Notice: NI - 44-101 - Short Form Prospectus Distributions

In the late 1970's Canadian markets began to face increased competition from the Eurobond markets and from the U.S. markets. In Canada, issuers wishing todistribute freely tradeable securities had to clear a long form prospectus for each distribution. This was the case regardless of the size of the issuer, the extent ofits market following and the number of times it had previously filed a prospectus. Clearing a long form prospectus was a time consuming and expensive process.In the Eurobond markets, there was little in the way of regulation. The U.S markets, while heavily regulated, allowed certain issuers much faster access to marketthan similar issuers in Canada. The time and expense involved in accessing Canadian markets as opposed to accessing foreign markets gave rise to the concernthat unless issuers had rapid and cost effective access to Canadian markets, issuers would choose to distribute securities outside of Canada.

The solution for Canadian markets and issuers was the adoption by several provinces in 1982 of the Prompt Offering Qualification System (the "POP system").The POP system allowed senior issuers to access Canadian markets more rapidly and at a lower cost than had previously been the case. Those provinces thatadopted the POP system felt that establishing the POP system would shorten the time periods and streamline the procedures by which issuers that qualify couldhave access to the capital markets through a prospectus offering without reducing the existing benefits of investor protection or the degree and quality ofdisclosure to the public.

A major consequence of the introduction of the POP system was that issuers and selling securityholders began selling securities on a "bought deal" basis toCanadian underwriters. The consequences of selling under a "bought deal" was that the seller of the securities often paid lower underwriting commissions, andboth the seller and the underwriters generally incurred less market risk than when the securities were sold under a long form prospectus.

Theory Behind the POP System

The POP system operates through the incorporation by reference in a short form prospectus of an issuer's Annual Information Form (the "AIF"), informationcircular, financial statements and material change reports. The theory is that the short form prospectus, together with the documents incorporated by reference,provide equivalent disclosure to that contained in a long form prospectus.

To be eligible to distribute any type of securities under the POP system under NP47, most issuers must have a reporting issuer history of 12 months and a publicfloat of $75 million. The purpose of the reporting issuer history requirement in the basic eligibility criteria is to ensure that a public disclosure record pertaining tothe issuer exists for a minimum period of time. The purpose of the public float requirement is to ensure that issuers are of a sufficient size to receive prompt andcomprehensive coverage in the media of any material change affecting their affairs and to be followed and reported on by investment analysts.

Canadian reporting issuers without a reporting history may also be eligible to use the POP system under NP47 to distribute any type of securities if they have apublic float of $300 million. There, the size of the issuer provides the securities regulatory authorities with sufficient comfort as to the market following of theissuer that a 12 month reporting history is not required.

The POP system may also be used under NP47 to distribute non-convertible debt securities or non-convertible preferred shares of (i) an issuer that does not meetthe public float test if the debt or preferred shares are "investment grade" or (ii) an issuer that does not satisfy the basic POP eligibility criteria if the securitiesbeing distributed are guaranteed by a guarantor that meets specified eligibility criteria. Investment grade securities qualify for the POP system even if the issuerdoes not meet the public float test because they trade primarily on the basis of yield and an assessment of creditworthiness by an independent rating organization.Securities guaranteed by an issuer that has satisfied specified criteria qualify for the POP system because the securities trade, at least partially, on the strength ofthe guarantee.

Evolution of the POP System

The general mode of the original implementation of the POP system in many provinces was by way of blanket ruling of the securities regulatory authority andadoption of a local companion policy. The exceptions to this were Quebec and Alberta which implemented the POP system directly as part of their legislation. Anumber of the eastern provinces accepted short form prospectuses using their statutory powers of discretion.

Since its original adoption in 1982, the POP system has been modified in the various provinces to make it more accessible to issuers. These modificationsincluded permitting the use of a U.S. Form 10-K or Form 20-F instead of an AIF, extending the POP system to secondary offerings and securities exchangetake-over bids, reducing the public float test from $100 million to $75 million and eliminating the requirement that an issuer and its consolidated subsidiaries havea specified minimum consolidated shareholders' equity or a minimum net income after tax before the issuer was eligible to participate in the POP system.

In late 1991, the CSA proposed the promulgation of the POP system on a national basis by way of the adoption in each province, other than Quebec, of anational policy statement relating to the POP system. This national policy statement was adopted in 1993 as NP47. In the view of the CSA, adopting a nationalpolicy statement would result in increased efficiencies. NP47 contained a number of significant changes from the predecessor local policy statements. Inparticular, NP47 provided for greater reciprocity among jurisdictions in that it allowed an issuer with the requisite reporting history in one of the participatingjurisdictions to utilize the POP system in another jurisdiction where it did not have such history. It also introduced a substantial issuer test whereby a Canadianissuer without a reporting history in any jurisdiction could use the POP system if that issuer had a public float of at least $300 million. NP47 was later amendedto reduce the reporting issuer history requirement in the basic eligibility criteria from 36 months to 12 months.

Reformulation of NP47

The proposed National Instrument, Forms, Policy and Implementing Rule replace NP47 in its entirety. The proposed National Instrument and Forms aredesigned to continue to allow issuers to access Canadian capital markets rapidly and with a minimum of regulatory impediments, while maintaining current levelsof investor protection and public disclosure. The proposed Policy provides information relating to the exercise of discretion under the proposed NationalInstrument and the manner in which its provisions are intended to be interpreted or applied by the Canadian securities regulatory authorities.

CSA Approach to Reformulation

The CSA approached each provision of NP47 on the following basis:

First, consideration was given to whether each provision of NP47 should be carried forward as a rule in those jurisdictions that have rule-making orregulation-making authority. A provision that is properly characterized as a rule has been included in the proposed National Instrument; a provision that wasconsidered useful but which was not in the nature of a mandatory requirement or prohibition has been included in the proposed Policy.

Second, the CSA considered whether the regulatory purpose behind each provision of NP47 was still appropriate. Substantive changes have been proposed tosome provisions. Changes have also been proposed for the sake of simplification, organization and comprehensiveness.

