| | | | Grandfathering Exemptions – A “grandfathering” exemption is available if the manager does not manage any investment funds which currently have investors resident in any of the Three Canadian Provinces, but this exemption will cease to be available if and when fund securities are sold to an investor in one of the Three Canadian Provinces. Another “grandfathering” exemption is available so long as neither the manager nor any fund it manages has, after September 27, 2012, “actively solicited” residents in any of the Three Canadian Provinces. Actively Solicited – The securities regulators in the Three Canadian Provinces have stated that “active solicitation” refers to intentional actions taken by the investment fund or the investment fund manager to encourage a purchase of the fund’s securities, such as pro-active, targeted actions or communications that are initiated by an investment fund manager for the purpose of soliciting an investment. Actions that are undertaken by an investment fund manager at the request of, or in response to, an existing or prospective investor who initiates contact with the investment fund manager would not constitute active solicitation. Examples of active solicitation include: direct communication with residents of one of the Three Canadian Provinces to encourage their purchases of the investment fund’s securities; advertising in Canadian or international publications or media (including the Internet), if the advertising is intended to encourage the purchase of the investment fund’s securities by residents of one of the Three Canadian Provinces (either directly from the fund or in the secondary/resale market); or purchase recommendations being made by a third party to residents of one of the Three Canadian Provinces, if that party is entitled to be compensated by the investment fund or the investment fund manager, for the recommendation itself, or for a subsequent purchase of fund securities by residents of one of the Three Canadian Provinces in response to the recommendation. According to the securities regulators, active solicitation would not include: advertising in Canadian or international publications or media (including the Internet) only to promote the image or general perception of an investment fund; responding to unsolicited enquiries from prospective investors in one of the Three Canadian Provinces; or the solicitation of a prospective investor that is only temporarily in one of the Three Canadian Provinces, such as in the case where a resident from another jurisdiction is vacationing in one of the Three Canadian Provinces. Permitted Client Exemption - If no “grandfathering” exemption is available, the only alternative to registration as a non-Canadian resident investment fund manager will be to take the steps necessary to perfect the “permitted client” exemption, if available. As drafted, it appears that the “permitted client” exemption would only be available if the manager does not manage any investment fund which has ever distributed any securities in one of the Three Canadian Provinces to an investor who did not, at the time of the distribution, qualify as a “permitted client.” So, in order to be able to rely upon the “permitted client” exemption, the manager would have to be able to confirm that all purchasers of its funds’ securities in any of the Three Canadian Provinces, dating back to the inception of each fund, met the “permitted client” test. Since the “permitted client” definition is relatively new and the private placements could have legitimately been made to other investors as well, this aspect of the test may be problematic. We are hopeful that the securities commissions in the Three Canadian Provinces may provide some clarification on this matter. In addition, the investment fund manager will have to: (i) appoint an agent for service of process in each of the Three Canadian Provinces where investors in its funds are resident; (ii) file a notice with the applicable Canadian securities regulators indicating that it is relying on the “permitted client” exemption; (iii) file a prescribed form of notice with the applicable securities regulators regarding certain regulatory actions by non-Canadian regulators, which form must be updated on an ongoing basis within ten days of any change to the information contained in the form; (iv) provide prescribed cautionary disclosure to investors resident in the Three Canadian Provinces; and (v) notify the securities regulators annually that it has relied on the “permitted client” exemption during the preceding year, which notice must include disclosure of the total assets under management attributable to securities beneficially owned by residents of each of the Three Canadian Provinces. An investment fund manager relying on the “permitted client” exemption in the Province of Ontario will also have to pay an annual fee to the Ontario Securities Commission calculated on the basis of the amount of revenue it has derived during the year as a result of having Ontario-resident investors in its funds. In addition, although the Canadian regulators have not yet specifically so stated, it may be that an investment fund manager relying on the “permitted client” exemption will be required to submit monthly reports to the Canadian securities regulators regarding compliance with CSA Staff Notice 31-317 – Reporting Obligations Related to Terrorist Financing for Registrants, Exempt International Dealers and Exempt International Advisers, which obligations apply to “persons and entities authorized under provincial legislation to engage in the business of dealing in securities or any other financial instruments, or to provide portfolio management or investment advising services.” Permitted Client – The term “permitted client” includes, among other things: (i) a person or company, other than an individual or an investment fund, that has net assets of at least Cdn. $25 million as shown on its most recently prepared financial statements; (ii) an individual who beneficially owns financial assets (being cash, securities, contracts of insurance, deposits, or evidence of a deposit) having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds Cdn. $5 million; and (iii) a person or company acting on behalf of a managed account which is managed by that person or company, if it is registered or authorized to carry on business as an adviser or the equivalent under the securities legislation of any province or territory of Canada, or the securities legislation of any other country. Three Month Transition Period – Non-Canadian resident investment fund managers will have until December 31, 2012 to either apply for registration as an investment fund manager or take the necessary steps to perfect the “permitted client” exemption from the registration requirements, if it is available. | |