Notice, Proposed Rule, Proposed Companion Policy: OSC Rule - 45-501 - Ontario Prospectus and Registration Exemptions
Notice, Proposed Rule, Proposed Companion Policy: OSC Rule - 45-501 - Ontario Prospectus and Registration Exemptions
NOTICE OF PROPOSED 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
Introduction
This Notice is accompanied by a proposed Rule, two Forms and a Companion Policy, each of which is being published for review and comment. Proposed Rule45-501 Exempt Distributions consolidates various provisions currently set forth in the following rules (the "Replacement Rules") of the Ontario SecuritiesCommission (the "Commission"):
(1) In the Matter of Trades by Issuers Upon Exercise of Certain Conversion or Exchange Rights and In the Matter of the First Trade in Securities AcquiredUpon Exercise of Such Conversion or Exchange Rights (1997), 20 OSCB 1218, that incorporated by reference a Blanket Ruling of the same name (1994), 17OSCB 2877 ("Trades by Issuers on Certain Conversions or Exchanges"),
(2) In the Matter of Certain Proposed Amendments (1997), 20 OSCB 1220, that incorporated by reference a Blanket Order of the same name (1987), 10 OSCB5936 ("Hold Periods and 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 of Securities of a Company to Another Company inConnection with an Amalgamation, an Arrangement or a Specified Statutory Procedure (1997), 20 OSCB 1218, that incorporated by reference a BlanketRuling of the same name (1994), 17 OSCB 1975 ("Trades on Securities Exchange Issuer Bids and Amalgamations"),
(4) In the Matter of Trades in Securities of a Private Company Under the Execution Act (1997), 20 OSCB 1218, that incorporated by reference a BlanketRuling of the same name (1985), 8 OSCB 127 ("Trades in Securities of a Private Company"),
(5) In the Matter of Certain Amendments (1997), 20 OSCB 1218 that incorporated by reference a Blanket Ruling of the same name (1983), 6 OSCB 3508, and
(6) In the Matter of Dividend Reinvestment Plans (1997), 20 OSCB 1218 that incorporated by reference a Blanket Ruling of the same name (1994), 17 OSCB1178 ("Dividend Reinvestment Plans"),
In addition, certain provisions of Ontario Securities Commission Policy Statement No. 6.1 ("Policy 6.1") and sections 14 to 32 and 67 and 68 of the Regulationto the Securities Act (Ontario) (the "Act") (other than clauses 14(e) and 19(5) of the Regulation which are incorporated in Rule 45-502 Dividend or InterestReinvestment and Stock Dividend Plan and clause 14(g) which will be incorporated in Rule 32-503 Registration and Prospectus Exemptions for Trades byFinancial Intermediaries in Mutual Fund Securities to Corporate Sponsored Plans and section 15 which will be revoked by an amendment to Rule 32-503) andsubsection 69(3) and clause 151(a) of the Regulation are restated in this proposed Rule. Sections 22 and 25 of Schedule I to the Regulation are also restated inthis proposed Rule.
The attached table of concordance summarizes the proposed treatment of each of these instruments and provisions.
Substance and Purpose of Proposed Rule and Forms
As will be evident from the text of the proposed Rule, Companion Policy and Forms, as well as the description of the instruments set out below, the scope of thereformulation exercise was to consolidate and streamline existing exemptions and requirements relating to exempt distributions. The scope of the projectinvolved clarifying existing requirements, ensuring consistency within the existing framework and providing additional exemptive relief in certain situations asnoted.
The Commission hopes that the proposed Rule and related instruments will be viewed as an improvement over the existing provisions relating to exemptdistributions which are interspersed throughout, in addition to the Act, the Regulation, Policy 6.1, and the Replacement Rules. However, the Commissionrecognizes that the proposed Rule and related instruments are, at best, only partial, interim measures in addressing the administrative burdens, expense andcomplexity of the closed system generally. 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 will necessitate a reconsideration of whether,and to what extent, the existing "closed system" framework would have to be altered, or perhaps eliminated, in such an environment.
The purpose of the proposed Rule is to consolidate the requirements concerning exempt distributions currently contained in Part III of the Regulation, theReplacement Rules and certain provisions of Policy 6.1 which are to be adopted as a rule. The proposed Rule establishes some new exemptions from theregistration and prospectus requirements of the Act. The proposed Rule also provides for the removal of certain exemptions in the Act and the proposed Ruleunless certain requirements contained in the proposed Rule are met. The proposed Rule also sets out restrictions on the resale of securities purchased in relianceon certain exemptions.