Third, the drafting of each provision of NP47 was reviewed with a view to determining whether revisions were required to achieve legislative certainty, if theprovision was to be included in the proposed National Instrument, or whether clarifications were required to ensure that the regulatory purpose underlying theprovision was properly reflected. During this process, virtually all provisions of NP47 have been redrafted to ensure that legislative certainty and clarity areachieved in the proposed National Instrument and that clarity is achieved in the proposed Policy.

Fourth, the CSA considered whether there were any regulatory gaps or outdated regulations due to changes in the industry or staff practice since NP47'sadoption in 1993. In the course of this consideration, the CSA determined that few major substantive changes were required, but that some additions, forexample, specific eligibility criteria for issuers of asset-backed securities and cash settled derivative securities, were appropriate.

The CSA are of the view that the regulatory regime established by NP47 has operated efficiently and with minimal difficulties since its inception and that majorchanges are not required at this time to the policy rationale underlying NP47 or the concepts in NP47. Accordingly, the intent of the CSA in preparing theproposed National Instrument, Forms and Policy was to ensure that these instruments remain largely consistent with the regulatory regime in place fordistributions by way of short form prospectus. The substantive modifications made from NP47 are designed to update its provisions where appropriate and toaddress difficulties that have arisen in respect of NP47 in the past.

Major Changes of a Substantive Nature

The major changes from NP47 are:

(i) a change in the timing of the application of the public float test such that the applicable public float test under Part 2 of the proposed National Instrument mustbe satisfied on a date within 60 days before the filing of the preliminary short form prospectus;

(ii) the expansion of the POP eligibility criteria in section 2.4 of the proposed National Instrument applicable to distributions of approved rating non-convertibledebt and non-convertible preferred shares and the POP eligibility criteria in section 2.5 of the proposed National Instrument applicable to distributions ofguaranteed non-convertible debt and non-convertible preferred shares to expressly include, in each case, cash settled derivatives;

(iii) a change in the POP eligibility criteria applicable to distributions of guaranteed non-convertible debt and non-convertible preferred shares such that therequirements in paragraph 4.3(1)(b) of NP47 that the guarantor have approved rating securities outstanding and that the securities being distributed have anapproved rating have been omitted from paragraph 2.5(1)3 of the proposed National Instrument in cases where the guarantor satisfies the $75,000,000 publicfloat test;

(iv) a change in the POP eligibility criteria applicable to distributions of guaranteed convertible debt and convertible preferred shares such that the requirements inparagraph 4.3(2)(c) of NP47 that the guarantor have approved rating securities outstanding and that the securities being distributed have an approved rating havebeen omitted from section 2.6 of the proposed National Instrument on the basis that the guarantor is required to satisfy the $75,000,000 public float test;

(v) the addition of the concept of "alternative credit support" in the POP eligibility criteria in sections 2.5 and 2.6 of the proposed National Instrument applicableto distributions of guaranteed securities to address persons or companies that are prohibited by law from providing a guarantee;

(vi) greater harmonization in the treatment of reorganizations and take-over bids by omitting the provision in NP47 that requires a successor issuer to file a newAIF promptly after a reorganization, and modifying the provision in NP47 that requires an issuer when filing a renewal AIF to advise of the occurrence of amaterial take-over bid to include any material reorganization or material acquisition of shares or assets;

(vii) the addition in section 2.7 of the proposed National Instrument of eligibility criteria specifically applicable to distributions of asset-backed securities byspecial purpose vehicle issuers, as a result of which the shelf system will be available for such distributions;

(viii) the addition in section 5.1 of the proposed National Instrument of asset-backed securities and cash settled derivatives in the list of securities that may bedistributed by way of a non-fixed price offering under the POP system;

(ix) a change in the conditions attached in section 5.1 of the proposed National Instrument to the distribution of securities by way of a non-fixed price offeringunder the POP system such that the securities need only have received a rating from an approved rating organization, rather than an approved rating;

(x) the addition of disclosure standards in proposed Form 44-101F1, the form of AIF, specifically applicable to issuers with asset-backed securities outstanding;

(xi) the addition of disclosure standards in proposed Form 44-101F2, the form of short form prospectus, specifically applicable to distributions of asset-backedsecurities and cash settled derivatives;

(xii) the mandating of expedited review procedures for the clearance of renewal AIFs; and

(xiii) the addition in the proposed Policy of the initial AIF and short form prospectus clearance procedures from National Policy Statement No. 1.

This Notice summarizes in a general manner the proposed National Instrument, Forms, Policy and Implementing Rule and highlights the more significant changesmade in the proposed National Instrument and Forms.

Reference should also be made to the Table of Concordance which is being published with this Notice for information as to the treatment of each provision ofNP47 in the proposed instruments. The footnotes in each instrument contain further background and explanation.

Summary of Proposed National Instrument

The proposed National Instrument has eight parts.

Part 1. Section 1.1 contains the definitions of terms and phrases used in the proposed National Instrument that are not defined in or interpreted under a definitioninstrument in force in a jurisdiction. National Instrument 14-101 Definitions⁽¹⁾ sets out definitions for commonly used terms and definitions of terms used in morethan one national instrument and should be read together with the proposed National Instrument.

The definitions contained in section 1.1 are to a large extent based on, and in most cases very close to, the definitions contained in NP47. However, some of thedefinitions are new. The new definitions consist of terms used in NP47, but not defined there, and terms new to the proposed National Instrument. The Table ofConcordance shows how each definition in NP47 has been handled in the reformulated instruments. Cross-references to the new location of definitions fromNP47 are also provided.

Part 2. Part 2 contains the eligibility criteria for participation in the POP system under the proposed National Instrument.

