be trading insecurities in a local jurisdiction if that person or company posts on the Internet a document thatoffers or solicits trades of securities, and if that document is accessible to persons orcompanies in that local jurisdiction.
(2) Despite subsection (1), the securities regulatory authorities consider the posting of a documenton the Internet that offers or solicits trades of securities not to be a trade or, if applicable, adistribution, in a local jurisdiction if
(a) the document contains a prominently displayed disclaimer that expressly identifies thelocal jurisdictions and/or foreign jurisdictions in which the offering or solicitation isqualified to be made, and that identification does not include the local jurisdiction; and
(b) reasonable precautions are taken by all persons or companies offering or solicitingtrades of securities through the document posted on the Internet not to sell to anyoneresident in the local jurisdiction.
(3) Market participants are reminded that the registration requirements of securities legislationapply in connection with the posting of a prospectus or other offering document on the Internetfor use in connection with a distribution in a local jurisdiction. The act of posting a prospectusor offering document in those circumstances is an act in furtherance of a trade in that localjurisdiction, and the person or company posting the prospectus or offering document must, inorder to comply with the registration requirements
(a) be registered to trade in the local jurisdiction;
(b) have the benefit of an exemption from the registration requirements in connection withthe distribution in the local jurisdiction; or
(c) refer all inquiries concerning the document to a registered dealer in the local jurisdiction.
2.3 Trading from a Jurisdiction - A person or company located in British Columbia, Alberta or Quebecthat is distributing securities entirely outside of those jurisdictions through the Internet is consideredto be trading within those jurisdictions and is therefore subject to applicable registration andprospectus requirements in those jurisdictions. The securities regulatory authorities in thosejurisdictions may provide relief from those provisions in appropriate circumstances. The securitiesregulatory authorities in the remaining jurisdictions will assert jurisdiction over market participants ona case by case basis, with due regard to the legal tests ordinarily applied in such circumstances.
2.4 Application of Securities Laws of Foreign Jurisdictions - Canadian issuers and other marketparticipants are reminded that foreign securities regulators may take the view that documents postedon a website that is accessible by persons or companies in their jurisdiction may constitute an offeringof securities in that foreign jurisdiction. In some foreign jurisdictions, securities regulators haveinformed the market as to the steps that should be taken to ensure that such regulators do not takethe view that a document posted on a website constitutes an offering of securities in that foreignjurisdiction. Some of those steps could include the use of disclaimers in the document and/ormeasures that restrict access to the document. Issuers and other market participants are urged toinform themselves of any relevant guidelines in this regard. Reference is made to a report of theTechnical Committee of the International Organization of Securities Commissions (IOSCO) datedSeptember 1998 entitled "Securities Activity on the Internet", which is available on the website ofIOSCO at www.iosco.org. The annex to that report refers market participants to the rules, policiesand guidelines of various international securities regulators on these matters.
2.5 Distribution Lists
(1) Securities legislation requires certain persons or companies distributing securities under aprospectus to record the names and addresses of all persons or companies that have receiveda copy of the preliminary prospectus. Issuers and registrants are reminded that thisrequirement applies whether a preliminary prospectus is distributed in paper form or byelectronic means.
(2) The securities regulatory authorities are of the view that no relief from this requirement isnecessary or warranted in connection with the electronic distribution of prospectuses, sincecurrent technology makes it feasible for a person or company either to monitor who has hadaccess to a preliminary prospectus or to require a written or electronic consent form from eachrecipient of a preliminary prospectus.
(3) In order to comply with securities legislation, a person or company should therefore record thenames and addresses of all recipients of a preliminary prospectus by electronic means fromsuch person or company, including those recipients who merely view a preliminary prospectusby electronic means.
2.6 Advertising - Persons or companies should be aware that the posting of new information on awebsite during a period of distribution may be construed as advertising, which is subject to restrictionsin certain jurisdictions.
2.7 Roadshows
(1) For the purposes of this Policy, "roadshow" means a presentation in a jurisdiction by a dealerto a prospective purchaser of securities during the "waiting period" in compliance with securitieslegislation requirements. The "waiting period" is the time between the issuance of a receipt forthe preliminary prospectus pertaining to the distribution and the issuance of a receipt for thefinal prospectus.
(2) The securities regulatory authorities do not object in principle to an issuer or underwriter holdinga roadshow over the Internet during the "waiting period" in connection with a distribution ofsecurities. However, care should be taken to ensure that the transmission of a roadshow overthe Internet complies with the "waiting period" requirements and securities legislation generally.In this connection, the following guidelines are recommended:
1. Pursuant to securities legislation, a copy of the filed preliminary prospectus is requiredto be made available to each viewer before each roadshow transmission, and eachtransmission should contain visual statements emphasizing that the informationconveyed through the roadshow does not contain all of the information in the preliminaryprospectus, which should be reviewed for complete information. A copy of thepreliminary prospectus could be sent electronically to viewers in accordance with theguidelines contained in National Policy 11-201.
2. Electronic access to the transmission of a roadshow over the Internet should becontrolled by the issuer or underwriter conducting the roadshow, using such means aspassword protection, in order to ensure that all viewers are identified and have beenoffered a preliminary prospectus. Any persons or companies that are "prospectivepurchasers" as referred to in the provisions of securities legislation relating to roadshowsmay be invited to view the roadshow.
3. An issuer or underwriter should not transmit a roadshow to a person or company unlessthat person or company has agreed not to copy or further distribute the transmissions.An issuer or underwriter should take reasonable steps to prevent copying or furtherdistribution of transmissions.
PART 3 EFFECTIVE DATE
3.1 Effective Date - This National Policy comes into force on January 1, 2000.