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Notice of Rule Policy, Forms, Companion Policy: OSC Rule - 45-501 - Ontario Prospectus and Registration Exemptions
Notice of Rule Policy, Forms, Companion Policy: OSC Rule - 45-501 - Ontario Prospectus and Registration Exemptions
NOTICE OF RULE, POLICY AND FORMS UNDER THE SECURITIES ACT
RULE 45-501 EXEMPT DISTRIBUTIONS - COMPANION POLICY 45-501CP
FORMS 45-501F1 AND 45-501F2 AND
RESCISSION OF ONTARIO SECURITIES COMMISSION POLICY 6.1
Notice of Rule, Policy and Forms and Rescission of Policy
The Commission has made Rule 45-501 Exempt Distributions (the "Rule") and Forms 45-501F1 and 45-501F2 (the"Forms") under section 143 of the Securities Act (the "Act").
The Rule, the Forms and the material required by the Act to be delivered to the Minister of Finance were delivered onOctober 8, 1998. If the Minister does not approve the Rule and the Forms, reject the Rule and the Forms or return themto the Commission for further consideration, the Rule and the Forms will come into force on December 22, 1998. If theMinister approves the Rule and the Forms, the Rule and the Forms will come into force 15 days after they are approved.
The Commission has adopted Companion Policy 45-501 Exempt Distributions (the "Policy") under section 143.8 of theAct. The Policy will come into force on the date that the Rule and the Forms come into force.
The Rule consolidates various provisions currently set forth in the following rules (the "Replacement Rules") of theOntario Securities Commission (the "Commission"):
(1) In the Matter of Trades by Issuers Upon Exercise of Certain Conversion or Exchange Rights and In the Matterof the First Trade in Securities Acquired Upon Exercise of Such Conversion or Exchange Rights (1997), 20OSCB 1218, as amended at (1998), 21 OSCB 2333, that incorporated by reference a Blanket Ruling of thesame name (1994), 17 OSCB 2877 ("Trades by Issuers on Certain Conversions or Exchanges"),
(2) In the Matter of Certain Proposed Amendments (1997), 20 OSCB 1220, as amended at (1998), 21 OSCB2334, that incorporated by reference a Blanket Order of the same name (1987), 10 OSCB 5936 ("Hold Periodsand First Trades For Convertible Securities and Underlying Securities"),
(3) In the Matter of Trades by Issuers in Connection with Securities Exchange Issuer Bids and by Holders ofSecurities of a Company to Another Company in Connection with an Amalgamation, an Arrangement or aSpecified Statutory Procedure (1997), 20 OSCB 1218, as amended at (1998), 21 OSCB 2332, thatincorporated by reference a Blanket Ruling of the same name (1994), 17 OSCB 1975 ("Trades on SecuritiesExchange Issuer Bids and Amalgamations"),
(4) In the Matter of Trades in Securities of a Private Company Under the Execution Act (1997), 20 OSCB 1218,as amended at (1998), 21 OSCB 2330, that incorporated by reference a Blanket Ruling of the same name(1985), 8 OSCB 127 ("Trades in Securities of a Private Company"), and
(5) In the Matter of Dividend Reinvestment Plans (1997), 20 OSCB 1218, as amended at (1998), 21 OSCB 2335,that incorporated by reference a Blanket Ruling of the same name (1994), 17 OSCB 1178 ("DividendReinvestment Plans").
The Replacement Rules expire on the earlier of the date on which the Rule comes into force and December 31, 1998.
Certain provisions of Ontario Securities Commission Policy Statement No. 6.1 ("Policy 6.1") and sections 14 to 32 and67 and 68 of the Regulation to the Act (other than clauses 14(e) and 19(5) of the Regulation which are incorporated inRule 45-502 Dividend or Interest Reinvestment and Stock Dividend Plans and clause 14(g) which is incorporated in Rule32-503 Registration and Prospectus Exemptions for Trades by Financial Intermediaries in Mutual Fund Securities toCorporate Sponsored Plans and section 15 which has been revoked by an amendment to Rule 32-503) and subsection69(3) and clause 151(a) of the Regulation are restated in this Rule. Sections 22 and 25 of Schedule I to the Regulationare also restated in this Rule.
The Commission has also rescinded Policy 6.1, effective on the date that the Rule comes into force.
Concurrently with making the Rule and the Forms, the Commission revoked
(i) sections 14, 16-32, 67 and 68 of the Regulation;
(ii) subsection 69(3) of the Regulation;
(iii) clause 151(a) of the Regulation;
(iv) sections 22 and 25 of Schedule 1 to the Regulation; and
(v) Forms 20 and 21 of the Regulation.
See "Regulations Revoked or Amended" below.
Changes from the Current Exempt Distribution Regime
The Rule, while generally consistent with current exempt distribution requirements in Ontario, will effect the followingprincipal changes from the current regime:
The Rule establishes some new exemptions from the registration and prospectus requirements of the Actincluding exemptions for
(i) sales of units of securities of more than one issuer provided the issuers are affiliated and engagedin the same or related businesses;
(ii) trades amongst promoters and control persons;
(iii) trades made in connection with mergers or amalgamations, including "three-cornered" transactions;and
(iv) trades by non-corporate issuers.
The Rule removes certain exemptions in the Act unless certain requirements in the Rule are met. Specifically,the Rule restricts the availability of the current exemptions for seed capital securities and government incentivesecurities and also removes the private placement exemption for purchasers that are entities created or usedprimarily to permit purchases without a prospectus unless certain conditions are met.
The Rule sets out resale restrictions for securities purchased in reliance on certain exemptions.
The Rule and Policy clearly establish that "tacking" of hold periods is permitted. The relevant hold period runsfrom the date of the first trade made in reliance upon an exemption from the prospectus requirements of theAct.
The Rule, when read together with Rule 14-501 Definitions, changes the rights that flow from the delivery ofan offering memorandum. Specifically, the contractual right of action is now broader (it applies to sellingsecurityholders) and the period of time during which notice can be given has been increased (from 90 to 180days).
The Policy provides guidance as to the views of the Commission concerning the availability and use of certainexemptions including,
(i) the availability of exemptions for three-cornered amalgamations or mergers; and
(ii) the Commission's concern over the use of a securities exchange take-over bid to achieve reportingissuer status.
These changes and the other provisions of the Rule and the Policy are discussed in greater detail in the Summary ofthe Rule and the Summary of the Policy which follow.
Substance and Purpose of the Rule, Policy and Forms
The scope of the reformulation exercise was to consolidate and streamline existing exemptions and requirementsrelating to exempt distributions.
The Commission hopes that the Rule and related instruments will be viewed as an improvement over the existingprovisions relating to exempt distributions which are interspersed throughout the Act, the Regulation, Policy 6.1, andthe Replacement Rules. However, the Commission recognizes that the Rule and related instruments are, at best, onlypartial, interim measures in addressing the administrative burdens, expense and complexity of the closed systemgenerally. The Commission is well aware of the difficulties inherent in the existing closed system framework and wouldanticipate that future consideration by the CSA of the appropriateness of an integrated disclosure model in Canada willnecessitate a reconsideration of whether, and to what extent, the existing "closed system" framework would have to bealtered, or perhaps eliminated, in such an environment.
The Final Report of the Task Force on Small Business Financing dated October 1996 recommended, among otherthings, replacing certain existing private placement exemptions with new private placement exemptions. Theserecommendations are currently being considered by a working group of Commission staff. The Commission recognizesthat future consideration of these proposals may require significant changes to be made to the Rule.
Together with other representatives of the Canadian Securities Administrators, Commission staff is currently reviewingcertain developments in other jurisdictions such as the decreased "hold period" recently adopted in certain provincesto determine whether any changes to the existing regime of resale restrictions under the Act should be made. This Rulewill be evaluated as part of the review and the conclusions arising out of this review may lead in the future to furtherrefinement of this Rule.
The purpose of the Rule is to consolidate the requirements concerning exempt distributions currently contained in PartIII of the Regulation, the Replacement Rules and certain provisions of Policy 6.1 which are to be adopted as a rule.
The purpose of the Policy is to set forth the views of the Commission as to the manner in which the Rule and theprovisions of the Act relating to exempt distributions are to be interpreted and applied.
Form 45-501F1 replaces Form 20 of the Regulation as the form of reporting trades under certain prospectus exemptionscontained in subsection 72(1) of the Act and certain sections of the Rule. Form 45-501F2 replaces Form 21 of theRegulation as the form of reporting trades under subsection 72(4) of the Act and certain sections of the Rule.
Summary of Rule
Definitions
Part I of the Rule contains definitions, many of which are based on definitions in the Replacement Rules and others ofwhich are included from the Regulation. A definition of "government incentive securities" has been included based onthe list of securities designated by the Commission in Policy 6.1 but this list has been updated to reflect recentdevelopments in tax legislation and in that regard to add a new type of government incentive security. A new term,"private issuer", has been defined in the Rule. This term is based upon a similar concept in the Securities Act (BritishColumbia) and has been included for use in a new exemption for distributions by unincorporated private entities. Thedefinition in the rule is more restricted than the definition in the Securities Act (British Columbia) as it brings into thedefinition only those entities which have not distributed any securities to the public. The British Columbia statute dealsonly with the distribution of equity securities. Finally, a definition of the term "multiple convertible security" is includedin the Rule in order to deal with a gap in the Replacement Rules where the exemption currently extends to one level ofconversion.
An interpretation section has been included to assist in interpreting the term "affiliated entity" which is used in the Rule.The interpretation provisions are based on subsections 1(2), (3) and (4) of the Act but are broader as they extend tounincorporated entities.
Additional Exemptions
Part 2 of the Rule provides for certain exemptions from the registration and prospectus requirements in addition to thosecontained in the Act. These exemptions are, for the most part, a restatement of the exemptions contained in theReplacement Rules and sections 14, 17, 18, 20 and 21 of the Regulation. Sections 2.1 to 2.5 of the Rule restate theprospectus exemptions in section 14 of the Regulation. Where appropriate these provisions have been amended tocorrect ambiguities or inconsistencies. Section 2.3 has been expanded to permit trades amongst promoters and controlpersons. The existing exemption in clause 14(f) has been restated in section 2.4 of the Rule; however, it has beenamended to contain restrictions substantially the same as those included for use of the exemption in clause 72(1)(p)of the Act and to remove the ability to sell to parents, brothers or sisters of a senior officer or director of the issuer oran affiliate of the issuer in reliance on this exemption unless they otherwise meet the net worth or advice requirementof this exemption.
Section 2.6 restates the provisions of section 18 of the Regulation as part of the Rule. Clause 18(e) of the Regulationhas been changed to specify that the report required to be filed is an insider report. This requirement, as changed,corresponds to the requirement in subclause 72(7)(b)(ii) of the Act in that this report must be filed within three days.
Sections 2.7 and 2.8 restate the prospectus and registration exemptions provided in the rule Trades on SecuritiesExchange Issuer Bids and Amalgamations. Section 2.7 provides an exemption from the registration and prospectusrequirements for trades in securities issued by an issuer to its securityholders in connection with a securities exchangeissuer bid. Section 2.7 amends the Replacement Rules so that compliance with the issuer bid provisions of the Actis no longer required as a condition to relying on the exemption. Section 2.8 expands on the exemption in clause72(1)(i) to transactions such as "three-cornered" mergers or amalgamations by making it clear that trades made by anissuer in connection with a merger, amalgamation or arrangement between parties other than the issuer are alsoexempted.