Section 2.1 permits POP eligible issuers to satisfy the prospectus requirement under securities legislation by filing a short form prospectus. This provision wasformerly set out in subsection 6.1(1) of NP47. Subsection 2.1(2) is new and is a transition clause that provides that a preliminary short form prospectus filed byan issuer under NP47 is considered to be a preliminary short form prospectus for the purposes of National Instrument 44-101. An issuer that has filed apreliminary short form prospectus under NP47 before the proposed National Instrument comes into force may file a short form prospectus under the NationalInstrument, when in force, and distribute securities under the National Instrument. The short form prospectus filed by an issuer in such circumstances mustcomply with Form 44-101F2. Because the eligibility of the issuer to file a preliminary short form prospectus would have been determined under NP47, the issuerwould not be required to meet the "60 days before filing" public float test normally otherwise applicable under the proposed National Instrument. Subsection2.1(3) clarifies that a National Instrument 44-101 Receipt is evidence of the issuance of a receipt under securities legislation for a short form prospectus or anamendment to a short form prospectus.

Section 2.2 contains the basic eligibility criteria for participation in the POP system, ie. being a reporting history of 12 months, a public float of $75 million within60 days before the filing of the preliminary prospectus and not being in default of any requirement of securities legislation. These criteria have not changedmaterially from the equivalent provisions in section 4.1 of NP47, other than the change mentioned above in timing of the application of the public float test to adate within the 60 days before the filing of the preliminary prospectus. Aside from resulting in the public float test being satisfied on a date closer to the date of adistribution under the POP system, this timing change represents a significant simplification in the POP eligibility criteria in that the same public float test appliesto an issuer whose most recent AIF is an initial AIF and to an issuer whose most recent AIF is a renewal AIF. Under the eligibility criteria in NP47, the timeperiods for satisfying the public float test vary depending on whether the issuer has most recently filed an initial AIF or a renewal AIF.

Section 2.3 contains alternative eligibility criteria for participation in the POP system for a Canadian issuer that does not have a 12 month reporting history. Thissection replaces section 4.2 of NP47 and allows an issuer to participate in the POP system if, within 60 days before the filing of the preliminary prospectus, theissuer has a public float of $300 million or more.

Section 2.4 contains alternative POP eligibility criteria for distributions of approved rating non-convertible debt securities, non-convertible preferred shares orcash settled derivatives. This section parallels paragraph 4.3(1)(a) of NP47, but, as mentioned above, expressly adds cash settled derivatives to the list ofsecurities that may distributed. The addition of cash settled derivatives is consistent with U.S. regulation which also permits cash settled derivative securities tobe registered under Form S-3, the short form registration statement under the United States Securities Act of 1933. In 1992, the SEC amended the Form S-3eligibility criteria for investment grade securities to substitute the term "non-convertible securities" for the former specific reference to non-convertible debt orpreferred stock. This amendment clarified that cash settled derivative securities were eligible under the investment grade standard for Form S-3.

Section 2.5 contains alternative POP eligibility criteria for distributions of guaranteed non-convertible debt securities, non-convertible preferred shares or cashsettled derivatives. This section parallels paragraph 4.3(1)(b) of NP47. As noted above, cash settled derivatives and the concept of "alternative credit support"have been added and the eligibility criteria have changed such that the guarantor of the securities distributed is no longer required to have approved ratingsecurities outstanding in all cases. Under paragraph 2.5(1)3 of the proposed National Instrument, the guarantor is only required to have approved ratingsecurities outstanding if it does not satisfy the $75 million public float test. This change tracks relief given by the Ontario Securities Commission in In the Matterof Trizec Corporation Ltd. (1995), 18 OSCB 4611. The addition of the concept of "alternative credit support" provides an alternative to a guarantee for a personor company that is prohibited by law from providing a guarantee, eg. under section 414 of the Bank Act (Canada).

Section 2.6 contains the alternative eligibility criteria for distributions of guaranteed convertible debt securities or preferred shares. This section parallelssubsection 4.3(2) of NP47. However, as noted above, the requirements in paragraph 4.3(2)(c) of NP47 that the guarantor of the securities distributed haveapproved rating securities outstanding and that the securities being distributed have an approved rating have been omitted from section 2.6 of the proposedNational Instrument on the basis that the guarantor is required to satisfy the $75,000,000 public float test. The concept of "alternative credit support" has alsobeen added, which provides an alternative to a guarantee for a person or company that is prohibited by law from providing a guarantee.

Section 2.7 is new and contains alternative eligibility criteria for participating in the POP system by a special purpose vehicle issuer wishing to distributeasset-backed securities. The issuer must have a current AIF, not be in default of any requirement of securities legislation and, at the time of filing its AIF, havereasonable grounds for believing that all asset-backed securities that it may distribute under the POP system will receive an approved rating. Furthermore, at thetime of filing the preliminary short form prospectus, the issuer must have received confirmation that the asset-backed securities to be distributed will receive anapproved rating, subject to final determination of the specific attributes of the asset-backed securities.

Section 2.7 has been added because a special purpose issuer of asset-backed securities will not typically satisfy the reporting history and public float eligibilitycriteria in section 2.2 or 2.3 of the proposed National Instrument because the issuer is commonly established at the time of the first distribution of asset-backedsecurities. The alternative eligibility criteria of sections 2.4, 2.5 and 2.6 will also be of limited use to a special purpose issuer given the requirement of a 12 monthreporting history and, in the case of sections 2.5 and 2.6, a guarantee, as well as the applicability of those sections to only debt securities, preferred shares andcash settled derivatives. The alternative eligibility criteria of section 2.7 permit special purpose entities without a market following or reporting history to qualifyto use the POP system primarily on the basis of the credit rating of the asset-backed securities issued.

As a result of the inclusion in the proposed National Instrument of POP eligibility criteria specifically applicable to distributions of asset-backed securities ofspecial purpose vehicle issuers, the shelf system will be available for these distributions. Proposed National Instrument 44-102 Shelf Prospectus Distributions andPricing Distributions after a Prospectus has been receipted will be published for comment shortly.

