Investor Alert:
CIRO is issuing a warning to Canadian investors regarding Canada Token Trade.
Effective Date: December 31, 2021
IIROC is publishing guidance to clarify the capital and margin requirements for special warrants, subscription receipts and restricted securities, as defined in this notice. For any other products, where a margin rate or requirement is not specified within the IIROC Rules, the Dealer Member (Dealer) must obtain a margin rule interpretation or use a 100% margin rate.
There has been a decrease in the use of special warrants, with the implementation of Multilateral Instrument 45-102 (currently National Instrument 45-102) in November 2001. Issuers meeting the definition of “qualifying issuer” are opting for the use of restricted securities, subject to four month trading restriction, that do not require the clearance of a prospectus. As the restricted securities have features similar to special warrants and subscription receipts these securities shall be margined in a similar way.
For the purposes of this Guidance Note:
“Special warrants” are defined as those limited term securities issued via prospectus exemptions under the securities acts of the selling jurisdictions, which are convertible into another security class of the issuer (predominantly common shares) at a set conversion rate upon clearance of a final prospectus at no additional cost to the subscriber.
“Subscription receipts” are defined as those limited term securities issued via prospectus, which are convertible into another security class of the issuer (predominantly common shares) at a set conversion rate based on the successful completion of a planned reorganization or transaction. Where completion is not successful, security proceeds are either returned to the subscriber or a more generous conversion rate is made available to the subscriber.
“Restricted securities” are defined as securities with resale restrictions initially distributed pursuant to Multilateral Instrument 45-102 (currently known as National Instrument 45-102) or Quebec Securities Commission1 Regulation 45-106 Respecting prospectus exemptions. The resale restrictions are four months for qualifying issuers2/(reporting issuer in Quebec) and twelve months for non-qualifying issuers.2 At the end of the trading restriction period the restriction legend is removed and the shares trade as common shares. Investors typically receive restricted securities through private placement offers.
Special warrants may differ in the treatment of the issue proceeds from the purchase date to the date of expiry or receipt for a final prospectus and in the events occurring upon expiry. Currently existing variations are as follows:
The proceeds of the issue are required to be held in trust until the expiry or conversion of the special warrants, at which time, if no receipt for a final prospectus has been obtained from the selling jurisdiction securities commission, the cash proceeds plus interest are returned to the subscriber.
The proceeds of the issue are not restricted and are available to the issuer immediately. Upon expiry of the special warrants, if no receipt for a final prospectus has been obtained from the selling jurisdiction securities commission, the subscribers receive common shares based on a set conversion rate subject to the requirements of the selling jurisdiction securities act for the exemption used.
As with special warrants, subscription receipts may differ in the treatment of the issue proceeds from the purchase date to the date of expiry of the original conversion rate terms and in the events occurring upon expiry of such terms. Currently existing variations are as follows:
The proceeds of the issue are required to be held in trust until the expiry of original conversion rate terms or conversion of the subscription receipts, at which time, if the planned reorganization or transaction is not successful:
the cash proceeds plus interest are returned to the subscriber; or
the common shares are made available to the subscriber at a more generous conversion rate; or
both of the options under (a) and (b) are made available to the subscriber.
The proceeds of the issue are not restricted and are available to the issuer immediately. Upon expiry of the original conversion rate terms, if the planned reorganization or transaction is not successful, the subscribers receive common shares at a more generous conversion rate.
The proceeds of restricted securities are usually available to the issuer immediately but there may be instances where the proceeds are held in trust in an escrow account with an acceptable institution and returnable to subscribers under certain conditions.
The market value of special warrants, subscription receipts and restricted securities may be difficult to determine. If indeterminable directly, the market value of these securities may be determined based on the market value of the underlying common shares.
In the case of underwriting commitments for special warrants, subscription receipts and restricted securities, the market value reported for the underwriting commitment position shall be the lesser of:
The market value determined for the security position, and
The value of the security position determined based on its issue price.
IIROC Rules this Guidance Note relates to:
Rule 5600, and
Rule 5500.
This Guidance Note replaces MR0244 - Capital and Margin Requirements for Special Warrants, Subscription Receipts and Restricted Securities.
This Guidance Note was published under Notice 21-0190 - IIROC Rules, Form 1 and Guidance.