Sections 2.9 and 2.10 restate the prospectus and registration exemptions provided in the rule Trades by Issuers onCertain Conversions or Exchanges and extend these provisions to cover multiple convertible securities. The sectionsrestate the exemptions available through the rule for trades by an issuer when the issuer causes the holder to convertor exchange. In order to use the exemption in section 2.10 for a forced exchange, the exchange issuer must satisfyconditions which are parallel to the conditions set out in subclause 72(1)(h)(ii) of the Act. The filing of the notice andpayment of a fee which are conditions subsequent to the use of the exemption stipulated in that rule have been restatedin section 7.5 of the Rule and the filing of the notice is no longer a condition to relying on the exemption in section 2.9.
Section 2.11 creates a new exemption from the registration and prospectus requirements for purchases of units ofsecurities of one or more issuers, other than mutual funds or non-redeemable investment funds, that in the aggregatehave an acquisition cost to the purchaser of not less than $150,000, provided that, if the securities are of more thanone issuer, the issuers are affiliated entities and are engaged in the same or related types of businesses. Thisexemption is based on item 3 of paragraph B of Policy 6.1 and expands the exemptions in paragraph 5 of subsection35(1) and clause 72(1)(d) of the Act. Issuers that are mutual funds or non-redeemable investment funds are excludedas it is not intended that this exemption permit pooled fund investments.
Section 2.12 restates and replaces the rule Trades In Securities of a Private Company and now provides an exemptionfor trades in securities of a private issuer by a sheriff.
Section 2.13 restates the prospectus exemption contained in the rule Hold Periods and First Trades for ConvertibleSecurities and Underlying Securities. This rule stipulates that the relevant hold period for convertible securities acquiredunder certain exemptions gets the benefit of the status of the underlying security. As drafted in the Rule the exemptionhas been expanded from the current exemption contained in the rule to provide similar treatment for first trades inexchangeable securities and multiple convertible securities. It is now clear from the wording of this section that the holdperiod is the aggregate period of time that any one or more of the convertible or exchangeable security and underlyingsecurity have been held. The seller is permitted to "tack" on the amount of time that the securities have been held ina previous exempt trade by someone else. The Companion Policy describes this view of the Commission regardingthe interpretation of certain provisions in the Act.
Sections 2.14 and 2.15 restate the provisions of section 17 of the Regulation which create an exemption for first tradesin securities acquired in connection with certain take-over bids and for first trades in securities traded to facilitate theincorporation of the issuer if the purchaser is a promoter of the issuer. The first trade relief in section 2.14 of the Ruleis conditional on the offeror in the take-over bid being a reporting issuer before the filing of the securities exchange take-over bid circular.
Section 2.16 creates an exemption for a first trade in underlying securities if the distribution of the multiple convertible,convertible and exchangeable security is qualified by a prospectus. This exemption is based on the exemptioncontained in Trades by Issuers on Certain Conversions or Exchanges and has been amended to contemplate multipleconvertible securities and to delete the requirements that for convertible securities at the time of the trade the issueris a reporting issuer and no unusual effort is made to prepare the market or create demand. For exchangeablesecurities, the exemption is only available if the issuer of the underlying security is a reporting issuer at the time of thefirst trade.
Section 2.17 is a new exemption for non-corporate private issuers parallel to the private company exemptions inparagraph 35(2)10 and clause 73(1)(a) of the Act.
Section 2.18 restates sections 20 and 21 of the Regulation as part of the Rule.
Removal of Exemptions
Part 3 of the Rule provides for the removal of exemptions contained in the Act and in the Rule if certain conditions arenot met.
Sections 3.1 and 3.5 provide that the exemptions contained in paragraphs 5 and 18 of subsection 35(1) and clauses72(1)(d) and 72(1)(l) of the Act are not available if the aggregate acquisition cost to the purchaser, or the fair value ofthe assets purchased, is less than $150,000. These provisions are based on and will replace sections 27 and 28 of theRegulation. The concept of fair value replaces present value which is the terminology used in Policy 6.1.
Section 3.2 provides that the exemptions contained in paragraph 5 of subsection 35(1) and clause 72(1)(d) of the Actand section 2.11 of the Rule are not available unless the aggregate acquisition cost is satisfied by the payment of cashor other immediately available funds by the purchaser or the incurrence or assumption of liabilities by the purchaser,or a combination thereof. This section also provides that, if the acquisition cost is to be satisfied by the incurrence orassumption of liabilities by the purchaser, the exemptions are not available unless the purchaser is primarily liable forthe liabilities and there is no understanding, arrangement or expectation that the liabilities or the obligation to pay themwill be waived and the acquisition cost including the liabilities that are incurred or assumed by the purchaser, has a fairvalue of not less than $150,000. This section restates the provisions of items 1 and 2 of paragraph B of Policy 6.1.
Section 3.3 provides that the registration and prospectus exemptions contained in paragraph 5 of subsection 35(1) andclause 72(1)(d) of the Act and section 2.11 of the Rule are not available if the purchaser is an entity that is created, oris being used, primarily to permit purchases without a prospectus and the share or portion of the aggregate acquisitioncost of the securities of each member or partner of the partnership, syndicate or unincorporated organization, eachbeneficiary of the trust or each shareholder of the company, as the case may be, is less than $150,000. This sectionis based on the provisions of item 4 of paragraph B of Policy 6.1.
Section 3.4 is a new provision which provides that the registration and prospectus exemptions contained in paragraph5 of subsection 35(1) and clause 72(1)(d) of the Act and section 2.11 of the Rule are not available for a trade in asecurity if the purchasing entity is an investment club unless the share or portion of the aggregate acquisition cost ofeach member of the investment club is at least $150,000.
Section 3.6 provides that the exemption contained in clause 72(1)(p) of the Act is unavailable if the solicitations madein all jurisdictions exceed the specified maximum numbers. This provision is based on and will replace section 31 ofthe Regulation and expands its application to cover the registration exemption in paragraph 21 of subsection 35(1) ofthe Act. In addition, this section removes the registration and prospectus exemptions for trades to a parent, brotheror sister of any director or senior officer of the issuer or an affiliated entity of the issuer and for trades involving apromoter when the promoter is a registered dealer and has acted as a promoter of any other issuer during the lasttwelve months.
Section 3.7 provides that the exemptions contained in clause 72(1)(p) of the Act and section 2.4 of the Rule are notavailable if the number of members or partners in a partnership, syndicate, unincorporated organization or other entitycreated or used primarily to permit purchases of securities without a prospectus exceeds the number of prospectivepurchasers and purchasers referred to in clause 72(1)(p) of the Act or section 2.4 of the Rule.
Sections 3.8 and 3.9 restate the provisions of section 22 of the Regulation as part of the Rule.
Section 3.10 restates the provisions of section 24 of the Regulation as part of the Rule and section 3.11 restates section25 of the Regulation as part of the Rule with certain amendments to include the exemption provided for control persondistributions in the rule In the Matter of Dividend Reinvestment Plans and the exemptions in Rule 45-502 Dividend orInterest Reinvestment and Stock Dividend Plans, Rule 45-503 Trades to Employees, Executives and Consultants andRule 32-503 Registration and Prospectus Exemptions for Trades by Financial Intermediaries in Mutual Fund Securitiesto Corporate Sponsored Plans. Certain changes have been made to provide tacking relief and restrictions similar tothose provided in sections 2.13 and 6.4 of the Rule which provide that the status of the underlying security will effectthe relevant hold period for the convertible or exchangeable instrument. A new provision has been added as subsection3.11(5) of the Rule to permit the period of time during which a security has been held by an affiliated entity of the sellerto be included in calculating the relevant hold period imposed on control persons in this section. This provision reflectsrelief granted by the Commission in the past to allow tacking among control group affiliates.
Section 3.12 provides that the registration exemption in certain sections of the Rule is not available to marketintermediaries. This is consistent with the provisions of subsection 206(1) of the Regulation.
Offering Memoranda
Part 4 provides that certain private placement exemptions are not available if a contractual right of action is not providedwhen an offering memorandum is delivered in connection with the use of certain exemptions. This provision is basedon and replaces section 32 of the Regulation. The definition of contractual right of action contained in section 32 of theRegulation is included in the amended Rule 14-501 Definitions to provide that the right of action shall be against theselling securityholder for rescission or damages rather than just against the issuer. The definition has also beenamended to expand the period of time within which notice can be given after payment for the securities from 90 daysto 180 days. The Commission notes that one of the recommendations in the report of The Toronto Stock ExchangeCommittee on Corporate Disclosure "Responsible Corporate Disclosure" is that there be statutory liability for statementsin offering memoranda. The Commission has published proposed amendments to the Act to provide for statutoryliability. If these amendments are adopted, it is expected that contractual rights of action will no longer be required.
Dealer Registration
Part 5 provides that exemptions from the registration and prospectus requirements that refer to a registered dealer areunavailable unless the dealer is registered to act as a dealer for the trade described in the exemption. This provisionis based on and replaces section 30 of the Regulation.
First Trades
Part 6 provides for restrictions on first trades in securities acquired under certain exemptions. The restrictions areprimarily based on and replace the restrictions set out in section 19 of the Regulation, (excluding subsection 19(5) whichis dealt with in Rule 45-502 Dividend or Interest Reinvestment and Stock Dividend Plans) and in the Replacement Rules.Section 6.4 restates section 23 of the Regulation, modified to include subclause 72(1)(h)(ii) trades and to reflect theprovisions of Hold Periods and First Trades for Convertible Securities and Underlying Securities and Trades by Issuerson Certain Conversions or Exchanges. This section also restates in part the resale provisions of Trades by Issuers onCertain Conversions or Exchanges and provides that securities acquired on a forced conversion or exchange of amultiple convertible, convertible or exchangeable security which was acquired in a 72(4) trade (which is a defined termin the Rule) will have resale restrictions which parallel those in subsection 72(4) of the Act.
Section 6.5 restates the first trade requirements in Trades by Issuers on Certain Conversions or Exchanges andprovides that securities acquired upon a forced conversion or exchange of a multiple convertible, convertible orexchangeable security which was acquired in a 72(5) trade (which is a defined term in the Rule) will have resalerestrictions which parallel those in subsection 72(5) of the Act.
Section 6.6 restates the first trade provisions of Trades on Securities Exchange Issuer Bids and Amalgamations. Inaddition, section 6.6 of the Rule also establishes first trade requirements in respect of securities of a private issuer afterthat issuer has ceased to be a private issuer. This parallels the similar resale restrictions imposed in respect ofsecurities of a private company when it ceases to be a private company.
Filing Requirements
Part 7 provides for the form of reports to be filed in connection with private placements and the resale of sharesacquired under such exempt distributions, based on the existing Form 20 and Form 21. This provision is based on andreplaces section 67 and 68 of the Regulation and sections 22 and 25 of Schedule 1 to the Regulation. The reports areto be filed in the form of Forms 45-501F1 and 45-501F2. Form 45-501F1 is the replacement to Form 20 and is requiredto be filed in the circumstances prescribed under subsection 72(3) of the Act and in connection with trades made undersections 2.4, 2.5 or 2.11 of the Rule. Form 45-501F2 is the replacement to Form 21 and is required to be filed in thecircumstances prescribed under clause 72(4)(c) of the Act and under sections 2.13, 6.2 or 6.4 of the Rule. In addition,section 7.6 restates and replaces subsection 69(3) of the Regulation.
Summary of Policy
The Availability and Use of Exemptions
Parts 2 and 3 of the Policy provide guidance as to the view of the Commission concerning the availability and use ofcertain exemptions. Section 2.1 of the Policy provides the view of the Commission that a vendor of securities may relyconcurrently on different private placement exemptions, except that concurrent reliance on clause 72(1)(p) of the Actand section 2.4 of the Rule does not appear to be possible. Section 2.1 also provides the view of the Commission that,if prospective purchasers are solicited with respect to a private placement of securities and the securities are ultimatelysold to some of the purchasers under clause 72(1)(d) of the Act or section 2.11 of the Rule and other purchasers underclause 72(1)(p) of the Act or section 2.4 of the Rule, all persons solicited with respect to the private placement shouldbe counted for the purposes of the "fifty" and "seventy-five prospective purchasers" solicitation rules in clause 72(1)(p)of the Act and section 2.4 respectively.