The alternative eligibility requirements in section 2.7 are similar to the Form S-3 standards for asset-backed securities in the U.S. Accordingly, offerings ofasset-backed securities may proceed under the POP system, including under the shelf system under proposed National Instrument 44-102, on a timely basiscomparable to the offering alternatives available in the U.S. to issuers of asset-backed securities.

The CSA note that an initiative is underway in the U.S. to create disclosure standards for asset-backed securities issues.

Section 2.8 contains alternative POP eligibility criteria for a successor issuer following a reorganization. The section omits the requirement in NP47 for asuccessor issuer to file an AIF promptly after a reorganization because the benefits of the requirement do not, in the opinion of the CSA, outweigh the costs, andalso because the omission equalizes the treatment of reorganizations and take-over bids on this issue. As a take-over bid may or may not be structured as areorganization, it is appropriate that the requirement to file an AIF not be triggered by the particular structure a take-over bid assumes. NP47 does not require anew AIF to be filed following take-over bids generally.

Subsection 2.8(1) mirrors section 4.4 of NP47 and provides that a successor issuer is eligible to participate in the POP system if (i) the successor issuer has acurrent AIF, (ii) the successor issuer is a reporting issuer in a jurisdiction and is not in default of any requirements of securities legislation, (iii) the successorissuer satisfies the $75 million public float test and at least one of the participants satisfies the 12 month reporting history criteria and the $75 million public floattest, and (iv) at the time of the reorganization, none of the participants was in default of any requirement of securities legalisation. Subsections 2.8(2) and (3) arenew and address the situation where a successor issuer has not filed an AIF. Subsection 2.8(2) provides that a successor issuer may elect to use the current AIFof a participant in the reorganization. If it does so, the successor issuer is considered, under subsection 2.8(3), to have a current AIF. Subsection 2.8(4) providesthat the use by a successor issuer of a participant's AIF does not preclude the participant from continuing to use the AIF as its own AIF if the participantcontinues to exist after the reorganization.

Section 2.9 sets out the method of calculation of the aggregate market value of an issuer's securities for the purposes of determining, if applicable, whether anissuer satisfies a public float test in Part 2. The calculation provisions of subsection 4.1(2) of NP47 have been broken up in section 2.9 of the proposed NationalInstrument into two subsections for greater clarity and simplification.

Part 3. Part 3 contains the filing procedures for initial and renewal AIFs and specifies the supporting documents required to be filed with an AIF. Part 3 alsocontains provisions relating to the time period for filing an AIF and provisions setting out when an AIF may be reviewed. Part 3 largely parallels section 5 ofNP47; however, some provisions of section 5 of NP47 have been moved to the proposed Policy and others have not been carried forward in any of thereformulated instruments.

The CSA are currently developing mutual reliance procedures for the treatment of, among other things, initial AIFs and renewal AIFs. The CSA expect theseprocedures to supplant the review procedures contained in the proposed National Instrument and Policy. These mutual reliance procedures, once adopted, willlikely result in some modification to this Part of the proposed National Instrument.

Section 3.1 reflects the content of section 5.1 of NP47. Section 3.1 contains the procedures for an issuer filing an initial AIF and the obligation on the part of theregulator in the local jurisdiction to issue a notice of acceptance for the AIF. The parts of National Policy Statement No. 1 and NP47 dealing with the clearanceof initial AIFs and manner of review have been moved to the proposed Policy at section 3.1. Subsection 3.1(2) tracks the current requirement in National PolicyStatement No. 1 to select a principal jurisdiction.

Section 3.2 contains the filing procedures for renewal AIFs and integrates the portions of the Memorandum of Understanding for Expedited Review of ShortForm Prospectuses and Renewal AIFs dated December 18, 1996 (the "MOU") that deal with renewal AIFs. Prior to amendments to the MOU, an issuer filing arenewal AIF could choose between the MOU and the provisions in NP47.As a result of amendments to the MOU, an issuer is required to clear a renewal AIFusing the expedited review procedures established under the MOU. These expedited review procedures have been integrated into the proposed NationalInstrument and section 3.2 of the proposed Policy.

Subsection 3.2(3) requires an issuer filing a renewal AIF for a financial year in which the issuer made an acquisition of shares or assets or was a party to areorganization that in either case was material to the issuer to state that fact in the covering letter accompanying the AIF. The reference to a material acquisitionof shares or assets expands upon the existing requirement in NP47 to advise of a material take-over bid. The requirement to advise of a material reorganization isnew and has been added because the requirement in NP47 to file a new AIF following a reorganization has been omitted. The requirement merely to advise that amaterial reorganization has occurred parallels the treatment of material take-over bids.

Subsection 3.3(1) requires an issuer to file with an AIF an eligibility certificate and the documents incorporated by reference in the AIF that have not previouslybeen filed.

Subsection 3.3(2) requires an issuer that is filing an AIF in the form of an annual report on Form 10-K or Form 20-F to file an undertaking with the regulator tothe effect that the issuer will provide to any person or company, upon request, the documents listed in item 9 of Form 44-101F1. This requirement is based onitem 8 of Appendix A to NP47.

Section 3.4 provides that an issuer that has securities registered under the 1934 Act may file an AIF in the form of a Form 10-K or Form 20-F.

Part 4. Part 4 contains provisions relating to the filing procedures for a short form prospectus and the distribution of securities under a short form prospectus.

Section 4.1 contains general requirements applicable to the filing of short form prospectuses. The equivalent section of NP47 is section 6.3. Section 4.1 alsodeals with the selection of a principal jurisdiction if there is no designated jurisdiction and permits an issuer, if its annual financial statements for the most recentlycompleted financial year have not yet been approved by its directors, to include its third quarter interim financial statements in its short form prospectus insteadof the annual financial statements.

