Notice and Proposed Change to Proposed Rule: OSC Rule - 72-501 - Prospectus Exemption for First Trade in Certain Securities Over a Market Outside Ontario

Notice and Proposed Change to Proposed Rule: OSC Rule - 72-501 - Prospectus Exemption for First Trade in Certain Securities Over a Market Outside Ontario

Request for Comment OSC Rule


Substance and Purpose of Proposed Rule

On May 31, 1996, the Commission published the proposed Rule for comment at (1996), 19 OSCB 2952. The proposed Rule is derived from the Blanket Ruling(1994), 17 OSCB 1978 In the Matter of the First Trade in Securities Acquired Pursuant to Certain Exemptions. The Blanket Ruling became a deemed rule ofthe same name, which was revoked on March 1, 1997 and replaced by a Rule In the Matter of First Trade in Securities Acquired Pursuant to Certain Exemptions(the "Replacement Rule"), which was published at (1997), 20 OSCB 1220. The Replacement Rule expires on the earlier of the date on which the proposed Rulecomes into force and July 1, 1998.

The purpose of the proposed Rule is to provide relief from the prospectus requirements of the Securities Act (the "Act") for the first trade in securities of issuersthat are not reporting issuers in Ontario that is carried out through the facilities of a stock exchange outside Ontario or on certain regulated markets outsideOntario. The proposed Rule, as published on May 31, 1996, only provided relief for the sale of securities acquired under certain prospectus exemptionsspecifically listed in the proposed Rule.

As a result of staff's recommendations, a comment received on the proposed Rule and further deliberations of the Commission, the Commission has amended theproposed Rule and is republishing it for comment.

Changes Made to the Proposed Rule

The purpose of the changes to the proposed Rule is to provide relief from the prospectus requirement for the sale of securities acquired under any prospectusexemption. The amended proposed Rule accomplishes this by defining "restricted security" as "a security acquired in a distribution exempt under the Act or theregulations from section 53 of the Act". The definition of "restricted security" has also been expanded to include "a security acquired under a provision in a rulethat prohibits a trade of the security except on certain conditions".

A consequential change to the proposed Rule is the deletion of section 2.3 of the proposed Rule. That section took away the prospectus relief for certain"restricted securities" if the right to convert or exchange was acquired under certain prospectus exemptions that did not come within the definition of "restrictedsecurity".

The prospectus relief provided by the proposed Rule is still subject to certain conditions. These conditions limit the relief to situations where (i) at the time ofacquisition of the restricted security, the issuer of the restricted security was not a reporting issuer in Ontario and either no more than 10 percent of the securitiesby number of shares and holders was held by persons or companies whose last address as shown on the books of the issuer was in Ontario or no more than 10percent of the securities by number of shares and holders was beneficially owned by persons or companies in Ontario, and (ii) the first trade is executed throughthe facilities of a stock exchange outside Ontario, on Nasdaq, SEAQ or in the Eurobond Market. In respect of the first condition, the proposed Rule publishedfor comment on May 31, 1996, required the percentage test to be calculated "after giving effect to the issue of the restricted security and any other securities ofwhich the restricted security is a part that were issued at the same time or substantially at the same time as the restricted security". The words "or substantially atthe same time" have been replaced with the words "as part of the same distribution".

Reasons for Changes

At the time it published the proposed Rule, the Commission considered expanding the definition of "restricted security" contained in section 1.1 of the proposedRule to include securities acquired in a distribution exempt from section 53 of the Act, which are subject to the hold periods prescribed by subsection 72(4) ofthe Act. However, the Commission determined that it was not appropriate to do so as part of the policy reformulation process and that consideration of such achange should take place as part of the reconsideration of the "closed system" generally. Since that time, as a result of recommendations from staff, a commentreceived on the proposed Rule and the Commission's consideration of other proposed rules that deal with first trades outside Ontario, the Commissionreconsidered its position on limiting the scope of the proposed Rule. The Commission agreed with staff that if the policy rationale of the proposed Rule is toprovide relief where the impact of the trade on Ontario capital markets would be negligible, there is no justification for restricting the scope of the proposed Ruleto certain prospectus exemptions.

The reason for adding to the definition of "restricted security" the words "a security acquired under a provision in a rule that prohibits a trade of the securityexcept on certain conditions" is that certain proposed rules restrict the first trade in securities. The additional wording ensures that if the securities are acquiredunder an exception from a restriction, those securities are "restricted securities" and therefore eligible to be traded on markets outside Ontario under theproposed Rule.

The reason for deleting section 2.3 of the proposed Rule is that given the broader relief now provided by the proposed Rule, that section is no longerappropriate.

The words "or substantially at the same time" in paragraph 2.1(b) have been deleted because the necessity for that concept has diminished given the expansion ofthe definition of restricted security. The words "as part of the same distribution" have been added to include a situation where different exemptions are used toissue restricted securities that are all part of the same distribution.

Summary of Comments

The Commission received a comment letter dated August 9, 1996 on the proposed Rule from Ogilvy Renault, which letter was restricted to comments regardingthe impact of the proposed Rule on international offerings. Ogilvy Renault indicated that it has been a generally shared view of the securities bar in Ontariodealing with international matters that the resale in a foreign market of securities acquired under the "private placement" exemption in Ontario is not, generally, adistribution in Ontario and therefore does not require a prospectus or prospectus exemption unless there are sufficient "connecting factors" to Ontario. OgilvyRenault read the proposed Rule as giving rise to a perception that the Commission thinks there may be a need for a resale exemption in the context of aninternational offering by private placement and requested that the Commission clarify the issue. Ogilvy Renault felt that the proposed Rule lead to confusion andsuggested that the Commission give serious consideration to dealing with the issue of resale now rather than wait for reconsideration of the "closed system"generally.

The Commission is of the view that the first trade over a market outside Ontario in a security acquired under a prospectus exemption may, depending upon thefacts, be a distribution for purposes of the Act. The proposed amendment will provide certainty to market participants in circumstances where it is unclear as towhether or not a trade outside of Ontario is a distribution.

Ogilvy Renault also commented on the statement in the Notice accompanying the proposed Rule that securityholders may be able to resell securities outsideOntario in the circumstances contemplated in Interpretation Note 1 of the Commission. Ogilvy Renault indicated that on their reading of the Interpretation Note,it was directed at sales of securities by issuers and not by first purchasers. Although the Interpretation Note does not specifically address sales by firstpurchasers, the Commission is of the view that the statements in the Interpretation Note concerning distributions are equally applicable to resales that aredistributions under the Act.


Interested parties are invited to make written submissions with respect to the proposed Rule. Submissions received by June 6, 1997 will be considered.

Submissions should be made in duplicate to:

Daniel P. Iggers,
Ontario Securities Commission
20 Queen Street WestSuite 800,Box 55
Toronto, OntarioM5H 3S8

A diskette containing the submissions (in DOS or Windows format, preferably WordPerfect) should also be submitted. As the Securities Act requires that asummary of written comments received during the comment period be published, confidentiality of submissions received cannot be maintained.

Questions may be referred to:

Randee Pavalow
Policy Coordinator
Ontario Securities Commission
(416) 593-8257

Jennifer McDougall
Senior Legal Counsel
Ontario Securities Commission
(416) 593-8243

Proposed Rule

The text of the proposed Rule, as amended, follows, together with footnotes that are not part of the proposed Rule but have been included to providebackground and explanation.

DATED: April 18, 1997.