Section 2.2 outlines certain concerns of the Commission concerning the use of securities exchange take-over bids toachieve reporting issuer status and cautions issuers that the filing of a securities exchange take-over bid circular doesnot necessarily result in reporting issuer status under the Act unless the securities exchange take-over bid circular filedcomplies with the disclosure and any other applicable requirements of the Act.
Section 2.3 of the Policy sets out the Commission's view that the exemption in 72(1)(i) of the Act may be used byissuers governed by a statute of any jurisdiction or foreign jurisdiction.
Section 2.4 of the Policy sets out the Commission's view that section 2.8 of the Rule extends to three-corneredamalgamations.
Section 2.5 of the Policy sets out the Commission's view that "tacking" of hold periods is permitted.
Restrictions on the Use of Exemptions
Part 3 of the Policy provides the views of the Commission with respect to certain aspects of the interpretation of theprivate placement exemptions contained in clause 72(1)(d) and section 2.11 of the Rule. Section 3.1 indicates that theexemptions contained in clause 72(1)(d) of the Act and section 2.4 of the Rule are available to entities which are createdor used, primarily for the purchase of securities without a prospectus and investment clubs only if each member,partner, beneficiary or shareholder of the entity, as the case may be, contributed at least $150,000 for the securitiespurchased under the exemption. Section 3.2 provides examples of liabilities which do not in the view of the Commissionsatisfy the requirements of subsection 3.2(2)(a) of the Rule with respect to whether the aggregate acquisition cost hasbeen satisfied by the incurrence or assumption of liabilities by purchasers and the factors to be taken into account indetermining the fair value of liabilities assumed or incurred for this purpose.
In section 3.4, the Commission provides an example of related types of businesses for the purposes of the use of theprivate placement exemption in section 2.11 of the Rule for units or blocks of securities having a minimum acquisitioncost of $150,000 and notes that different resale provisions for different securities which comprise the block or unit mayresult.
Offering Memoranda
Part 4 provides the views of the Commission as to the use of offering memoranda in connection with privateplacements. Section 4.1 sets forth the view of the Commission that the obligation to provide a contractual right of actionfor rescission or damages applies both when the offering memorandum is required to be provided under section 4.1of the Rule and when the offering memorandum is provided voluntarily in connection with the exempt trades specifiedunder clause 72(1)(c), (d) or (p) of the Act and section 2.11 of the Rule. The Commission also provides its views asto the content of an offering memorandum, indicating the content of an offering memorandum is not prescribed apartfrom the contractual right of action contemplated by Part 4 of the Rule and the requirements relating to future orientedfinancial information as contemplated by National Instrument 52-101 Future Oriented Financial Information. TheCommission also notes that the use of the exemptions contained in each of clause 72(1)(p) of the Act and section 2.4of the Rule contain requirements relating to the information to be provided to an investor. The Commission cautionsagainst providing preliminary offering material to investors before providing the "final" offering memorandum unlessthe contractual right of action is described.
In section 4.2 of the Policy, the Commission notes that the contractual right of action, in order to correspond to therights provided in section 130 of the Act, must include the right of an investor to hold the parties against whom it hasa right of action, jointly and severally liable.
Review of Offering Material
Part 5 of the Policy indicates that the offering material used by the vendors of securities who rely on private placementexemptions is not generally reviewed and commented upon by Commission staff.
Summary of Written Comments Received by the Commission
Background
A proposed version of the Rule was published by the Commission for comment on October 17, 1997 ((1997), 20 OSCB5287) (the "October 1997 Version"). The Commission received six comment letters on the October 1997 Version.
As a result of staff's consideration of the comment letters, its recommendations to the Commission and the deliberationsof the Commission, the Commission published an amended version of the Rule on May 29, 1998 ((1998, 21 OSCB3386) (the "May 1998 Version") for comment in accordance with the requirements of Section 143.2(7) of the Act. Thechanges made to the May 1998 Version from the October 1997 Version, together with a summary of the commentsmade on the October 1997 Version were described in a Commission Notice published with the May 1998 Version.
The Commission received submissions from two commentors on the May 1998 Version, Ogilvy Renault, Toronto,Ontario and Parlee McLaws, Calgary, Alberta.
The Commission has considered the comments received and thanks the commentors for providing their comments.
The following is a summary of the comments received together with the Commission's responses and, where applicable,the changes adopted by the Commission.
Discussion of Specific Comments Concerning the May 1998 Version
Prospectus Exemptions
1. Trade by a Promoter or Issuer in a Government Incentive Security
Section 2.4 of the May 1998 Version provided an exemption for a trade by a promoter or issuer in agovernment incentive security. This exemption restated the existing exemptions in clauses 14(f) and 151(a)of the Regulation, but amended these exemptions to impose requirements parallel to those imposed for anexempt trade under paragraph (iv) of clause 72(1)(p) of the Act. In short, this provision requires that theexemption will only be available if the "promoter, if any, has not acted as a promoter of any other issue ofsecurities under this exemption within the previous twelve months". One commentor questioned whether itwas appropriate to impose this additional requirement.
The Commission believes that it is necessary to limit the ability of a promoter to access the market relying onthe government incentive security exemption more than once a year. For that reason it believes that therequirement is appropriate. The commentor did, however, suggest that given the fact that most governmentincentive securities are tax vehicles and investment decisions regarding government incentive securities aregenerally made in the latter half of a calendar year, the appropriate restriction should be to a calendar year,as opposed to a twelve month period. The Commission accepts this comment and has made the changeproposed in Section 2.4 of the Rule.
2. Amalgamations
One commentor suggested that the exemption in Section 2.8 of the Rule for trades in connection withamalgamations and arrangements should be amended to make it clear that the exemption applies to so-called"three-cornered mergers". The Commission is anxious to cure any technical problem with the wording of thecurrent exemptions in clause 72(1)(i) of the Act and had attempted through the wording of Section 2.8 of theMay 1998 Version to broaden the exemptions currently available under that clause. The Commission believesthat the exemption should be available in the context of a three-cornered merger and accordingly, has modifiedthe wording in Section 2.8 of the Rule to clarify this matter. The Commission has also made a correspondingchange to Section 2.4 of the Policy.
Regulations Revoked or Amended
The Commission has, by regulation, revoked
(i) sections 14, 16-32, 67 and 68 of the Regulation;
(ii) subsection 69(3) of the Regulation;
(iii) clause 151(a) of the Regulation;
(iv) sections 22 and 25 of Schedule 1 to the Regulation; and
(v) Forms 20 and 21 of the Regulation.
The regulation is subject to the approval of the Minister of Finance and will not be effective before the Rule comes intoforce.
Text of Rule, Policy and Forms
The text of the Rule, Policy and Forms follows.
Text of Rescission of Policy
The Rule and Policy will replace Policy 6.1. The Commission is rescinding Policy 6.1 effective on the date on whichthe Rule comes into force. The text of the rescission is as follows:
"Ontario Securities Commission Policy 6.1 entitled "Private Placements" is rescinded effective the date thatRule 45-501 comes into force."
DATED: October 16, 1998.
ONTARIO SECURITIES COMMISSION RULE 45-501
EXEMPT DISTRIBUTIONS
TABLE OF CONTENTS
PART TITLE
PART 1 DEFINITIONS
1.1 Definitions
1.2 Interpretation
PART 2 EXEMPTIONS FROM THE REGISTRATION AND PROSPECTUS REQUIREMENTS OF THE ACT
2.1 Exemption for a Trade in a Variable Insurance Contract
2.2 Exemption for a Trade Among Control Persons or to the Issuer
2.3 Exemption for a Trade to or by a Promoter
2.4 Exemption for a Trade by a Promoter or Issuer in a Government Incentive Security
2.5 Exemption for a Trade in Seed Capital or Government Incentive Securities
2.6 Exemption for a Trade by a Control Person in a Security Acquired Under a Formal Take-Over Bid
2.7 Exemption for a Trade in Connection with a Securities Exchange Issuer Bid
2.8 Exemption for a Trade on an Amalgamation, Arrangement or Specified Statutory Procedure
2.9 Exemption for a Trade Upon Exercise of Conversion Rights in a Convertible Security
2.10 Exemption for a Trade Upon Exercise of Exchange Rights in an Exchangeable Security
2.11 Exemption for a Trade in Units
2.12 Exemption for a Trade in a Security of a Private Company or Private Issuer under the Execution Act
2.13 Exemption for a First Trade in a Multiple Convertible Security, Convertible Security or ExchangeableSecurity Acquired Under Certain Exemptions
2.14 Exemption for a First Trade in a Security Acquired in Connection with a Take-over Bid
2.15 Exemption for a First Trade in a Security Acquired to Facilitate Incorporation
2.16 Exemption for a First Trade in an Underlying Security Where the Right to Purchase, Convert orExchange is Qualified By Prospectus
2.17 Exemption for a Trade in a Security of a Private Issuer
2.18 Further Exemptions
PART 3 REMOVAL OF CERTAIN REGISTRATION AND PROSPECTUS EXEMPTIONS
3.1 Removal of Private Placement Exemptions If Acquisition Cost Is Less Than $150,000
3.2 Satisfaction of Acquisition Cost
3.3 Removal of Exemptions if Purchaser Primary Purpose Entity
3.4 Removal of Exemptions for Investment Clubs
3.5 Removal of Asset Acquisition Exemption If Fair Value of Assets Is Less Than $150,000
3.6 Removal of Seed Capital Exemption
3.7 Determination of Number of Purchasers Under Seed Capital and Government Incentive SecurityExemptions if Purchaser is a Primary Purpose Entity
3.8 Removal of Exemption for Bonds, Debentures and Other Evidences of Indebtedness
3.9 Removal of Exemption for Securities of a Private Mutual Fund With a Promoter or Manager
3.10 Removal of 72(4) Resale Exemption for Control Person Distribution
3.11 Removal of Subsection 72(7) Exemption for Control Person Distribution
3.12 Removal of Registration Exemption for Market Intermediaries
PART 4 OFFERING MEMORANDUM
4.1 Removal of Exemptions Contained in Clause 72(1)(d) of the Act and Section 2.11
4.2 Removal of Exemptions If No Contractual Right of Action Provided and Described in OfferingMemorandum
4.3 Delivery of Offering Memorandum to Commission
PART 5 DEALER REGISTRATION
5.1 Removal of Exemption Unless Dealer Registered for Trade Described in the Exemption
PART 6 RESTRICTIONS ON FIRST TRADES IN SECURITIES ACQUIRED UNDER CERTAIN EXEMPTIONS
6.1 First Trade in a Security Acquired By a Promoter Under Section 2.3 or Section 2.15
6.2 First Trade in a Security Acquired Under Section 2.4, 2.5 or 2.11
6.3 First Trade in a Security Acquired Under Clause 72(1)(h) of the Act
6.4 First Trade In an Underlying Security of a Multiple Convertible Security, Convertible Security or anExchangeable Security Acquired Under Certain Exemptions
6.5 First Trade in a Security Acquired Under Section 2.9 or 2.10
6.6 First Trade in a Security Acquired Under Section 2.7, 2.8 or 2.17 or Under Subsection 2.18(1)
PART 7 FILING REQUIREMENTS AND FEES
7.1 Form 45-501F1
7.2 Form 45-501F2
7.3 Fees for Form 45-501F1
7.4 Fees for Form 45-501F2
7.5 72(4) Reports
7.6 72(5) Disclosure
7.7 Fees for Trade Made Under Section 2.8
ONTARIO SECURITIES COMMISSION RULE 45-501
EXEMPT DISTRIBUTIONS
PART 1 DEFINITIONS
1.1 Definitions - In this Rule
"convertible security" means a security of an issuer that is convertible into or carries the right of the holderto purchase or of the issuer to cause the purchase of, a security of the same issuer;
"entity" means a company, syndicate, partnership, trust or unincorporated organization;
"exchangeable security" means a security of an issuer that is exchangeable for, or carries the right of theholder to purchase or of the exchange issuer to cause the purchase of a security of another issuer thatis a reporting issuer;
"exchange issuer" means an issuer that distributes securities of a reporting issuer held by it in accordancewith the terms of an exchangeable security of its own issue;
"formal bid" has the meaning ascribed to that term in subsection 89(1) of the Act;
"government incentive security" means
(a) a security, or unit or interest in a partnership that invests in a security, that is issued by a companyand for which the company has agreed to renounce in favour of the holder of the security, unit orinterest, amounts that will constitute Canadian exploration expense, as defined in subsection 66.1(6)of the ITA, or Canadian development expense, as defined in subsection 66.2(5) of the ITA, orCanadian oil and gas property expense, as defined in subsection 66.4(5) of the ITA;
(b) a unit or interest in a partnership or joint venture that is issued in order to fund Canadian explorationexpense as defined in subsection 66.1(6) of the ITA or Canadian development expense as definedin subsection 66.2(5) of the ITA or Canadian oil and gas property expense as defined in subsection66.4(5) of the ITA;
(c) a unit or interest in a partnership or joint venture the sole purpose of which is to carry out aprogramme of mineral exploration designated by the Minister of Natural Resources under the OntarioMineral Exploration Program Act; or
(d) a security that entitles the acquiror to a unit of a limited partnership the sole purpose of which is tocarry out scientific research activities as defined by subsection 37(7) of Regulation 2900 under theITA;
"hold period" means that period of either six, 12 or 18 months that would be applicable to a security if it hadbeen acquired under an exemption referred to in subsection 72(4) of the Act;
"multiple convertible security" means a security of an issuer that is convertible into or exchangeable for, orcarries the right of the holder to purchase or of the issuer or exchange issuer to cause the purchase of aconvertible security, an exchangeable security or another multiple convertible security;
"private issuer" means a person that
(a) is not a reporting issuer or a mutual fund;
(b) is an issuer all of whose issued and outstanding shares
(i) are subject to restrictions on transfer contained in the constating documents of the issuer or one ormore agreements among the issuer and the holders of its securities; and
(ii) are beneficially owned, directly or indirectly, by not more than 50 persons or companies, counting anytwo or more joint registered holders as one beneficial owner, exclusive of persons
(A) that are employed by the issuer or an affiliated entity of the issuer, or
(B) that beneficially owned, directly or indirectly shares of the issuer while employed by it or anaffiliated entity of it and at all times since ceasing to be so employed have continued tobeneficially own, directly or indirectly, at least one share of the issuer; and
(c) has not distributed any securities to the public.