Section 4.2 of the proposed National Instrument contains a list of the required supporting documents that appears, in part, in subsections 6.3(2) through (5) ofNP47 and, in part, in the filing chart in National Policy Statement No. 1. Section 4.2 omits the requirement in NP47 to file directors' resolutions, although thisrequirement still exists under Quebec securities legislation. Section 4.2 also omits the requirement to file "green sheets". The requirement in section 6.3(5) ofNP47 to disclose asset coverage ratios has also been omitted. In addition, the exemption for approved rating organizations from the requirement to file consentsin connection with the disclosure in a short form prospectus of a rating of securities has been moved from blanket rulings in the various jurisdictions to subsection4.2(4) of the proposed National Instrument. Subsection 4.2(1) is new and has been added to require the filing of an eligibility certificate, in addition to theeligibility certificate filed at the time of filing an AIF, because of the substantive eligibility requirements that, under the proposed National Instrument, must besatisfied at the time of filing the preliminary short form prospectus.

Part 5. Part 5 contains provisions dealing with non-fixed price offerings and reductions of offering prices under a short form prospectus. The provisions ofsection 6.1 of NP47, on which Part 5 is based, have been expanded in the proposed National Instrument in two regards. First, cash settled derivatives andasset-backed securities have been added to the list of securities that may be distributed by way of non-fixed offerings. Second, the conditions attached to thedistribution have been relaxed so as to require only a rating from an approved rating organization, not an approved rating. Section 5.1 of the proposed NationalInstrument specifies that the securities distributed must have received at the time of filing the preliminary prospectus a rating, on a provisional basis, from at leastone approved rating organization. Any rating received from an approved rating organization for the securities to be distributed is required to be disclosed in ashort form prospectus under item 8(7) of Form 44-101F2.

Part 6. Part 6 contains provisions relating to circulars. Section 6.1 largely parallels section 6.2 of NP47 and permits the use of short form prospectus disclosurein take-over bid and issuer bid circulars, either directly or through incorporation by reference. Section 6.2 of the proposed National Instrument is new andextends the use of short form prospectus disclosure and the ability to incorporate the disclosure by reference to information circulars. Section 6.3 specifies thedisclosure that POP issuers must insert in their information circulars stating the availability of continuous disclosure material. This section also lists thedocuments that must be available to securityholders upon request.

Part 7. Part 7 provides relief on a national basis from securities legislation for the solicitation of expressions of interest and replaces blanket rulings in the variousjurisdictions dealing with the same subject. The conditions attached to the relief in the proposed National Instrument are similar to those found in the blanketrulings, with some modifications.

Part 8. Part 8 replaces the exemption provisions in section 4.5 of NP47. Section 8.1 of the proposed National Instrument sets out the requirements forapplications for exemption. Section 5.1 of the proposed Policy describes the procedure to be followed if an exemption is sought in more than one jurisdiction.Section 8.2 of the proposed National Instrument sets out the manner in which the granting of an exemption may be evidenced and has been drafted to parallelproposed National Instrument 81-102 Mutual Funds. Section 8.3 contains transitional rules relating to the grandfathering of waivers previously obtained underNP47.

Summary of Form 44-101F1

Form 44-101F1 prescribes the contents of an AIF and Management's Discussion and Analysis. Instruction (3) to Form 44-101F1 has been modified to clarify thatthe Form is a disclosure obligation with which issuers must comply. Issuers may not omit prescribed disclosure even if, in their opinion, the information is notmaterial. Materiality determines the degree of detail issuers are required to provide. Noteworthy changes from the disclosure prescribed in Appendix A to NP47include:

(i) the omission of the revenue test in item 1(2) of Appendix A to NP47 used in the determination of which subsidiaries may be omitted in the disclosureprescribed by item 2 of Form 44-101F1;

(ii) the reduction in the disclosure period in items 3 and 5 of Form 44-101F1 from five years to three years;

(iii) changes made in item 4(1) of Form 44-101F1 dealing with segmented disclosure, which is based on item 3(1) of NP47, to reflect amendments to section1701 of the Handbook;

(iv) the omission of specific disclosure provisions for financial institutions prescribed by items 3(1)(l) and (m) of Appendix A to NP47, which have beensuperseded by section 3025 of the Handbook;

(v) the addition of disclosure requirements in item 4(2) of Form 44-101F1 specifically applicable to issuers with asset-backed securities outstanding;

(vi) changes made in items 5(4) and 6(2) of Form 44-101F1 to require only a cross-reference to a reconciliation of foreign GAAP financial statements toCanadian GAAP financial statements, rather than the more elaborate information required in items 4 and 5 of Appendix A to NP47; and

(vii) the addition of instructions in Schedule 1 to Form 44-101F1 MD&A to the effect that information described in the schedule may be omitted if theinformation either is not material or is already disclosed in the notes to the issuer's financial statements and a cross-reference to that note is provided.

Other changes have also been made, primarily in items 3, 4 and 8, to be more consistent with the long form prospectus disclosure regime in place in certainjurisdictions.

Aside from these changes, the disclosure prescribed by Form 44-101F1 is substantially similar to that prescribed by Appendix A to NP47. Changes of anon-substantive nature have also been made in the interests of simplicity, clarity and comprehensiveness.

Summary of Form 44-101F2

Form 44-101F2 prescribes the contents of a short form prospectus. Noteworthy changes from the disclosure prescribed in Appendix B to NP47 include:

(i) the reduction in face page disclosure requirements for a short form prospectus and the consolidation of those requirements in item 1 of Form 44-101F2, whichhas been retitled "Front Page Disclosure";

(ii) the addition in items 8(3) and (4) of Form 44-101F2 of disclosure requirements specifically applicable to distributions of asset-backed securities and cashsettled derivatives;

(iii) the omission of the requirement in item 9 of Appendix B to NP47 to disclose asset coverage ratios in offerings of debt securities or preferred shares;

(iv) the addition of disclosure requirements in item 13 of Form 44-101F2 specifically applicable to guarantors and other credit supporters of the securitiesdistributed that do not have a current AIF; and

(v) the addition in items 19(3) and (4) of Form 44-101F2 of certificate requirements for amendments to a short form prospectus.

Changes have also been made, primarily to items 1.7, 6, 8, 11 and 15(1), to be more consistent with current practice and the long form prospectus disclosureregime in place or contemplated in certain jurisdictions.

