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On October 12, 2021, the Ontario Government released the Capital Markets Act (the “CMA“) — a draft legislation that intends to modernize the legislative and regulatory framework of Ontario’s capital markets, and further enhance the province’s position as a globally competitive capital markets jurisdiction.

If passed by the Legislative Assembly of Ontario, the CMA will replace both the Securities Act and the Commodity Futures Act in Ontario.

The CMA

The purpose of the CMA is to:

1. provide protection to investors from unfair, improper or fraudulent practices;
2. foster fair, efficient and competitive capital markets and confidence in capital markets;
3. foster capital formation; and
4. contribute to the stability and integrity of the financial system and to the reduction of systemic risk.

The Capital Markets Modernization Taskforce

The commitment to transform Ontario’s capital markets began in February 2020, when the Ontario government established the Capital Markets Modernization Taskforce (the “Taskforce“). The Taskforce’s mandate is to review and transform the regulatory landscape for the capital markets sector in Ontario, and advise the Minister of Finance on how to best foster innovation and improve the competitiveness of the province’s capital markets.

The Taskforce released two reports; a consultation report on July 9, 2020, and a final report (the “Final Report“) on January 22, 2021, outlining a broad range of recommendations, derived primarily from stakeholders, to strengthen the vitality and competitiveness of Ontario’s capital markets. In total, there are 74 recommendations, many of which have been incorporated into the CMA.

The Recommendations

The following are some of the more notable recommendations from the Final Report that have been incorporated into the CMA:

1. Adjudication
   • Introduce a separate Capital Markets Tribunal to carry out the Ontario Securities Commission’s (the “OSC”) adjudicative function; and
   • Separate the OSC’s currently combined Chair and Chief Executive Officer position into two distinct positions.
2. Modernizing enforcement and enhancing investor protection
   • Increase the maximum for administrative monetary penalties to $5 million and increase the maximum fine for offences to $10 million; 
   • Modernize investigative tools by empowering the provincial Court to issue capital market production orders;
   • Provide the OSC with the authority to prescribe requirements and restrictions for persons engaging in promotional activities, which are defined to include communications that encourage or reasonably could be expected to encourage purchasing and trading securities and derivatives; and
   • Prohibit false or misleading statements about public companies in connection with promotional activity and attempts in making such statements.
3. Regulation as a competitive advantage
   • Provide the OSC with designation powers and rule-making authority, such as the power to designate crypto assets as securities and/or derivatives and the power to prescribe crypto assets to be securities and/or derivatives; 
   • Provide for the automatic issuance of a receipt for a preliminary prospectus, a prospectus or a prescribed offering document for issuers that meet certain requirements to be set out in OSC rules. Such requirements, which would be the subject of further consultation, may include that issuers have a certain public float or have issued debt securities above a set amount in a specified time period and have established an appropriate disclosure record;
   • Introduce additional categories under the accredited investor prospectus exemption which will be consistent with the legislation of other Canadian Securities Administrators (“CSA”) jurisdictions and promote harmonization by moving accredited investor provisions currently found in the Securities Act into National Instrument 45-106. By relocating all of the accredited investor categories to the OSC rules, the OSC would have more flexibility to tailor them and ensure they remain aligned with evolving capital markets. This would include conducting work on developing additional accredited investor categories that would be published for consultation as proposed OSC rules; and
   • Broaden the civil liability recourse for investors in the exempt market. Currently, the rights of action for misrepresentations in an offering memorandum are much more limited in Ontario than in other CSA jurisdictions. For example, in Ontario, a claim cannot be made against the directors or promoters of the issuer; it can only be made against the issuer. The CMA would change this and instead allow for investors purchasing securities to have recourse for damages when there is a misrepresentation in a prescribed disclosure document against (i) the issuer, (ii) the directors of the issuer, (iii) promoters of the issuer, (iv) influential persons, (v) experts and (vi) every person who signed the prescribed disclosure document. These investors would also have a right of rescission against the issuer.
4. Proxy system, corporate governance and mergers and acquisitions
   • The CMA includes the rule-making authority to allow for requirements to be placed on issuers to have an annual advisory shareholders’ vote on the board’s approach to executive compensation. Such voting provides critical input to boards and facilitates shareholder engagement in ensuring that approaches to executive compensation reflect shareholders’ best long-term interests. 

Conclusion

The CMA has the potential to respond to Ontario’s need for streamlined regulation, the development and implementation of legislation in a transparent manner, greater harmonization among jurisdictions, a market with a competitive edge with the potential to attract global investment and support economic growth and innovation, and legislation that is both easily accessible and comprehensible by the public. The OSC and the government will ensure stakeholders have the opportunity to familiarize themselves and adapt to any changes that would result from the CMA, while ensuring that their commitment to modernize the capital markets sector moves forward in a timely manner.

The public, including sector experts and market participants, are invited to share their input on the draft legislation by accessing the Ontario Regulatory Registry, which will remain open for comment until January 21, 2022.