"72(4) trade" means a trade in a security under the exemption in clause 72(1)(a), (b), (c), (d), (l), (m), (p) or(q) of the Act or sections 2.4, 2.5 or 2.11 of this Rule;
"72(5) trade" means a trade in a security under the exemption in clause 72(1)(f) (other than a trade to anassociated consultant or investor consultant as defined in Rule 45-503 Trades to Employees, Executives andConsultants), (h), (i), (j), (k) or (n) of the Act, or section 2.7 or 2.8 of this Rule; and
"underlying security" means a security issued or transferred, or to be issued or transferred in accordance withthe terms of a convertible security or an exchangeable security or a multiple convertible security.
1.2 Interpretation
(1) In this Rule a person or company is considered to be an affiliated entity of another person orcompany if one is a subsidiary entity of the other or if both are subsidiary entities of the same personor company, or if each of them is controlled by the same person or company.
(2) In this Rule a person or company is considered to be controlled by a person or company if
(a) in the case of a person or company,
(i) voting securities of the first-mentioned person or company carrying more than 50 percentof the votes for the election of directors are held otherwise than by way of security only, byor for the benefit of the other person or company, and
(ii) the votes carried by the securities are entitled, if exercised, to elect a majority of thedirectors of the first-mentioned person or company;
(b) in the case of a partnership that does not have directors, other than a limited partnership, thesecond-mentioned person or company holds more than 50 percent of the interests in thepartnership; or
(c) in the case of a limited partnership, the general partner is the second-mentioned person orcompany.
(3) In this Rule a person or company is considered to be a subsidiary entity of another person orcompany if
(a) it is controlled by,
(i) that other, or
(ii) that other and one or more persons or companies each of which is controlled by that other,or
(iii) two or more persons or companies, each of which is controlled by that other; or
(b) it is a subsidiary entity of a person or company that is the other's subsidiary entity.
PART 2 EXEMPTIONS FROM THE REGISTRATION AND PROSPECTUS REQUIREMENTS OF THE ACT
2.1 Exemption for a Trade in a Variable Insurance Contract
(1) Sections 25 and 53 of the Act do not apply to a trade by a company licensed under the Insurance Actin a variable insurance contract, that is
(a) a contract of group insurance;
(b) a whole life insurance contract providing for the payment at maturity of an amount not less thanthree quarters of the premiums paid up to age 75 for a benefit payable at maturity;
(c) an arrangement for the investment of policy dividends and policy proceeds in a separate anddistinct fund to which contributions are made only from policy dividends and policy proceeds; or
(d) a variable life annuity.
(2) For the purposes of subsection (1), "contract", "group insurance", "life insurance" and "policy" havethe respective meanings ascribed to them by sections 1 and 171 of the Insurance Act.
2.2 Exemption for a Trade Among Control Persons or to the Issuer - Sections 25 and 53 of the Act donot apply to a trade in a security of an issuer, if
(a) each of the parties to the trade is a person or company that is, as regards the issuer, a personor company referred to in clause (c) of the definition of distribution in subsection 1(1) of the Act;or
(b) the trade consists of a redemption, purchase or other acquisition by the issuer of a security ofthe issuer.
2.3 Exemption for a Trade to or by a Promoter - Sections 25 and 53 of the Act do not apply to
(a) a trade by an issuer in a security of its own issue to a promoter of the issuer;
(b) a trade by a promoter of the issuer in a security of the issuer to another promoter of the issuer;or
(c) a trade in a security of the issuer between a promoter of the issuer and a person or company thatis, as regards the issuer, a person or company referred to in clause (c) of the definition ofdistribution in subsection 1(1) of the Act.
2.4 Exemption for a Trade by a Promoter or Issuer in a Government Incentive Security - Sections 25and 53 of the Act do not apply to a trade by an issuer or by a promoter of an issuer in a security of theissuer that is a government incentive security, if
(a) in the aggregate in all jurisdictions, not more than 75 prospective purchasers are solicitedresulting in sales to not more than 50 purchasers;
(b) prospective purchasers are given a contractual right of action;
(c) before entering into an agreement of purchase and sale, the prospective purchaser has beensupplied with an offering memorandum that includes information
(i) identifying every officer and director of the issuer,
(ii) identifying every promoter of the issuer,
(iii) giving the particulars of the professional qualifications and associations during the five yearsbefore the date of the offering memorandum of each officer, director and promoter of theissuer that are relevant to the offering,
(iv) indicating each of the directors that will be devoting his or her full time to the affairs of theissuer,and
(v) describing the contractual right of action in favour of the purchaser;
(d) the prospective purchaser has access to substantially the same information concerning theissuer that a prospectus filed under the Act would provide and
(i) because of net worth and investment experience or because of consultation with or advicefrom a person or company that is not a promoter of the issuer and that is an adviser ordealer registered under the Act, is able to evaluate the prospective investment on the basisof information about the investment presented to the prospective purchaser by the issueror selling securityholder; or
(ii) is a senior officer or director of the issuer or of an affiliated entity of the issuer or a spouseor child of any director or senior officer of the issuer or of an affiliated entity of the issuer,
(e) the offer and sale of the security is not accompanied by an advertisement and no selling orpromotional expenses have been paid or incurred for the offer and sale, except for professionalservices or for services performed by a dealer registered under the Act;
(f) the promoter, if any, has not acted as a promoter of any other issue of securities under thisexemption within the calendar year; and
(g) section 3.7 does not make the exemption unavailable.
2.5 Exemption for a Trade in Seed Capital or Government Incentive Securities - Sections 25 and 53 ofthe Act do not apply to a trade in a security that was previously acquired under the exemption in clause72(1)(p) of the Act or section 2.4, if
(a) in the case of a security acquired under clause 72(1)(p) of the Act, each of the parties to thetrade is one of the not more than 25 purchasers; or
(b) in the case of a security acquired under section 2.4, each of the parties to the trade is one of thenot more than 50 purchasers.
2.6 Exemption for a Trade by a Control Person in a Security Acquired Under a Formal Take-Over Bid
(1) Section 53 of the Act does not apply to a trade that is a control person distribution in a security thatwas acquired under a formal bid, if
(a) the offeree issuer had been a reporting issuer for at least 12 months at the date of the bid;
(b) subject to subsection (2), the intention to make the trade was disclosed in the take-over bidcircular for the take-over bid;
(c) the trade is made within the period commencing on the day of the expiry of the bid and ending20 days after that day;
(d) a notice of intention and a declaration prepared in accordance with Form 23 to the Regulationare filed by the seller before the trade;
(e) an insider report under Form 55-101F1 is filed by the seller within three days after the completionof the trade; and
(f) no unusual effort is made to prepare the market or to create a demand for the securities and noextraordinary commission is paid for the trade.
(2) Paragraph (1)(b) does not apply to a trade to another person or company that made a competingformal bid for securities of the same issuer for a per security price not greater than the per securityconsideration offered by that other person or company in its take-over bid.
2.7 Exemption for a Trade in Connection with a Securities Exchange Issuer Bid - Sections 25 and 53of the Act do not apply to a trade in a security that is exchanged by or for the account of the offeror witha securityholder of the offeror in connection with an issuer bid as defined in Part XX of the Act, if at thetime of the trade, the issuer whose securities are being issued or transferred is a reporting issuer not indefault under the Act or the regulations.
2.8 Exemption for a Trade on an Amalgamation, Arrangement or Specified Statutory Procedure -Sections 25 and 53 of the Act do not apply to a trade in a security of an issuer in connection with
(a) a statutory amalgamation or statutory arrangement; or
(b) a statutory procedure under which one issuer takes title to the assets of the other issuer that inturn loses its existence by operation of law or under which one issuer merges with one or moreissuers, whether or not the securities are issued by the merged issuer.
2.9 Exemption for a Trade Upon Exercise of Conversion Rights in a Convertible Security - Sections 25and 53 of the Act do not apply to a trade by an issuer in an underlying security of its own issue to a holderof a convertible security or multiple convertible security of the issuer on the exercise by the issuer of itsright under the convertible security or multiple convertible security to cause the holder to convert into orpurchase the underlying security or on the automatic conversion of the convertible security or multipleconvertible security, if no commission or other remuneration is paid or given to others for the trade exceptfor ministerial or professional services or for services performed by a registered dealer.
