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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
Canada | Publication | January 19, 2023
Most issuers that utilize the offering memorandum (OM) prospectus exemption under National Instrument 45-106 Prospectus Exemptions (NI 45-106) prepare a new OM to include audited annual financial statements dated within 120 days of the financial year end. As we approach “OM season,” issuers should begin to consider how the amendments to NI 45-106 described below will impact disclosure in their OMs.
Subject to ministerial approval, amendments to NI 45-106 will be effective on March 8, 2023, that will require issuers to provide additional disclosure to purchasers when relying on the offering memorandum prospectus exemption in NI 45-106. The amendments were originally proposed in September 2020 (the 2020 proposed amendments) and were subject to public comment. Norton Rose Fulbright Canada commented on such 2020 proposed amendments. Many of these comments were acknowledged by the Canadian Securities Administrators, and certain particularly burdensome disclosure requirements were scaled back or tailored to specific circumstances.
The amendments include generally applicable additions to OM disclosure requirements and specific requirements for issuers involved in real estate activities (real estate issuers) and collective investment vehicles (CIVs).
The term “real estate activities” excludes activities concerning “mineral projects” and “oil and gas activities” (as defined under securities law), and in Quebec, activities relating to the forms of investments subject to the Regulation Respecting Real Estate Prospectus and Registration Exemptions (Québec). CIV means either an investment fund or an issuer whose primary purpose is to invest money provided by its security holders in a portfolio of securities other than securities of subsidiaries of the issuer.
As discussed in the notice of amendments dated December 8, 2022 (see here), the OM prospectus exemption was designed as a small business financing tool and was expected to be used by simple issuers for relatively small investments. In practice, however, the OM exemption has been used by larger and more complex issuers than were initially envisioned, many of whom are real estate issuers and CIVs engaged in mortgage lending. The amendments are intended to provide purchasers purchasing securities under an OM with enhanced disclosure and, in relation to real estate issuers and CIVs, more tailored disclosure.
The new disclosure requirements under the OM prospectus exemption are summarized below.
Regarding Form 45-106F2, which is the required form of OM for non-qualifying issuers, the following will be required:
Real estate issuers will be required to provide an independent appraisal of an interest in real property to the purchaser if such an interest will be acquired from a related party, or a value for such an interest is disclosed in the OM.
In addition to the general changes to Form 45-106F2, real estate issuers must now complete a new Schedule 1 to Form 45-106F2, which includes:
In addition to the general changes to Form 45-106F2, CIVs must now complete a new Schedule 2 to Form 45-106F2, which includes:
While certain amendments were scaled back from the 2020 proposed amendments, specifically for appraisal requirements and the requirement to amend an OM with interim financial statements, these amendments will increase disclosure obligations and related liabilities for entities distributing securities under an offering memorandum prospectus exemption.
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Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
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On February 2, 2024, the Belgian Presidency of the Council of the European Union confirmed that the Committee of Permanent Representatives had signed the Artificial Intelligence (AI) Regulation, referred to as the AI Act. Approval by the EU Parliament followed on 13 March 2024, and the AI Act is likely to appear in the EU’s Official Journal around May 2024. The AI Act aims to establish a stringent legal framework governing the development, marketing, and utilisation of artificial intelligence within the region, thereby marking a significant advancement in the regulation of this burgeoning domain.
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The EU’s Artificial Intelligence Regulation, commonly referred to as the AI Act, is expected to come into force during the summer of 2024 (the AI Act). The AI Act will be the first comprehensive legal framework for the use and development of artificial intelligence (AI), and is intended to ensure that AI systems developed and used in the EU are safe, transparent, traceable, non-discriminatory and environmentally friendly.
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