Lexpert US Guides

www.lexpert.ca | LEXPERT • June 2014 | 33 FUND REGULATION » ignated person" or "chief compliance offi cer" of a registered fi rm, such individuals must also register as a representative of such fi rm. Consequences of Registration Registered dealers, advisors and investment fund managers in Canada are subject to similar regulatory treatment. " e three main features of the compliance regime for Canadian registrants are: profi ciency requirements for individuals employed with registrants in certain ca- pacities, such as examination and experience requirements; require- ments for fi rms regarding their fi nancial condition, including working capital and insurance coverage, and reporting, in the form of annual audited fi nancial statements, and, for registered investment fund man- agers, quarterly unaudited fi nancial statements; and know your client (KYC), know your product and other requirements with respect to a registered fi rm's dealings with its clients, including their "insider" sta- tus of any publicly traded issuer and other information, such as their risk tolerance. A variety of restrictions on a registered fi rm's activities, including in relation to referral arrangements, tied selling, managing confl icts of interest and inter-fund trades by a portfolio manager in respect of its funds and managed accounts, are also applicable. The Registration Loophole for Private Equity In contrast to hedge funds and other investment funds that trade securities (rather than manage businesses) and are subject to vary- ing degrees of regulation, investment funds that are active in the management of their portfolio companies or businesses are the least regulated forms of funds in Canada. Such non-passive investment funds can include private-equity funds, infrastructure funds, real estate funds and other similar investment entities. If properly struc- tured and managed, the sponsors and managers of such funds can avoid having to register in any category of registration under pro- vincial securities laws. OFFERING DOCUMENT AND MANDATORY DISCLOSURE " e marketing and disclosure document provided to investors, if relying on either of the common exemptions, has no specifi ed form and is not required to be translated into French for sales in Québec. However, the term "off ering memorandum" is broadly defi ned under Canadian securities law and would include any form of off ering or in- formational document. " e distribution of securities pursuant to an off ering memorandum is subject to statutory liability in certain juris- dictions, and must be disclosed in the off ering memorandum. Non-Canadian managers, either directly or through a registered dealer, will furnish Canadian investors with, most o en, their stan- dard form of off ering document that is "wrapped" with a short supple- ment containing the requisite additional Canadian disclosure, or, less o en, one omnibus off ering memorandum dra ed explicitly for use in the Canadian market. Although certain disclosure requirements that apply to Canadian registrants are not required for non-Canadian funds, many such non-Canadian funds off ering their securities in Canada subscribe to "best practices" in connection with such off er- ings, and include much of this disclosure. In 2013, a number of Canadian and non-Canadian securities deal- ers obtained limited exemptive relief from the requirement to prepare a Canadian "wrapper" in connection with private placements of cer- tain eligible foreign securities to sophisticated investors in Canada. At "PROPOSED amendments to securities laws across Canada ... [would allow] ... participants to forego much of the cost and effort of "Canadianizing" marketing and disclosuredocuments ..." the time of writing, proposed amendments to securities laws across Canada would make similar relief available to all market participants to forego much of the cost and eff ort of "Canadianizing" marketing and disclosure documents for use in Canada, potentially including non-Canadian funds, provided certain conditions are met. " e Canadian off ering memorandum must include: • Purchasers' rights of action for rescission or damages. Generally, a purchaser in most Canadian provinces has a statutory right of action against the issuer (or in certain provinces, any directors of the issuer or the dealer of the securities) for rescission or damages where an off ering memorandum delivered to it contains a misrepresentation and the private placement is made in reliance on a common exemption. • Related and connected issuer disclosure and other confl icts. If there is a confl ict of interest or other material relationship between a dealer and issuer that would cause a prospective purchaser to ques- tion whether the issuer and dealer are independent of each other, details of this relationship must be disclosed. Other confl icts of inter- est inherent in the asset management context, such as allocation of investment opportunities and allocation of time must be disclosed. • Resale restrictions. Details of applicable resale restrictions for securities purchased under an off ering document in a prospectus exempt off ering must be disclosed. • Collection of information. Notice must be provided that the personal information of each purchaser will be collected and provided to the securities regulator in Ontario, possibly to securities regulators in other provinces and, pursuant to certain freedom of information laws, potentially to the public. • For registered investment fund managers. Certain disclosures relating to rules applicable under National Instrument 31-103 ‒ Reg- istration Requirements, Exemptions and Ongoing Registrant Obligations must be included for registered investment fund managers, including with respect to confl icts of interest, fairness in allocation of investment opportunities, "so -dollar" policies and referral arrangements. " e Canadian off ering memorandum typically includes: • Tax disclosure. Where the tax treatment of the securities in the hands of Canadian holders diff ers materially from the tax treatment in the hands of non-Canadian resident investors, Canadian tax disclosure is o en included. • Deemed representations. " e issuer will also include "deemed representations" from purchasers in the wrapper to support the issuer's reliance on the relevant private placement and registration exemptions as well as in respect of the indirect collection of personal information through mandatory sales reports. • Anti-terror and money-laundering obligations. Disclosure

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