New Proposed Rules for Canadian Issuers Quoted in the US OTC Markets

Note: for a post on the current version of M.I. 51-105 see here.

Canadian securities commissions (except the OSC) have published new proposed rules for Canadian issuers that have securities quoted on the US over-the-counter markets (the OTC Rule)[1]. The OTC Rule derives from BC Instrument 51-509. The latter was designed in 2008 to combat abuse of the US OTC markets, Pink OTC Market and OTC Bulletin Board, by British Columbia promoters[2]. The OTC Rule extends the new regulatory environment to most Canadian provinces.

The US OTC markets reputation as “speculative” and opaque markets has been an obstacle to their usefulness to Canadian issuers. In fact, relatively few Quebec issuers have securities quoted solely on Pink Sheets. The OTC Rule complements, from the Canadian side of the border, recent efforts by the SEC and the markets themselves to weed out abuses and increase transparency. The US OTC markets could become extremely valuable to small Canadian issuers as an additional and cheaper source of equity capital than traditional stock markets. Hopefully the implementation of a specifically tailored and uniform rule across most Canadian jurisdictions will help accomplish the objective.


The stated objective of the OTC Rule is to reduce the occurrence of pump and dump schemes and the misuse of shell companies, by improving disclosure by Canada-based issuers and promoters and creating special restrictions on the resale of shares sold in private placements.


The Rule applies to any OTC Issuers with a significant jurisdictional nexus with Canada. An OTC Issuer is an issuer whose securities are quoted on any U.S. over-the-counter markets (except those issuers that are also listed on TSX, TSX-V, CNSE, NYSE, NYSE-Amex, Nasdaq[3]) or whose trades in securities are reported on the grey market[4].

An OTC Issuer is subject to the rule if it is directed or administered from a Canadian province, promotional activities are conducted in or from a Canadian province, or it distributed seed shares in Canada prior to obtaining a ticker symbol (OTC Reporting Issuer). Legitimate US issuers will need to evaluate whether their Canadian directors create an unwanted jurisdictional nexus to a Canadian jurisdiction.

Conversely, an OTC Issuer ceases to be a reporting issuer if the above activities have ceased for more than a year. In Québec, the OTC Reporting Issuer must apply to the AMF to have its status revoked.

The OTC Rule would apply to an OTC Reporting Issuer that is a reporting issuer in Canada.

Disclosure Requirements

OTC Issuers that are not SEC filers must meet the same periodic disclosure requirements imposed on other domestic reporting issuers, notably under National Instrument 51-102 Continuous Disclosure Obligations and, for oil and gas issuers, under National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities.

Insiders of OTC Reporting Issuers must file insider reports on SEDI. Directors, officers, promoters or control persons must file personal information forms (PIF).

OTC Issuers that are SEC filers can comply with the disclosure requirements by using the reports they file with the SEC.

In addition to normal disclosure requirements, OTC Issuers would also be required to disclose information about their promoters, their engagement and compensation in the form of Form 51-105F2 Notice of Promotional Activities.

Resale Restrictions

Due to long standing neglect from regulators, resales were always a sticking point in OTC financings: seed shares often came to magically form the float of new companies; and other private placement shares were often renegotiated with no regard for Canadian resale rules.

Seed shares can only be traded within a reorganization or merger transaction, or if: the security is properly legended; the trade is effected by a person through a registered investment dealer from an account registered in the name of that person; and the trade is executed in a OTC market in the US.

The legend must state the following: “Unless permitted under section 11 of Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets, the holder of this security must not trade the security in or from a jurisdiction of Canada unless (a) the security holder trades the security through an investment dealer registered in a jurisdiction of Canada from an account at that dealer in the name of that security holder, and (b) the dealer executes the trade through any of the over-the-counter markets in the United States of America.”

Private placement securities acquired after the OTC Reporting Issuer has received a ticker-symbol can only be resold after a 4-month period has passed either from the date of the original distribution or the date a control person distributed the security. Additional restrictions apply: a person can only trade up to 5% of the OTC reporting issuer’s outstanding securities of the same class in any given 12-month period; the person trades the security through a Canadian-registered investment dealer, who executes the trade through an OTC market in the US; there is no unusual promotional effort; no extraordinary commissions are paid for the trade; and the security bears a legend stating:

The holder of this security must not trade the security in or from a jurisdiction of Canada unless the conditions in section 13 of Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets are met.

These requirements are in addition to existing resale limitations provided by US securities laws.


Non-SEC filers will be given additional time to comply with the new disclosure requirements.

Effect on existing Québec Issuers

According to my own analysis of the data, as of June 15, 2011, 217 Quebec issuers had 228 securities quoted on PK, 195 of which were either listed on an organized exchange (most commonly TSX or TSX-V) or a SEC reporting issuer. Of the remaining 33, 4 complied with the Pink OTC Markets Group’s Guidelines for Providing Adequate Current Information while 29 had gone dark; 13 of the latter were inactive due to bankruptcy or regulatory action.

In other words, the number of Quebec-based issuers likely to be impacted by the rule is relatively small (20 issuers). These issuers draw very little benefit from their status because of the lack of liquidity of the market for their stock, of existing restrictions on US resales under Rule 144 and finally because of the sheer psychological (and sometimes, for Canadian investors, logistical) obstacles of investing into a Pink Sheet stock. Most of these issuers (at least those that are active and can afford it) should seek to become entirely private before the OTC Rule is adopted.

[3] Note the absence of the London Stock Exchange and Frankfurt Stock Exchange listed issuers.
[4] Trades by broker-dealers of securities that are not formally quoted on the OTC markets. For instance, broker-dealers may trade on Pink OTC Markets the securities of a Canadian issuer that is listed on AIM.