Aside from these changes, the disclosure prescribed by Form 44-101F2 is substantially similar to that contained in Appendix B to NP47. Changes of anon-substantive nature have also been made in the interests of simplicity, clarity and comprehensiveness.

Summary of Proposed Companion Policy

The purpose of the proposed Policy is to provide information relating to the exercise of discretion under the proposed National Instrument, the manner in whichits provisions are intended to be interpreted or applied by the Canadian securities regulatory authorities, and the relationship of the proposed National Instrumentwith local securities legislation and other national instruments, such as the shelf system and post receipt pricing procedures under proposed National Instrument44-102 (to be published for comment shortly), the MOU, the OSC Notice on Selective Review and National Policy Statement No. 1. The proposed Policy hasseven parts.

Part 1. Part 1 provides general information concerning the purpose and operation of the proposed National Instrument, Forms and Policy. Part 1 also describesthe interrelationship between the proposed National Instrument and Policy and Quebec securities legislation and the proposed National Instrument and otherinstruments.

In addition, Part 1 provides guidance on the interpretation of certain of the definitions in Part 1 of the proposed National Instrument. In particular, explanation isprovided on the definitions of "approved rating", "asset-backed security" and "successor issuer".

Part 2. Part 2 provides explanation as to the eligibility criteria found in Part 2 of the proposed National Instrument. Section 2.6 provides particular guidance onthe eligibility to distribute asset-backed securities under the POP system and the interpretation of "promoter" in the context of distributions of asset-backedsecurities. Section 2.7 provides particular guidance on the eligibility criteria for successor issuers.

Part 3. Part 3 provides explanation as to the initial AIF review procedures in section 3.1 of the proposed National Instrument, the mechanism for the review of arenewal AIF under section 3.2 of the proposed National Instrument and the supporting documents required to be filed under section 3.3 of the proposed NationalInstrument. Part 3 also provides some guidance on the filing of a short form prospectus at the same time as the filing of a renewal AIF or within the reviewperiod for a renewal AIF. As discussed above, upon the CSA developing mutual reliance procedures in this area, Part 3 will likely be modified further to reflectthe adoption of these procedures.

Part 4. Part 4 provides explanation on the form of short form prospectus and disclosure requirements found in section 4.1 of the proposed National Instrument.The discretion of the regulator to refuse to issue a receipt if the regulator has concerns about the adequacy or timeliness of the disclosure in a prospectusincorporated by reference is noted in section 4.1 of the proposed Policy. Section 4.2 of the proposed Policy provides guidance on the views of the Canadiansecurities regulatory authorities on the filing of a short form prospectus if an issuer's directors have not yet approved the annual financial statements for the mostrecently completed fiscal year. Section 4.4 of the proposed Policy comments on the inability of an issuer to incorporate confidential material change reports byreference in a short form prospectus and the practice of the Canadian securities regulatory authorities to cease trade a distribution of an issuer if it comes to theirattention that the issuer has filed a confidential material change report during the distribution. This section reflects, with modifications, subsection 6.1(6) ofNP47. The review procedures for short form prospectuses described in section 4.5 of the proposed Policy replace the provisions in National Policy StatementNo. 1. Section 4.6 of the proposed Policy describes the National Instrument 44-101 Receipt System, the system by which a receipt issued by the principaljurisdiction evidences the issuance of a receipt in the non-principal jurisdictions that have not opted out.

Part 5. Part 5 describes the mechanism by which an exemption may be applied for from particular provisions of the proposed National Instrument.

Part 6. Part 6 sets out the views of Canadian securities regulatory authorities as to some of the factors that should be considered by an issuer of asset-backedsecurities in preparing an AIF.

Part 7. Part 7 provides guidance on the disclosure prescribed by Form 44-101F2. Section 7.1 emphasizes that prospectus liability is not excluded by virtue of theshort form prospectus regime. Subsection 7.4(2) contains a discussion of "materiality" in the context of business acquisitions. Section 7.5 sets out the views ofCanadian securities regulatory authorities as to some of the factors that should be considered when preparing a short form prospectus to qualify a distribution ofasset-backed securities. Section 7.6 advises issuers to customize the additional disclosure applicable to distributions of cash settled derivatives required underitem 8(4) of Form 44-101F2 to their circumstances. Subsection 7.7(1) comments on the view of Canadian securities regulatory authorities that issuers should notdelay directors' approval of financial statements to avoid their inclusion in a short form prospectus. Subsection 7.7(2) explains that the implementing law of eachjurisdiction provides relief regarding the sending of financial statements to securityholders in circumstances where the incorporation by reference of financialstatements causes the statements to be filed earlier than would otherwise be the case under continuous disclosure requirements of securities legislation.Subsection 7.8(2) comments on the ability of a credit supporter to apply for relief from the requirement to sign a prospectus certificate.

Appendix A. Appendix A consists of a table of documents required to be filed in the various jurisdictions in connection with the clearance of national issues.

Appendix B. Appendix B contains a chronology illustrating the operation of the National Instrument 44-101 Receipt system procedures.

Summary of Proposed Implementing Rule - Ontario

Proposed Rule 44-801 is the local rule implementing the proposed National Instrument and Forms in Ontario. There are three parts to the proposed Rule. Part 1is interpretive. Part 2 designates the required form of AIF under National Instrument 44-101 as Form 44-101F1 and the required form of short form prospectusunder National Instrument 44-101 as Form 44-101F2.

Part 3 deals with the provisions of local legislation that apply to a distribution under National Instrument 44-101. Section 3.1 provides that a preliminary shortform prospectus and a short form prospectus under National Instrument 44-101 is a short form of preliminary prospectus and a short form of prospectus in theprescribed form for the purposes of the Securities Act (Ontario) (the "Act"). Subsection 3.2(1) provides relief from the 10 day waiting period requirement underthe Act. Subsection 3.2(2) provides that National Instrument 41-101 does not apply to a preliminary short form prospectus and a short form prospectus underNational Instrument 44-101. Subsection 3.2(3) specifies those provisions of Rule 41-501 General Prospectus Requirements that apply to a distribution underNational Instrument 44-101. Subsection 3.2(4) is a transitional provision allowing distributions under a short form prospectus receipted under NP47 to continuefor one year following the date of the receipt for the preliminary short form prospectus.