2.10 Exemption for a Trade Upon Exercise of Exchange Rights in an Exchangeable Security - Sections25 and 53 of the Act do not apply to a trade by an exchange issuer in an underlying security to a holderof an exchangeable security or multiple convertible security of the issuer on the exercise by the exchangeissuer of its right under the exchangeable security or multiple convertible security to cause the holder toexchange for or purchase the underlying security or on the automatic exchange of the exchangeablesecurity or multiple convertible security, if the exchange issuer delivers to the Commission a written noticestating the date, amount, nature and conditions of the proposed trade, including the net proceeds to bederived by the exchange issuer if the underlying securities are fully taken up and either
(a) the Commission has not informed the exchange issuer in writing within 10 days after the deliveryof the notice that it objects to the proposed trade, or
(b) the exchange issuer has delivered to the Commission information relating to the underlyingsecurity that is satisfactory to and accepted by the Commission.
2.11 Exemption for a Trade in Units - Sections 25 and 53 of the Act do not apply to a trade in securities ofone or more issuers, other than issuers that are mutual funds or non-redeemable investment funds, if
(a) the purchaser purchases as principal;
(b) the purchase is made in a single transaction in a block or unit that in the aggregate has anacquisition cost to the purchaser of not less than $150,000, provided that if the securities are ofmore than one issuer, the issuers are affiliated entities and are engaged in the same or relatedtypes of businesses; and
(c) section 3.2, 3.3, 3.4, 4.1 or 4.2 does not make the exemption unavailable.
2.12 Exemption for a Trade in a Security of a Private Company or Private Issuer under the ExecutionAct - Section 53 of the Act does not apply to a trade of securities by a sheriff under the Execution Act, if
(a) the issuer of the securities is a private company or private issuer;
(b) the aggregate acquisition cost to the purchaser is not more than $25,000; and
(c) each written notice to the public soliciting offers for the securities or giving notice of the intendedauction of the securities is accompanied by a statement substantially as follows:
"These securities are speculative. No representations are made concerning the securities,or the issuer of the securities. No prospectus is available and the protections, rights andremedies arising out of the prospectus provisions of the Securities Act, including statutoryrights of rescission and damages, will not be available to the purchaser of these securities."
2.13 Exemption for a First Trade in a Multiple Convertible Security, Convertible Security orExchangeable Security Acquired Under Certain Exemptions - Section 53 of the Act does not applyto a first trade in a multiple convertible security, convertible security or exchangeable security acquiredby a holder under a 72(4) trade, if
(a) at the time of the trade the issuer of the multiple convertible security, convertible security orexchangeable security is a reporting issuer and is not in default of the Act or the regulations;
(b) either,
(i) the multiple convertible security, convertible security, exchangeable security or underlyingsecurity is listed and posted for trading, or traded on The Toronto Stock Exchange or TheMontreal Exchange and complies with the requirements of clause 433(1)(m) or (n) of theInsurance Act, and the multiple convertible security and any one or more of the underlyingsecurities has or have been held for an aggregate period of at least six months after the laterof the date of the initial exempt trade or the date the issuer became a reporting issuer,
(ii) the multiple convertible security, convertible security, exchangeable security or underlyingsecurity is a bond, debenture, or other evidence of indebtedness issued or guaranteed byan issuer, or is a preferred share of an issuer, and complies with the requirements of clause433(1)(k) or (m) of the Insurance Act and the multiple convertible security or any one ormore of the underlying securities has or have been held for an aggregate period of at leastsix months after the later of the date of the initial exempt trade or the date the issuer becamea reporting issuer,
(iii) the multiple convertible security, convertible security, exchangeable security or underlyingsecurity is listed and posted for trading, or traded on The Toronto Stock Exchange or TheMontreal Exchange or are bonds, debentures or other evidences of indebtedness issued orguaranteed by an issuer whose securities are listed and posted for trading on The TorontoStock Exchange or The Montreal Exchange and the multiple convertible security or any oneor more of the underlying securities has or have been held for an aggregate period of atleast one year after the later of the date of the initial exempt trade or the date the issuerbecame a reporting issuer, or
(iv) the multiple convertible security or any one or more of the underlying securities has or havebeen held for an aggregate period of at least 18 months from the later of the date of theinitial exempt trade or the date the issuer became a reporting issuer;
(c) no unusual effort is made to prepare the market or to create a demand for the security and noextraordinary commission or consideration is paid for the trade; and
(d) the trade is not a control person distribution.
2.14 Exemption for a First Trade in a Security Acquired in Connection with a Take-over Bid - Section53 of the Act does not apply to the first trade in a security previously acquired under the exemptioncontained in clause 72(1)(j) of the Act if
(a) when such exemption was relied upon, a securities exchange take-over bid circular for thesecurities was filed by the offeror under the Act;
(b) the trade is not a control person distribution; and
(c) the issuer of the securities was a reporting issuer before the securities exchange take-over bidwas filed.
2.15 Exemption for a First Trade in a Security Acquired to Facilitate Incorporation - Section 53 of the Actdoes not apply to the first trade in a security previously acquired under the exemption contained in clause72(1)(o) of the Act if the purchaser is a promoter of the issuer.
2.16 Exemption for a First Trade in an Underlying Security Where the Right to Purchase, Convert orExchange is Qualified By Prospectus - Section 53 of the Act does not apply to the first trade in anunderlying security issued or transferred in accordance with the terms of a multiple convertible security,convertible security or exchangeable security if
(a) a receipt was obtained from the Director for a prospectus qualifying the distribution of themultiple convertible security, convertible security or exchangeable security;
(b) the trade is not a control person distribution; and
(c) the issuer of the underlying security issued or transferred in accordance with the terms of anexchangeable security is a reporting issuer at the time of the first trade.
2.17 Exemption for a Trade in a Security of a Private Issuer - Sections 25 and 53 of the Act do not applyto a trade in a security of a private issuer.
2.18 Further Exemptions
(1) Sections 25 and 53 of the Act do not apply to a trade if the security being traded is a security of acompany that,
(a) is incorporated but not continued under the Companies Act (British Columbia);
(b) is a private issuer within the meaning of section 1 of the Securities Act (British Columbia); and
(c) does not offer its securities for sale to the public.
(2) Sections 25 and 53 of the Act do not apply to a trade if the security being traded is a bond, debentureor other evidence of indebtedness of the Conseil scolaire de l'île de Montréal.
(3) Section 53 of the Act does not apply to the first trade in a security acquired by the seller under anexemption in clause 72(1)(a), (b), (c), (d), (f), (h), (i), (j), (k), (l), (m), (n), (p) or (q) of the Act whetheror not the issuer is in default of any requirement of the Act or regulations if,
(a) the seller is not in a special relationship with the issuer or, if the seller is in a special relationshipwith the issuer, the seller has reasonable grounds to believe that the issuer is not in default underthe Act or the regulations; and
(b) the first trade otherwise qualifies for the applicable exemption in subsection 72(4) or 72(5) of theAct.
PART 3 REMOVAL OF CERTAIN REGISTRATION AND PROSPECTUS EXEMPTIONS
3.1 Removal of Private Placement Exemptions If Acquisition Cost Is Less Than $150,000 - Theregistration and prospectus exemptions contained in paragraph 5 of subsection 35(1) and clause 72(1)(d)of the Act are not available for a trade in a security if the security has an aggregate acquisition cost to thepurchaser of less than $150,000.
3.2 Satisfaction of Acquisition Cost
(1) The registration and prospectus exemptions contained in paragraph 5 of subsection 35(1) and clause72(1)(d) of the Act and in section 2.11 are not available for a trade in a security unless the aggregateacquisition cost of the security is satisfied by the purchaser by the payment of cash or otherimmediately available funds or the incurring or assumption of a liability in accordance with subsection(2) or any combination thereof.
(2) If the acquisition cost is satisfied in whole or in part by the incurring or assumption of a liability by thepurchaser, the exemptions referred to in subsection (1) are not available unless
(a) the purchaser is primarily liable for the liability and there is no understanding, arrangement orexpectation that the liability or the obligation to pay it will be waived; and
(b) the acquisition cost, including the liability that is incurred or assumed by the purchaser, has afair value of not less than $150,000.
3.3 Removal of Exemptions if Purchaser Primary Purpose Entity - The registration and prospectusexemptions contained in paragraph 5 of subsection 35(1) and clause 72(1)(d) of the Act and section 2.11are not available for a trade in a security if
(a) the purchasing entity is created or is being used primarily to permit purchases without aprospectus; and
(b) the share or portion of any member or partner of the partnership, syndicate or unincorporatedorganization, any beneficiary of the trust or any shareholder of the company of the aggregateacquisition cost to the purchasing entity of the securities being purchased is less than $150,000.
3.4 Removal of Exemptions for Investment Clubs - The registration and prospectus exemptions containedin paragraph 5 of subsection 35(1) and clause 72(1)(d) of the Act and section 2.11 are not available fora trade in a security if the purchasing entity is an investment club unless the share or portion of eachmember of the investment club of the aggregate acquisition cost to the investment club of the securitiesbeing purchased is at least $150,000.
3.5 Removal of Asset Acquisition Exemption If Fair Value of Assets Is Less Than $150,000 - Theregistration and prospectus exemptions contained in paragraph 18 of subsection 35(1) and clause 72(1)(l)of the Act are not available for a trade in a security if the fair value of the assets purchased is less than$150,000.
3.6 Removal of Seed Capital Exemption - The registration and prospectus exemptions contained inparagraph 21 of subsection 35(1) and clause 72(1)(p) of the Act are not available for a trade in a securityif
(a) the solicitations referred to in the clause are made in the aggregate in all jurisdictions to morethan 50 prospective purchasers;
(b) the trade is to a parent, brother or sister of any director or senior officer of the issuer or of anaffiliated entity of the issuer and the parent, brother or sister is not otherwise a person referredto in subclause 72(1)(p)(ii)(A) or (B) of the Act; or
(c) the promoter is a registered dealer and has acted as a promoter of any other issuer that hastraded in securities of its own issue under the prospectus exemption referred to in this sectionin the previous 12 months.
3.7 Determination of Number of Purchasers Under Seed Capital and Government Incentive SecurityExemptions if Purchaser is a Primary Purpose Entity - The exemptions in clause 72(1)(p) of the Actand section 2.4 are not available if an entity has been created or is being used primarily to permit thepurchase of securities without a prospectus, and the number of members or partners of the partnership,syndicate or unincorporated organization, the number of beneficiaries of the trust, or shareholders of thecompany, as the case may be, exceeds the number of purchasers referred to in the clause or section.
3.8 Removal of Exemption for Bonds, Debentures and Other Evidences of Indebtedness - Theregistration and prospectus exemptions contained in paragraph 1(c) of subsection 35(2) and clause73(1)(a) of the Act are not available for a trade in a bond, debenture or other evidence of indebtednessthat is subordinate in right of payment to deposits held by the issuer or guarantor of the bond, debentureor other evidence of indebtedness.
3.9 Removal of Exemption for Securities of a Private Mutual Fund With a Promoter or Manager - Theregistration and prospectus exemptions contained in paragraph 3 of subsection 35(2) and clause 73(1)(a)of the Act are not available for trades in a security of a mutual fund that comes within the definition of"private mutual fund" in subsection 1(1) of the Act if the mutual fund is administered by a trust companyand there is a promoter or manager of the mutual fund other than the trust company.
3.10 Removal of 72(4) Resale Exemption for Control Person Distribution - The exemption in subsection72(4) of the Act is not available for a trade that is a control person distribution.
3.11 Removal of Subsection 72(7) Exemption for Control Person Distribution
(1) Except as otherwise provided in subsection (2) or (3), the exemption contained in clauses 72(7)(b)and (c) of the Act is not available for a trade in a security for six months from the date of acquisitionby the seller of the security or, if the security is an underlying security, six months from the date theseller acquired the first of the multiple convertible security, convertible security or exchangeablesecurity.