Form 45-501F1 replaces Form 20 of the Regulation as the form of reporting trades under certain prospectus exemptions contained in subsection 72(1) of the Actand certain sections of the proposed Rule. Form 45-501F2 replaces Form 21 of the Regulation as the form of reporting trades under subsection 72(4) of the Actand certain sections of the proposed Rule.
Substance and Purpose of Proposed Companion Policy
The purpose of the proposed Policy is to set forth the views of the Commission as to the manner in which the proposed Rule and the provisions of the Actrelating to exempt distributions are to be interpreted and applied. The proposed Policy provides the views of the Commission on matters relating to exemptdistributions such as the concurrent use of different private placement exemptions and the application of the restrictions in sections 3.3 and 3.4 of the proposedRule on the use of the exemptions contained in clause 72(1)(d) of the Act and section 2.11 of the proposed Rule in respect of entities that have been created, orused, for the purchase of securities without a prospectus. The proposed Policy also provides some guidance concerning the availability of exemptions for certainamalgamations, the use of an offering memorandum and the use of a securities exchange take-over bid circular to become a reporting issuer.
Summary of Proposed Rule
Part I of the proposed Rule contains definitions, many of which are based on definitions in the Replacement Rules and others of which are included from theRegulation. A definition of "government incentive securities" has been included based on the list of securities designated by the Commission in Policy 6.1 but thislist has been updated to reflect recent developments in tax legislation and in that regard to add a new type of government incentive security. A new term, "privateissuer", has been defined in the proposed Rule. This term is based upon a similar concept in the Securities Act (British Columbia) and has been included for use ina new exemption for distributions by unincorporated private entities. The definition in the proposed rule is more restricted than the definition in the Securities Act(British Columbia) as it brings into the definition 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 "double convertible security" is included in the proposed Rule in order to deal witha gap in the Replacement Rules where the exemption currently extends to one level of conversion.
An interpretation section has been included to assist in interpreting the term "affiliated entity" which is used in the proposed Rule. The interpretation provisionsare based on subsection 1(2), (3) and (4) of the Act but are broader as they extend to unincorporated entities.
Part 2 of the proposed Rule provides for certain exemptions from the registration and prospectus requirements in addition to those contained in the Act. Theseexemptions are, for the most part, a restatement of the exemptions contained in the Replacement Rules and sections 14, 17, 18, 20 and 21 of the Regulation.Sections 2.1 to 2.5 of the proposed Rule restate the prospectus exemptions in section 14 of the Regulation. Where appropriate these provisions have beenamended to correct ambiguities or inconsistencies. The existing exemption in clause 14(f) has been restated in section 2.4 of the proposed Rule; however, it hasbeen amended to parallel 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 directorof the issuer or an affiliate of the issuer in reliance on this exemption unless they otherwise meet the net worth or advice requirement of this exemption.
Section 2.6 restates the provisions of section 18 of the Regulation as part of the proposed Rule. Clause 18(e) of the Regulation has been changed to specify thatthe 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 thisreport must be filed within three days.
Sections 2.7 and 2.8 restate the prospectus and registration exemptions provided in the rule Trades on Securities Exchange Issuer Bids and Amalgamations.Section 2.7 provides an exemption from the registration and prospectus requirements for trades in securities issued by an issuer to its securityholders inconnection with a securities exchange issuer bid. Section 2.7 amends the existing provisions so that compliance with the issuer bid provisions of the Act is nolonger required as a condition to relying on the exemption. Section 2.8 provides an exemption for trades made in connection with a statutory amalgamation orarrangement or other procedure. This extends the existing exemption in clause 72(1)(i).
Sections 2.9 and 2.10 restate the prospectus and registration exemptions provided in the rule Trades by Issuers on Certain Conversions or Exchanges andextend these provisions to cover double convertible securities. The sections restate the exemptions available through the rule for trades by an issuer when theissuer causes the holder to convert or exchange. In order to use the exemption in section 2.10 for a forced exchange, the exchange issuer must satisfy conditionswhich are parallel to the conditions set out in subclause 72(1)(h)(ii) of the Act. The filing of the notice and payment of a fee which are conditions subsequent tothe use of the exemption stipulated in that rule have been restated in section 7.5 of the proposed Rule and the filing of the notice is no longer a condition torelying on the exemption in section 2.9.