Finally, subsection 3.2(5) provides the relief currently contained in the rule In the Matter of The Prompt Offering Qualification System (1997), 20 OSCB 1217which provides exemptive relief from the requirement for issuers to send financial statements filed under the Act to their securityholders if the issuer has filedthose statements earlier than 140 days from the end of its last financial year because it is required to do so under National Instrument 44-101, so long as thefinancial statements are sent to shareholders within the required time period under the Act.

Authority for Proposed National Instrument - Ontario

The following provisions of the Act provide the Commission with authority to adopt the proposed National Instrument and Forms.

Paragraph 143(1)13 of the Act authorizes the Commission to make rules regulating trading or advising in securities to prevent trading or advising that isfraudulent, manipulative, deceptive or unfairly detrimental to investors.

Paragraph 143(1)16 of the Act authorizes the Commission to make rules varying the application of the Act to establish procedures for or requirements in respectof the preparation and filing of preliminary prospectuses and prospectuses and the issuing of

receipts therefor that facilitate or expedite the distribution of securities or the issuing of the receipts, including, requirements in respect of distribution ofsecurities by means of a prospectus incorporating other documents by reference and requirements in respect of pricing of distributions of securities after theissuance of a receipt for the prospectus filed in relation thereto.

Paragraph 143(1)20 of the Act authorizes the Commission to make rules providing for exemptions from the prospectus requirements under the Act and for theremoval of exemptions from those requirements.

Paragraph 143(1)23 of the Act authorizes the Commission to make rules exempting reporting issuers from any requirement of Part XVIII of the Act undercircumstances that the Commission considers justify the exemption.

Paragraph 143(1)39 of the Act authorizes the Commission to make rules requiring or respecting the media, format, preparation, form, content, execution,certification, dissemination and other use, filing and review of all documents required under or governed by the Act, the regulations or the rules and alldocuments determined by the regulations or the rules to be ancillary to the documents, including preliminary prospectuses and prospectuses, proxies andinformation circulars and take-over bid circulars, issuer bid circulars and directors' circulars.

Alternatives Considered

The only alternative method of implementing the POP system would be to amend the securities legislation of the various jurisdictions. The CSA determined thatimplementing the POP system by way of national instrument was the most harmonious and efficient method of carrying forward NP47 and best allowed forperpetuating the existing national regime applicable to distributions by way of short form prospectus.

Unpublished Materials

In proposing the National Instrument, Forms, Policy and Implementing Rule, the CSA have not relied on any significant unpublished study, report or othermaterial.

Anticipated Costs and Benefits

The proposed National Instrument, Forms and Implementing Rule allow issuers to access Canadian capital markets in a very timely fashion and at a lower costthan the cost of distributing securities by way of a long form prospectus, while at the same time maintaining existing levels of investor protection and publicdisclosure. Issuers or selling securityholders carrying out distributions under the POP system can do so by way of "bought deal" underwriting. The consequencesof carrying out a bought deal underwriting is that the seller of the securities often pays lower underwriting commissions than under a distribution by way of along form prospectus. As well, the seller of the securities and the underwriters generally incur less market risk than when the securities are sold under a long formprospectus distribution.

The major cost imposed by the proposed National Instrument, Forms and Implementing Rule on an issuer results from the requirement to prepare and file an AIFif the issuer wishes to be eligible to use the POP system. This results in costs to an issuer in the form of time incurred by their own personnel and legal andaccounting costs in preparing an AIF and assisting in the clearance of an AIF as well as associated filing fees. Reporting issuers in Ontario, unless exempted, aresubject to the requirement to prepare and file an AIF even if they do not wish to distribute securities under the POP system. The CSA are of the view that thebenefits derived from being able to carry out a distribution under the POP system outweigh the costs involved in preparing and filing an AIF.

Regulations to be Amended or Revoked - Ontario

The Commission proposes to revoke subsections 34(1), 38(1) and 81(1) of the Regulation on the coming into force of Rule 41-501 General ProspectusRequirements. In the event that National Instrument 44-101 comes into force before the coming into force of Rule 41-501, the Commission proposes to amendsubsection 34(1) and paragraphs 38(1)7 and 81(1)8 and 9 to replace the references to the Rule "In the Matter of the Prompt Offering Qualification System" andNational Policy Statement No. 47 with a reference to the proposed National Instrument.

In addition, the Commission proposes to amend clause 34(a) of Schedule 1 of the Regulation to add a reference to the proposed National Instrument so thatclause (a) now reads "$2,000, if the reporting issuer has filed an annual information form that has been accepted by the Director under National Instrument44-101 Prompt Offering Qualification System;".

Related Instruments

The proposed National Instrument, Forms, Policy and Implementing Rule are related to Parts XV and XVI of the Act, Parts III and XIII of the Regulation to theAct and to National Policy Statement No. 1.

Specific Requests for Comment

In addition to welcoming submissions on any provision in the proposed National Instrument, Forms, Policy and Implementing Rule, the CSA seek comment onthe specific matters referred to below.

Specific Requests Concerning the Asset Concentration Test

The definition of "asset-backed securities" contained in section 1.1 of the proposed National Instrument does not currently include a limit on the percentage ofthe pool of securitized assets that can be contributed by the same obligor or related obligors. This is sometimes referred to as an "asset concentration test". TheCSA invite comment on the desirability of an asset concentration test.