(2) Subject to subsection (3), if a seller has acquired a security, other than an underlying security, of aclass under a 72(4) trade or 72(5) trade or under an exemption contained in section 2.9 or 2.10 orin section 2.1 or 3.1 of Rule 45-502 Dividend or Interest Reinvestment and Stock Dividend Plans orin section 2.2, 3.1 or 3.2 of Rule 45-503 Trades to Employees, Executives and Consultants or insection 1.2 of Rule 32-503 Registration and Prospectus Exemptions for Trades by FinancialIntermediaries in Mutual Fund Securities to Corporate Sponsored Plans, the exemption contained inclauses 72(7)(b) and (c) of the Act is not available for a trade in any security of the same class untilall securities of the class owned by the seller have been held by the seller for
(a) at least six months after the date on which the last security of the class was acquired by theseller under an exemption referred to in this subsection, if the security, or if the security acquiredunder the exemption is a multiple convertible security, convertible security or exchangeablesecurity, the underlying security, is listed and posted for trading or traded on The Toronto StockExchange or The Montreal Exchange and complies with the requirements of clause 433(1)(m)or (n), as applicable, of the Insurance Act;
(b) at least six months after the date on which the last security of the class was acquired by theseller under an exemption referred to in this subsection, if the security or if the security acquiredunder the exemption is a multiple convertible security, convertible security or an exchangeablesecurity, the underlying security, is a bond, debenture or other evidence of indebtedness issuedor guaranteed by an issuer or is a preferred share of an issuer, and complies with therequirements of clause 433(1)(k) or (m), as applicable, of the Insurance Act;
(c) at least one year after the date on which the last security of the class was acquired by the sellerunder an exemption referred to in this subsection, if the security, or if the security acquired underthe exemption is a multiple convertible security, convertible security or an exchangeable security,the underlying security, is listed and posted for trading or traded on The Toronto Stock Exchangeor The Montreal Exchange or is a bond, debenture or other evidence of indebtedness issued orguaranteed by a reporting issuer whose securities are so listed; or
(d) at least 18 months after the date on which the last security of the class was acquired by theseller under an exemption referred to in this subsection.
(3) Subsection (2) does not apply if the security referred to in that subsection has been acquired underthe exemption in subclause 72(1)(f)(i) of the Act or section 2.1 or 3.1 of Rule 45-502 Dividend orInterest Reinvestment and Stock Dividend Plans if in the financial year of the issuer during which thetrade takes place, the aggregate number of securities of an issuer acquired under the exemptions insubclause 72(1)(f)(i) of the Act and sections 2.1 and 3.1 of Rule 45-502 does not exceed one percentof the number of the securities of the class of securities outstanding at the commencement of thatfinancial year.
(4) If a seller has acquired a multiple convertible security, a convertible security or an exchangeablesecurity under a 72(4) trade or 72(5) trade or in section 2.1 or 3.1 of Rule 45-502 Dividend or InterestReinvestment and Stock Dividend Plans or in section 2.2, 3.1 or 3.2 of Rule 45-503 Trades toEmployees, Executives and Consultants or sections 2.9 and 2.10 of this Rule, the exemptioncontained in clauses 72(7)(b) and (c) is not available for a trade in the underlying security until allsecurities of the class of the underlying security owned by the seller have been held by the seller forthe applicable period set out in clause (a), (b), (c) or (d) of subsection (2) from the date of acquisitionof the last multiple convertible security, convertible security or exchangeable security acquired by theseller under one of the exemptions noted above.
(5) In this section, for purposes of calculating the period during which the seller has held a security, ifthe security was acquired by the seller from an affiliated entity, the period of time that the security hadbeen held by the affiliated entity before the transfer to the seller shall be included.
3.12 Removal of Registration Exemption for Market Intermediaries - The exemptions from registration insubsection 2.1(1) and sections 2.2, 2.4, 2.5, 2.7, 2.8, 2.9, 2.10, 2.11, 2.17 and 2.18 are not available toa market intermediary.
PART 4 OFFERING MEMORANDUM
4.1 Removal of Exemptions Contained in Clause 72(1)(d) of the Act and Section 2.11 - The exemptionscontained in clause 72(1)(d) of the Act and section 2.11 are not available for a trade in a security if therehas been any advertisement of the securities in printed public media, radio, television ortelecommunications, including electronic display, unless an offering memorandum is delivered to thepurchaser before entering into an agreement of purchase and sale, the purchaser is given a contractualright of action and the contractual right of action is described in the offering memorandum.
4.2 Removal of Exemptions If No Contractual Right of Action Provided and Described in OfferingMemorandum - The exemptions in clauses 72(1)(c),(d) and (p) of the Act and section 2.11 are notavailable for a trade, if the seller delivers an offering memorandum to the prospective purchaser, unlessthe prospective purchaser is given a contractual right of action and the contractual right of action isdescribed in the offering memorandum.
4.3 Delivery of Offering Memorandum to Commission - If the inclusion of a contractual right of action inan offering memorandum is required by section 2.4, 4.1 or 4.2 as a condition to the availability of anexemption, the seller shall deliver to the Commission a copy of the offering memorandum concurrentlywith or before the date on which a report of the trade referred to in subsection 72(3) of the Act orsubsection 7.5(1) is filed with the Commission.
PART 5 DEALER REGISTRATION
5.1 Removal of Exemption Unless Dealer Registered for Trade Described in the Exemption - Anexemption contained in the Act or the regulations from the registration or prospectus requirements of theAct or the regulations that refers to a registered dealer is not available for a trade in a security unless thedealer is registered in a category that permits it to act as a dealer for the trade described in the exemptingprovision.
PART 6 RESTRICTIONS ON FIRST TRADES IN SECURITIES ACQUIRED UNDER CERTAIN EXEMPTIONS
6.1 First Trade in a Security Acquired By a Promoter Under Section 2.3 or Section 2.15 - A person orcompany may trade a security acquired under the exemption contained in section 2.3 or section 2.15 only
(a) if the first trade is made under a prospectus for which a receipt has been obtained from theDirector;
(b) if the first trade is made under an exemption in Ontario securities law from section 53 of the Act;or
(c) if at the time of the trade, the issuer of the security is a reporting issuer and has been a reportingissuer for at least 18 months and is not in default of any requirement of the Act or theregulations,
(i) the seller, unless exempted by the regulations, files with the Commission and The TorontoStock Exchange or The Montreal Exchange if the securities are listed on either of thoseexchanges at least seven days and not more than 14 days before the first trade made tocarry out the distribution,
(A) a notice of intention to sell prepared in accordance with Form 23 of the Regulationdisclosing particulars of the ownership, the number of securities to be sold and themethod of distribution, and
(B) a declaration signed by each seller as at a date not more than 24 hours before its filingand prepared and executed in accordance with the regulations and certified as follows:
"The seller for whose account the securities to which this certificate relates are to be sold herebyrepresents that the seller has no knowledge of any material change which has occurred in the affairsof the issuer of the securities which has not been generally disclosed and reported to theCommission, nor has the seller any knowledge of any other material adverse information in regardto the current and prospective operations of the issuer which have not been generally disclosed",
(ii) the seller, unless exempted by the regulations, files within three days after the completionof any trade, an insider report under Form 55-101F1;
provided that the notice required to be filed under clause (i)(A) and the declaration required to be filedunder clause (i)(B) shall be renewed and filed at the end of 60 days after the original date of filing andthereafter at the end of each 28 day period so long as any of the securities specified under theoriginal notice have not been sold or until notice has been filed that the securities so specified or anypart thereof are no longer for sale; and
(iii) no unusual effort is made to prepare the market or to create a demand for the securities andno extraordinary commission or other consideration is paid in respect of such trade.
6.2 First Trade in a Security Acquired Under Section 2.4, 2.5 or 2.11 - A person or company may tradea security acquired under an exemption contained in section 2.4, 2.5 or 2.11 only
(a) if the first trade is made under a prospectus for which a receipt has been obtained from theDirector;
(b) if the first trade is made under an exemption in Ontario securities law from section 53 of the Act;or
(c) if
(i) at the time of the trade, the issuer of the security is a reporting issuer;
(ii) in the case of a person or company that is in a special relationship with the issuer, theperson or company has reasonable grounds to believe that the issuer is not in default underthe Act or the regulations;
(iii) the hold period has elapsed from the later of the date of the initial exempt trade and the datethe issuer became a reporting issuer;
(iv) no unusual effort is made to prepare the market or to create a demand for the securities andno extraordinary commission or consideration is paid for the trade; and
(v) the trade is not a control person distribution.
6.3 First Trade in a Security Acquired Under Clause 72(1)(h) of the Act - A person or company may tradea security acquired under the exemption contained in clause 72(1)(h) of the Act only
(a) if the first trade is made under a prospectus for which a receipt has been obtained from theDirector;
(b) if the first trade is made under an exemption in Ontario securities law from section 53 of the Act;or
(c) if
(i) at the time of the trade, the issuer of the security is a reporting issuer and has been areporting issuer for at least 12 months;
(ii) in the case of a person or company that is in a special relationship with the issuer, theperson or company has reasonable grounds to believe that the issuer is not in default underthe Act or the regulations;
(iii) disclosure to the Commission has been made of the exempt trade;
(iv) no unusual effort is made to prepare the market or to create a demand for the securities andno extraordinary commission or consideration is paid for the trade;
(v) the trade is not a control person distribution; and
(vi) section 6.4 does not apply.
6.4 First Trade In an Underlying Security of a Multiple Convertible Security, Convertible Security oran Exchangeable Security Acquired Under Certain Exemptions - A person or company may trade anunderlying security issued on conversion or exchange of a multiple convertible security, convertiblesecurity or exchangeable security if any of the multiple convertible security, convertible security orexchangeable security was acquired under a 72(4) trade only,
(a) if the first trade is made under a prospectus for which a receipt has been obtained from theDirector;
(b) if the first trade is made under an exemption in Ontario securities law from section 53 of the Act;or
(c) if
(i) at the time of the trade, the issuer of the underlying security is a reporting issuer;
(ii) in the case of a person or company that is in a special relationship with the issuer, theperson or company has reasonable grounds to believe the issuer is not in default under theAct or the regulations;
(iii) the hold period has elapsed from the later of the date of the initial exempt trade and the datethe issuer of the underlying security became a reporting issuer;
(iv) no unusual effort is made to prepare the market or to create a demand for the securities andno extraordinary commission or consideration is paid for the trade; and
(v) the trade is not a control person distribution.
6.5 First Trade in a Security Acquired Under Section 2.9 or 2.10 -A person or company, other than anassociated consultant or investor consultant as defined in Rule 45-503 Trades to Employees, Executivesand Consultants, may trade an underlying security acquired under section 2.9 or 2.10 on a forcedconversion or exchange of a multiple convertible security, convertible security or exchangeable securityacquired by the holder under a 72(5) trade or under an exemption contained in section 2.2, 3.1, 3.2, 3.3,5.1 or 8.1 of Rule 45-503 Trades to Employees, Executives and Consultants only
(a) if the first trade is made under a prospectus for which a receipt has been obtained from theDirector,
(b) if the first trade is made under an exemption in Ontario securities law from section 53 of the Act,or
(c) if
(i) at the time of the trade, the issuer of the security is a reporting issuer and has been areporting issuer for at least twelve months;
(ii) in the case of a person or company that is in a special relationship with the issuer, theperson or company has reasonable grounds to believe that the issuer is not in default underthe Act or the regulations;
(iii) disclosure to the Commission has been made of the exempt trade;
(iv) no unusual effort is made to prepare the market or to create a demand for the securities andno extraordinary commission or consideration is paid for the trade; and
(v) the trade is not a control person distribution.