Section 2.11 creates a new exemption from the registration and prospectus requirements for purchases of units of securities of one or more issuers, other thanmutual funds or non-redeemable investment funds, that in the aggregate have an acquisition cost to the purchaser of not less than $150,000, provided that, if thesecurities are of more than one issuer, the issuers are affiliated entities and are engaged in the same or related types of businesses. This exemption is based onitem 3 of paragraph B of Policy 6.1 and expands the exemptions in paragraph 5 of subsection 35(1) and clause 72(1)(d) of the Act. Issuers that are mutual fundsor non-redeemable investment funds are excluded as 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 exemption for trades in securities of a private issuerby a sheriff.
Section 2.13 restates the prospectus exemption contained in the rule Hold Periods and First Trades for Convertible Securities and Underlying Securities. Thisrule stipulates that the relevant hold period for convertible securities acquired under certain exemptions gets the benefit of the status of the underlying security.As drafted in the proposed Rule the exemption has been expanded from the exemption contained in the rule to provide similar treatment for first trades inexchangeable securities and double convertible securities. It is now clear from the wording of this section that the relevant hold period runs from the date ofacquisition of the security by the seller and that the seller is not permitted to "tack" on the amount of time that the securities have been held in a previous exempttrade by someone else. The Companion Policy describes this view of the Commission in respect of the Act.
Sections 2.14 and 2.15 restate the provisions of section 17 of the Regulation which create an exemption for first trades in securities acquired in connection withcertain take-over bids and for first trades in securities traded to facilitate the incorporation of the issuer if the purchaser is a promoter of the issuer. The first traderelief in section 2.14 of the proposed Rule is conditional on the offeror in the take-over bid being a reporting issuer before the filing of the securities exchangetake-over bid.
Section 2.16 creates an exemption for a first trade in underlying securities if the distribution of the double convertible, convertible and exchangeable security isqualified by a prospectus. This exemption is based on the exemption contained in Trades by Issuers on Certain Conversions or Exchanges and has been amendedto contemplate double convertible securities and to delete the provisos that at the time of the trade the issuer is a reporting issuer and no unusual effort is madeto prepare the market or create demand. These provisos have been deleted on the basis that they were not necessary if the initial offering had been qualified by aprospectus.
Section 2.17 is a new exemption for non-corporate private issuers parallel to the private company exemptions in paragraph 35(2)10 and clause 73(1)(a) of theAct.
Section 2.18 restates sections 20 and 21 of the Regulation as part of the proposed Rule.
Part 3 of the proposed Rule provides for the removal of exemptions contained in the Act and in the Rule if certain conditions are not met.
Sections 3.1 and 3.5 provide that the exemptions contained in paragraphs 5 and 18 of subsection 35(1) and clauses 72(1)(d) and 72(1)(l) of the Act are notavailable if the aggregate acquisition cost to the purchaser, or the fair value of the assets purchased, is less than $150,000. These provisions are based on and willreplace sections 27 and 28 of the Regulation. 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 Act and section 2.11 of the proposed Rule arenot available unless the aggregate acquisition cost is satisfied by the payment of cash or other immediately available funds by the purchaser or the incurrence orassumption 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 for the liabilities and there is no understanding,arrangement or expectation that the liabilities or the obligation to pay them will be waived and the acquisition cost including the liabilities that are incurred orassumed by the purchaser, has a fair value 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) and clause 72(1)(d) of the Act and section2.11 of the proposed Rule are not available if the purchaser is an entity that is created, or is being used, primarily to permit purchases without a prospectus andthe share or portion of the aggregate acquisition cost of the securities of each member or partner of the partnership, syndicate or unincorporated organization,each beneficiary of the trust or each shareholder of the company, as the case may be, is less than $150,000. This section is based on the provisions of item 4 ofparagraph B of Policy 6.1.
Section 3.4 is a new provision which provides that the registration and prospectus exemptions contained in paragraph 5 of subsection 35(1) and clause 72(1)(d)of the Act and section 2.11 of the proposed Rule are not available for a trade in a security if the purchasing entity is an investment club unless the share orportion of the aggregate acquisition cost of each 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 made in all jurisdictions exceed the specifiedmaximum numbers. This provision is based on and will replace section 31 of the Regulation and expands its application to cover the registration exemption inparagraph 21 of subsection 35(1) of the Act. In addition, this section removes the registration and prospectus exemptions for trades to a parent, brother or sisterof any director or senior officer of the issuer or an affiliated entity of the issuer.
Section 3.7 provides that the exemptions contained in clause 72(1)(p) of the Act and section 2.4 of the proposed Rule are not available if the number of membersor partners in a partnership, syndicate, unincorporated organization or other entity created or used primarily to permit purchases of securities without aprospectus exceeds the number of prospective purchasers and purchasers referred to in clause 72(1)(p) of the Act or section 2.4 of the proposed Rule.