Specific Requests Concerning Disclosure of an Acquired Business under the Form of Short Form Prospectus

Item 11 of Form 44-101F2 requires that financial statements of an acquired business be included in a prospectus for any completed material acquisition and forany material acquisition that is intended to be completed as disclosed in the prospectus. The financial information concerning the acquired business is notrequired, however, if the financial results of the acquired business have been included in the audited consolidated financial statements of the issuer for a period ofat least six months. The subsection does not contain the alternative requirement, currently found in certain provinces, that the financial statements of an acquiredbusiness must be included if 40 percent or more of the proceeds of the issue are to be applied, directly or indirectly, to finance the acquisition of the businesswhether or not the acquisition is material. The CSA concluded that the key determination should be the materiality of the acquisition to the issuer, not theamount or percentage of the proceeds that are to be applied towards the purchase. A discussion of the meaning of "materiality" for this purpose is set out insubsection 7.4(2) of the proposed Policy.

In revising the requirements for financial disclosure in connection with business acquisitions, the CSA considered SEC Release No. 33-7355; 34-37802;International Series Release No. 1021 dated October 10, 1996, which amended the existing provisions set forth in Rule 3-05(b) of Regulation S-X under theUnited States Securities Act of 1933 regarding inclusion of financial statements of acquired businesses (the "SEC Release"). Under SEC Rule 3-05(b), the extentof financial statement disclosure of an acquired business is determined not on the basis of whether the proceeds of the issue are to be applied to the acquisition,but instead on the basis of the significance of the acquisition to the business of the issuer determined by reference to a "sliding scale". The effect of the SECRelease is to raise the thresholds of "significance" that determine whether financial statements must be included so as to encourage issuers to offer their securitiesunder registered offerings rather than unregistered offerings under Regulation S. The CSA chose not to adopt the "sliding scale approach" reflected in the SECRelease as the current disclosure requirement based on materiality appears to work well in practice.

In proposing the requirement to include the financial history of an acquired business unless the financial results of the acquired business have been included in theaudited consolidated financial statements of the issuer for a period of at least six months, the CSA is trying to strike a balance between providing prospectiveinvestors with relevant historical financial information of an acquired business and ensuring that the disclosure requirements for issuers are not overly onerous. Ata certain point in time the results of the acquired business will have formed part of the issuer's historical financial disclosure so that a separate history relating tothe acquired business is not necessary. The CSA is of the view that after six months there would be sufficient history to provide an understanding of the financialresults.

Although the CSA has proposed that the financial information concerning an acquired business be provided unless the "six month test" is met, the CSArecognizes that each acquisition is to some extent fact specific and that it is difficult to set out one test that can be applied consistently to each fact situation. Forthat reason, the CSA invite comment on the proposed test and any suggested alternative tests which should be considered. For example, one alternative may beto combine the "six month test" with a provision that indicates that disclosure would not be required for acquisitions which took place longer than 12 months agoeven if the there was less than six months of audited consolidated financial information.

Item 11 of Form 44-101F2 reflects the direction taken in the proposed long form prospectus form in Ontario, Form 41-501F1 Information Required In AProspectus. Comments submitted on proposed Form 41-501F1 Information Required In A Prospectus in this regard will be considered by the CSA in the contextof item 11 of Form 44-101F2. The comments do not need to be submitted again.

Specific Requests Concerning AIF Disclosure for Issuers with Oil and Gas Operations or other Natural Resource Operations

Item 4(3) of the proposed form of AIF, Form 44-101F1, contains disclosure specifically applicable to issuers with natural resource operations, other than oil andgas operations. Item 4(4) of proposed Form 44-101F1 contains disclosure specifically applicable to issuers with oil and gas operations and has been expandedsignificantly compared to item 3(1)(j) of Appendix A of NP47. The CSA invites comment on the appropriateness and comprehensiveness of the disclosurerequired by items 4(3) and (4) of Form 44-101F1.

Comments

Interested parties are invited to make written submissions with respect to the proposed National Instrument, Forms, Policy and Implementing Rule. Submissionsreceived by May 22, 1998 will be considered.

Submissions should be addressed to all of the Canadian securities regulatory authorities listed below in care of the Ontario Securities Commission, in duplicate,as indicated below:

Submissions should also be addressed to the Commission des valeurs mobilières du Québec as follows:

Claude St-Pierre, Secretary
Commission des valeurs mobilières du Québec
800 Victoria Square
Stock Exchange Tower
P.O. Box 246, 17th Floor
Montréal, Québec H4Z 1G3

A diskette containing an electronic copy of the submissions (in DOS or Windows format, preferably WordPerfect) should also be submitted. As securitieslegislation in certain provinces requires that a summary of written comments received during the comment period be published, confidentiality of submissionscannot be maintained.

Questions may be referred to any of:

Agnes Lau
Deputy Director, Securities Analysis
Alberta Securities Commission
(403) 422-2191

Susan Wolburgh Jenah
Manager, Market Operations
Ontario Securities Commission
(416) 593-8245

Ram Ramachandran
Associate Chief Accountant
Ontario Securities Commission
(416) 593-8253

Pierre Martin
Conseiller juridique
Commission des valeurs mobilières du Québec
(514) 873-5326

Rescission of National Policy Statement No. 47

NP47 is replaced by the proposed National Instrument.

The text of the proposed rescission is:

"National Policy Statement No. 47 Prompt Offering Qualification System is rescinded effective upon the date proposed National Instrument 44-101 comes intoforce."

Proposed National Instrument, Forms, Companion Policy and Implementing Rule

The text of the proposed National Instrument, Forms, Policy and Implementing Rule follows, together with footnotes that are not part of the proposed NationalInstrument, Forms, Policy and Implementing Rule but have been included to provide background and explanation. A Table of Concordance also follows but isnot part of the instruments.

1. National Instrument 14-101 Definitions came into force on April 1, 1997. In Ontario, the National Instrument was published in the Ontario SecuritiesCommission Bulletin (1997), 20 OSCB 1727. In addition, certain jurisdictions, such as Ontario, have local definition rules. In Ontario, Rule 14-501 Definitionscame into force on July 29, 1997 and was published in the Ontario Securities Commission Bulletin (1997), 20 OSCB 4054.