6.6 First Trade in a Security Acquired Under Section 2.7, 2.8 or 2.17 or Under Subsection 2.18(1) - Aperson or company may trade a security acquired under section 2.7, 2.8 or 2.17, after the issuer hasceased to be a private issuer or under subsection 2.18(1) after the issuer has ceased to be a private issuerfor purposes of the Securities Act (British Columbia), only
(a) if the first trade is made under a prospectus for which a receipt has been obtained from theDirector;
(b) if the first trade is made under an exemption in Ontario securities law from section 53 of the Act;
(c) if
(i) at the time of the trade, the issuer of the security is a reporting issuer and has been areporting issuer for at least twelve months or in the case of securities acquired under section2.8 one of the amalgamating or merged issuers or one of the continuing issuers has beena reporting issuer for twelve months;
(ii) in the case of a person or company that is in a special relationship with the issuer, theperson or company has reasonable grounds to believe that the issuer is not in default underthe Act or the regulations;
(iii) disclosure to the Commission has been made of the exempt trade;
(iv) no unusual effort is made to prepare the market or to create a demand for the securities andno extraordinary commission or consideration is paid for the trade; and
(v) the trade is not a control person distribution; or
(d) in the case of a security acquired under section 2.7, if a securities exchange issuer bid circularin respect of the securities was filed by the offeror under the Act.
PART 7 FILING REQUIREMENTS AND FEES
7.1 Form 45-501F1 - Every report that is required to be filed under subsection 72(3) of the Act and subsection7.5(1) shall be filed in duplicate and prepared in accordance with Form 45-501F1.
7.2 Form 45-501F2 - Every report that is required to be filed under clause 72(4)(c) of the Act and subsection7.5(2) shall be filed in duplicate and prepared in accordance with Form 45-501F2.
7.3 Fees for Form 45-501F1
(1) A report filed in Form 45-501F1 shall be accompanied by a fee equal to the greater of
(a) $100; and
(b) subject to subsection (2), the amount calculated using the formula,
A + B
where
"A" is 0.02 percent of the aggregate gross proceeds realized in Ontario from the distribution ofsecurities, other than special warrants, for which the report filed in Form 45-501F1 is filed, and
"B" is 0.04 percent of the aggregate gross proceeds realized in Ontario from the distribution of specialwarrants for which the report filed in Form 45-501F1 is filed.
(2) The amount calculated under clause (1) is considered to be $100 if the report filed in Form 45-501F1is filed for,
(a) a trade in securities if there is no change in beneficial ownership of the securities as a result ofthe trade; or
(b) a first trade in securities previously acquired under an exemption contained in clause 72(1)(a),(b), (c), (d), (l), (p) or (q) of the Act or section 2.4, 2.5 or 2.11.
7.4 Fees for Form 45-501F2 - A report filed in Form 45-501F2 shall be accompanied by a fee of $100.
7.5 72(4) Reports
(1) If a trade has been made under section 2.4, 2.5 or 2.11, the seller shall, within 10 days of the trade,file a report prepared and executed in accordance with section 7.1.
(2) If a trade has been made under section 2.13, 6.2 or 6.4, the seller shall, within 10 days of the trade,file a report prepared and executed in accordance with section 7.2.
(3) If a trade is made under section 2.9, the issuer shall file the notice and pay the fees prescribed bysection 20 of Schedule 1 to the Regulation, as if the underlying security had been acquired in adistribution exempt from section 53 of the Act by subclause 72(1)(f)(iii) of the Act.
(4) If a trade is made under section 2.10 the exchange issuer shall pay the fees prescribed by section21 of Schedule 1 to the Regulation as if the security had been acquired in a distribution exempt fromsection 53 of the Act by clause 72(1)(h) of the Act.
7.6 72(5) Disclosure - The disclosure contemplated by clause 72(5)(b) of the Act and sections 6.3, 6.5 and6.6 may be made by the issuer by disclosing particulars of the date of the trade, the number of securitiespurchased and the purchase price paid or to be paid, in
(a) an information circular or take-over bid circular filed in accordance with the regulations; or
(b) a letter filed by a person or company certifying that the person or company has knowledge of thefacts contained in the letter
if in either case the filing is effected before any resale of the securities.
7.7 Fees for Trade Made Under Section 2.8 - If a trade is made under section 2.8 the issuer shall pay thefees prescribed by section 23 of Schedule I of the Regulation as if section 23 referred to section 2.8instead of clause 72(1)(i) of the Act.
ONTARIO SECURITIES COMMISSION RULE 45-501
EXEMPT DISTRIBUTIONS
TABLE OF CONTENTS
PART TITLE
PART 1 PURPOSE AND DEFINITIONS
1.1 Purpose
1.2 Definitions
PART 2 EXEMPTIONS FROM THE REGISTRATION AND PROSPECTUS REQUIREMENTS OF THE ACT
2.1 Interaction of Private Placement Exemptions
2.2 Trades in Connection with Securities Exchange Take-Over Bids
2.3 Trades on an Amalgamation, Arrangement or Specified Statutory Procedure
2.4 Three-Cornered Amalgamations
2.5 Tacki
PART 3 REMOVAL OF REGISTRATION AND PROSPECTUS EXEMPTIONS
3.1 Use of Primary Purpose Entity
3.2 Satisfaction of Acquisition Cost
3.3 Vendor's Certificate
3.4 Units
3.5 Sales by Pledgees of Securities That Form Part of Control Block
3.6 Removal of Seed Capital Exemption
PART 4 OFFERING MEMORANDA
4.1 Use of Offering Memoranda in Connection with Private Placements
4.2 Contractual Right of Action
PART 5 COMMISSION REVIEW
5.1 Review of Offering Material
5.2 Other Regulatory Approvals
PART 6 FILING REQUIREMENTS AND FEES
COMPANION POLICY 45-501CP TO
ONTARIO SECURITIES COMMISSION RULE 45-501
EXEMPT DISTRIBUTIONS
PART 1 PURPOSE AND DEFINITIONS
1.1 Purpose - This policy statement sets forth the views of the Commission as to the manner in which certainprovisions of the Act and the rules relating to private placement exemptions are to be interpreted and applied.
1.2 Definitions - In this Policy, "private placement exemptions" means the prospectus exemptions available for
(a) sales of securities to those persons or companies identified in clause 72(1)(a) of the Act;
(b) sales of securities to exempt purchasers recognized as such by the Commission under clause72(1)(c) of the Act;
(c) sales of securities to purchasers whose aggregate acquisition cost of securities is not less than$150,000 under clause 72(1)(d) of the Act or section 2.11 of Rule 45-501;
(d) sales of securities under clause 72(1)(p) of the Act; and
(e) sales of government incentive securities under section 2.4 of Rule 45-501.
Corresponding exemptions are provided for the registration requirements and the views set forth in this Policyapply in respect of the corresponding registration exemptions.
PART 2 EXEMPTIONS FROM THE REGISTRATION AND PROSPECTUS REQUIREMENTS OF THE ACT
2.1 Interaction of Private Placement Exemptions
(1) The Commission recognizes that a vendor of securities can, in connection with any private placement,rely concurrently on different private placement exemptions except that concurrent reliance on clause72(1)(p) of the Act and section 2.4 of Rule 45-501 does not appear to be possible.
(2) In this connection, the Commission notes that clause 72(1)(p) of the Act and section 2.4 of Rule 45-501impose various upper limits on the number of persons to whom securities can be offered or sold inreliance on these exemptions. A trade made in reliance upon an exemption other than these twoexemptions need not be counted for the purposes of the limitations relating to the number of purchasersin clause 72(1)(p) of the Act or section 2.4 of Rule 45-501. However, if prospective purchasers aresolicited with respect to a private placement of securities and the securities are ultimately sold to someof the purchasers under clause 72(1)(d) or section 2.11 of Rule 45-501 and other purchasers underclause 72(1)(p) or section 2.4 of Rule 45-501, all persons solicited with respect to the private placement,including those who were sold securities under the exemptions in clause 72(1)(d) or section 2.11,should, in the Commission's view be counted for the purposes of the "fifty prospective purchaser"solicitation rule in clause 72(1)(p) and the "seventy-five prospective purchaser" solicitation rule insection 2.4.
2.2 Trades in Connection with Securities Exchange Take-Over Bids
(1) Filing a securities exchange take-over bid circular under the Act has several consequences. First, theissuer becomes a "reporting issuer" within the meaning of subsection 1(1) of the Act. Second, reportingissuer status generally confers important benefits under the Act and the regulations, particularly inconnection with the availability of certain prospectus exemptions and the running of hold periods on theresales of particular securities. The basis for conferring reporting issuer status on an issuer is thatunder Item 15 of Form 32 of the Regulation, a securities exchange take-over bid circular is required tocontain prospectus-type disclosure for the offeror or other issuer whose securities are being offered inexchange for the securities of the offeree issuer. This presupposes that the securities exchange take-over bid circular complies with the applicable requirements of the Act and regulations, including, withoutlimitation, Item 15 of Form 32 of the Regulation. The onus of ensuring that the circular contains theappropriate disclosure rests with the issuer and its advisors.
(2) Issuers are cautioned that the filing of a securities exchange take-over bid circular does not necessarilyresult in reporting issuer status under the Act unless the filing is made in connection with a bona fidesecurities exchange take-over bid and the securities exchange take-over bid circular filed complies withthe applicable requirements of the Act and regulations including, without limitation, Item 15 of Form 32of the Regulation.
(3) Issuers should be aware that if the securities exchange take-over bid circular, as filed, does notsubstantially comply with applicable requirements and, if the adequacy of the disclosure is subsequentlychallenged and found to be substantively deficient, appropriate regulatory action will be taken by staffand the Commission, including the possibility of cease trading the securities of the issuer. As well, theresale exemption in section 2.14 of Rule 45-501 which turns on the use of a securities exchange take-over bid circular, would not be available.
(4) The Commission is concerned about the increased number of securities exchange take-over bidcirculars being filed by shell as opposed to substantial companies for the purpose of attaining reportingissuer status in situations where the bid did not proceed and the circular did not contain prospectus leveldisclosure. If a securities exchange bid is made by a shell offeror, the Commission may takeappropriate regulatory action. In addition, the first trade relief in section 2.14 of Rule 45-501 isconditioned upon the issuer being a reporting issuer before the filing of the securities exchange take-over bid circular. The Commission recognizes that the requirements of section 2.14 may be undulyonerous in certain situations and on a case by case basis may consider granting relief.
(5) The Commission is also aware that in certain cases issuers are making take-over bids by way ofcircular where an exemption from the circular requirements is otherwise available. While this ispermitted under the Act, staff will monitor these transactions to see if they give rise to the concerns setout in this section.
2.3 Trades on an Amalgamation, Arrangement or Specified Statutory Procedure - Clause 72(1)(i) of the Actprovides an exemption for trades in securities in connection with a statutory amalgamation or arrangementor other statutory procedure. The Commission is of the view that the reference to statute in that clause refersto any statute of a jurisdiction or foreign jurisdiction under which the amalgamating entities have beenincorporated or created and exist and under which the transaction is taking place.
2.4 Three-Cornered Amalgamations - Certain corporate statutes permit a so-called "three-cornered merger oramalgamation" under which two companies will amalgamate or merge and securityholders of theamalgamating or merging entities will receive securities of a third party affiliate of one amalgamating ormerging entity. Section 2.8 of Rule 45-501 exempts these trades as the exemption applies to any trade madein connection with an amalgamation or merger.
2.5 Tacking - The Commission is aware that conflicting views exist as to whether a subsequent exempt purchasercan "tack" on the period of time during which shares have been held by a previous exempt purchaser in orderto reduce its "hold" period. The Act provides in subsection 72(4) that the hold period commences from thedate of the "initial exempt trade". The Commission is of the view that the phrase "initial exempt trade" insubsection 72(4) of the Act and sections 2.13, 6.2 and 6.4 of the Rule refers to the first trade made in relianceupon an exemption from the prospectus requirements of the Act and that therefore tacking is permitted.
PART 3 REMOVAL OF REGISTRATION AND PROSPECTUS EXEMPTIONS
3.1 Use of Primary Purpose Entity - The restrictions in sections 3.3 and 3.4 of Rule 45-501 on the use of theexemptions contained in clause 72(1)(d) of the Act and section 2.11 of Rule 45-501 relate to entities that havebeen created, or used, to permit purchases of securities without a prospectus and investment clubs,respectively, if the share or portion of the aggregate acquisition cost of the securities of each member orpartner of the partnership, syndicate or unincorporated organization, each beneficiary of the trust or eachshareholder of the company is less than $150,000. The exemptions contained in clause 72(1)(d) of the Actand section 2.11 of Rule 45-501 are available to an entity that is created, or is used, primarily for the purchaseof securities without a prospectus if each member, partner, beneficiary or shareholder, of the entity, as thecase may be, contributes, at least $150,000 for the securities purchased under the exemption.
3.2 Satisfaction of Acquisition Cost
(1) The Commission is of the view that the following do not constitute liabilities that satisfy therequirements of paragraph 3.2(2)(a) of Rule 45-501:
1. Commitments assumed under various tax-oriented arrangements if the promoter or distributorhas held out to the purchaser a hope or expectation that payment of the obligation will be waived.
2. Mortgages under which the purchaser does not have a direct and real obligation to makepayments under the mortgage.
(2) In determining the fair value of liabilities assumed or incurred in satisfaction of the acquisition cost forthe purposes of paragraph 3.2(2)(b) of Rule 45-501, it is appropriate to take into account the currentinterest rates, and the maturity date of the liability, including any representations made by the promoteror distributor as to the probable payment date.
3.3 Vendor's Certificate - The Commission will normally be satisfied that a vendor has exercised reasonablediligence for the purposes of the certificate required in Form 45-501F1 if the vendor relies, if appropriate, onstatutory declarations or representations from the purchasers, unless the vendor has knowledge that any factsset out in the declarations or representations are incorrect.
3.4 Units
(1) Section 2.11 creates a new exemption for purchases of blocks or units of securities of more than oneissuer if the issuers are engaged in related businesses. One example of related types of businessesfor the purposes of section 2.11 of Rule 45-501 would be the developer and operator, respectively, ofa real estate project. The Commission does not consider that one issuer engaged in mining andanother issuer engaged in oil and gas are engaged in related types of business for purposes of section2.11 of Rule 45-501.
(2) If the exemption in section 2.11 of Rule 45-501 is relied upon, varying resale provisions for differentsecurities that comprise the block or unit may result. For example, one of the securities may be listedand posted for trading on a recognized stock exchange and meet the requirements of clauses 433(1)(m)or (n) of the Insurance Act and thus have a six month "hold period", while another security, while alsolisted and posted for trading on a recognized stock exchange, may not meet these Insurance Actrequirements and thus have a one year "hold period".
3.5 Sales by Pledgees of Securities That Form Part of Control Block - Pledgees selling securities that formpart of a control block should refer to National Instrument 62-101 Control Block Distribution Issues whichclarifies the application of section 3.11 to sales by a pledgee.
3.6 Removal of Seed Capital Exemption - Section 3.6 provides that the exemption in clause 72(1)(p) of the Actis not available in certain circumstances. The section removes the registration and prospectus exemptionsfor trades to a parent, brother or sister of any director or senior officer of the issuer or any affiliated entity ofthe issuer unless those persons are otherwise permitted purchasers under clause 72(1)(p). In addition, section3.6 removes the exemption if the promoter is a registered dealer and has acted as a promoter of any otherissuer which has traded in securities of its own issue under the exemption in clause 72(1)(p) of the Act in theprevious 12 months. The restrictions have been added as the Commission is of the view that clause 72(1)(p)of the Act is overly broad.
PART 4 OFFERING MEMORANDA
4.1 Use of Offering Memoranda in Connection with Private Placements
(1) Part 4 of Rule 45-501 provides for the use of an offering memorandum in certain private placementsituations. There is an obligation under section 4.1 of Rule 45-501 to deliver an offering memorandumdescribing a contractual right of rescission or damages in respect of a proposed private placementunder clause 72(1)(d) of the Act or section 2.11 of Rule 45-501 if there has been any advertisement ofthe securities in printed public media, radio, television or telecommunications, including electronicdisplay such as the Internet. An offering memorandum describing the contractual right of action mustalso be delivered to purchasers of "government incentive securities" in connection with sales ofsecurities made in reliance on section 2.4 of Rule 45-501. Though the obligation to prepare an offeringmemorandum is quite limited in its reach, business practice may dictate the preparation of offeringmaterial, which constitutes an "offering memorandum" under Rule 45-501, which is delivered voluntarilyto purchasers in connection with exempt trades under clauses 72(1)(c), (d) and (p) of the Act andsection 2.11 of Rule 45-501. The obligation to provide a contractual right of rescission or damagesapplies both when the offering memorandum is required to be provided under section 2.4 or 4.1 andwhen it is provided voluntarily in connection with the specified exempt trades under clauses 72(1)(c),(d)or (p) and section 2.11 of Rule 45-501. However, a document delivered in connection with a sale ofsecurities made otherwise than in reliance on the above-noted exemptions does not attract theobligations of Part 4.
(2) The Commission does not prescribe what an offering memorandum should contain apart from thecontractual right of action and the requirements relating to future oriented financial information ascontemplated by National Instrument 52-101 Future Oriented Financial Information. The use of theexemptions contained in each of clause 72(1)(p) of the Act and section 2.4 of Rule 45-501 requires thateach investor have access to substantially the same information concerning the issuer that a prospectusfiled under the Act would provide.
(3) The Commission cautions against the practice of providing preliminary offering material to certainprospective investors before furnishing a "final" offering memorandum unless the material contains adescription of the contractual right of action to be made available to purchasers in situations when sucha right of action and description is required. The only material prepared in connection with the privateplacement other than a "term sheet" (representing a skeletal outline of the features of an issue withoutdealing extensively with the business and affairs of the issuer) made available to investors shouldconsist of an offering memorandum containing the contractual right of action and satisfying in all otherrespects the Act and the regulation.
4.2 Contractual Right of Action - The definition of contractual right of action stipulates that the right of actionmust reasonably correspond to the rights provided in section 130 of the Act. The Commission notes that therights provided in section 130 of the Act include the right of an investor to hold the parties against whom it hasa right of action jointly and severally liable for recovery of damages.
PART 5 COMMISSION REVIEW
5.1 Review of Offering Material - Though vendors of securities who rely on private placement exemptions areobliged under subsection 72(3) of the Act and subsection 7.5(1) of Rule 45-501 to notify the Commission, byway of the filing of a Form 45-501F1, of certain details of their trades, the offering material they use inconnection with those trades is not generally reviewed and commented upon by Commission staff.
5.2 Other Regulatory Approvals - Given the self-policing nature of private placements and the fact that offeringmemoranda are not routinely reviewed by Commission staff, the decision relating to the appropriate disclosurein an offering memorandum rests with the issuer, the selling securityholder and their advisors. If Commissionstaff becomes aware of an offering memorandum that fails to disclose material information pertaining toparties involved in the transaction, staff may seek to intervene to effect remedial action.
PART 6 FILING REQUIREMENTS AND FEES - Section 7.6 of Rule 45-501 outlines a number of ways in which thedisclosure contemplated by clause 72(5)(b) of the Act and sections 6.3, 6.5 and 6.6 of the Rule may be made.The list of possible disclosure is not exhaustive and issuers may choose to make the required disclosure inother ways.
Note: This report is not required where a bank listed in Schedule I or II to the Bank Act (Canada) or a loan corporation or trust corporationregistered under the Loan and Trust Corporation Act acquires from a customer an evidence of indebtedness of the customer or an equityinvestment in the customer acquired concurrently with an evidence of indebtedness.
1. Full name and address of the Vendor.
2. Name and address of the issuer of the security traded and description of the security.
3. Date of trade(s).
4. Amount or Number of Purchase
Securities Purchased Price
5. The vendor has prepared and certified a list comprising the name and address of eachpurchaser, the amount or number of securities purchased and the purchase price paid byeach purchaser and such certified list will be provided on request to a duly authorizedrepresentative of the Commission or to securityholders who acquired securities pursuantto the prospectus exemption in clause 72(1)(p) of the Act or section 2.4 of Rule 45-501Exempt Distributions.
6. State the name and address of any person acting as agent in connection with the trade(s)and the compensation paid or to be paid to such agent.
7. Calculation of Fees payable upon filing Form 45-501F1: (See section 7.3 of Rule 45-501 ExemptDistributions)
Total Fee payable: $ .
8. After exercising reasonable diligence in its enquiries, the vendor believes that the vendor isentitled to the use of the exemption which is circled above.
Certificate of Vendor or Agent of Vendor
The undersigned hereby certifies that the statements made in this report are true and correct.
DATED at
this day of
19
(Name of vendor or agent -
please print)
(Signature)
(Official capacity -
please print)
(Please print here name of individualwhose signature appears above, ifdifferent from name of vendor or agentabove)
Instructions:
1. In answer to question 6 give the name of the person or company who has been or will be paid remuneration directly related to thetrade(s), such as commissions, discounts or other fees or payments of a similar nature. It is not necessary to include paymentsfor services incidental to the trade such as clerical, printing, legal or accounting services.
2. If the space provided for any answer is insufficient, additional sheets may be used and must be cross-referred to the relevant itemand properly identified and signed by the person whose signature appears on the report.
3. Fee: Cheque made payable to the Ontario Securities Commission.
4. Please print or type and file two signed copies with:
Ontario Securities Commission
Suite 1800, Box 55,
20 Queen Street West
Toronto, Ontario M5H 3S8.
1. Full name and address of the Vendor.
2. Full name and address of reporting issuer whose securities were traded.
3. Description of securities sold in reliance on subsection 72(4) of the Act or section 2.13, 6.2or 6.4 of Rule 45-501.
Amount or Number and
Date of Transaction Description Selling Price
4. State which subclauses or parts of subclauses of clause 72(4)(b) of the Act or section 2.13,6.2 or 6.4 of Rule 45-501 are relied upon by the Vendor.
5. Full name and address of the party from whom the Vendor acquired the securities and thedate of acquisition.
6. Certificate of Vendor.
The undersigned Vendor hereby certifies that the information given in this report relating to theVendor is true and correct and that to the best of the Vendor's information and belief:
(1) the information given in this report relating to any other party is true,
(2) (a) no unusual effort has been made to prepare the market or create a demand for thesecurities, and
(b) no extraordinary commission or consideration has been or has been agreed to bepaid in respect of the trade covered by this report, and
(3) the trade to which this report relates is an arm's length transaction made in good faith.
Dated at ........ this ...... day of ......, 19...
(name of Vendor or agent -- please print)
(signature)
(official capacity -- please print)
(please print here name of individual whose signature appears above, ifdifferent from name of Vendor or agent printed above)
Instructions:
1. If the space provided for any answer is insufficient, additional sheets may be used and must becross-referred to the relevant item and properly identified and signed by the person whose signature appearson the report.
2. Please file this report in duplicate. Cheques are payable to the Ontario Securities Commission inthe amount set out in section 7.4 of Rule 45-501 Exempt Distributions.