Sections 3.8 and 3.9 restate the provisions of section 22 of the Regulation as part of the proposed Rule.
Section 3.10 restates the provisions of section 24 of the Regulation as part of the proposed Rule and section 3.11 restates section 25 of the Regulation as part ofthe proposed Rule with certain amendments to include the exemption provided for control person distributions in the rule In the Matter of DividendReinvestment Plans and the exemptions in Rule 45-503 Trades to Employees, Executives, Certain Consultants and Their Companies and RRSPs and Employeeand Executive Trusts. Certain changes have been made to provide tacking relief and restrictions similar to those provided in sections 2.13 and 6.4 of theproposed Rule which provide that the status of the underlying security will effect the relevant hold period for the convertible or exchangeable instrument. A newprovision has been added as subsection 3.11(5) of the proposed Rule to permit the period of time during which a security has been held by an affiliated entity ofthe seller to be included in calculating the relevant hold period imposed on control persons in this section. This provision reflects relief granted by theCommission in the past to allow tacking among control group affiliates.
Section 3.12 provides that the registration exemption in certain sections of the proposed Rule is not available to market intermediaries. This is consistent with theprovisions of subsection 206(1) of the Regulation.
Part 4 provides that certain private placement exemptions are not available if a contractual right of action is not provided when an offering memorandum isdelivered in connection with the use of certain exemptions. This provision is based on and replaces section 32 of the Regulation. The definition of contractualright of action contained in section 32 of the Regulation will be included in the amended Rule 14-501 Definitions to provide that the right of action shall beagainst the selling securityholder for rescission or damages rather than just against the issuer. The definition has also been amended to expand the period of timewithin which notice can be given after payment for the securities from 90 days to 180 days. The Commission notes that one of the recommendations in the reportof the Toronto Stock Exchange Committee on Corporate Disclosure "Responsible Corporate Disclosure" is that there be statutory liability for statements inoffering memoranda. If this recommendation is accepted, it is expected that the Act will be amended and contractual rights of action will no longer be required.
Part 5 provides that exemptions from the registration and prospectus requirements that refer to a registered dealer are unavailable unless the dealer is registeredto act as a dealer for the trade described in the exemption. This provision is based on and replaces section 30 of the Regulation.
Part 6 provides for restrictions on first trades in securities acquired under certain exemptions. The restrictions are primarily based on and replace the restrictionsset out in section 19 of the Regulation, (excluding subsection 19(5) which is dealt with in Rule 45-502 Dividend or Interest Reinvestment and Stock DividendPlans) and 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 Issuers on Certain Conversions or Exchanges.This section also restates in part the resale provisions of Trades by Issuers on Certain Conversions or Exchanges and provides that securities acquired on aforced conversion or exchange of a double convertible, convertible or exchangeable security which was acquired in a 72(4) trade (which is a defined term in theproposed 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 and provides that securities acquired upon a forcedconversion or exchange of a double convertible, convertible or exchangeable security which was acquired in a 72(5) trade (which is a defined term in theproposed Rule) will have resale restrictions 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. In addition, section 6.6 of the proposed Rulealso establishes first trade requirements in respect of securities of a private issuer after that issuer has ceased to be a private issuer. This parallels the similar resalerestrictions imposed in respect of securities of a private company when it ceases to be a private company.
Part 7 provides for the form of reports to be filed in connection with private placement and the resale of shares acquired under such exempt distributions, basedon the existing Form 20 and Form 21. This provision is based on and replaces section 67 and 68 of the Regulation and sections 22 and 25 of Schedule 1 to theRegulation. The reports are to be filed in the form of proposed Forms 45-501F1 and 45-501F2. Form 45-501F1 is the replacement to Form 20 and is required tobe filed in the circumstances prescribed under subsection 72(3) of the Act and in connection with trades made under sections 2.4, 2.5 or 2.11 of the proposedRule. Form 45-501F2 is the replacement to Form 21 and is required to be filed in the circumstances prescribed under clause 72(4)(c) of the Act and undersections 2.13, 6.2 or 6.4 of the proposed Rule. In addition, section 7.6 restates and replaces subsection 69(3) of the Regulation.
Summary of Proposed Policy
Parts 2 and 3 of the Policy provide guidance as to the view of the Commission concerning the availability and use of certain exemptions. Section 2.1 of the Policyprovides the view of the Commission that a vendor of securities may rely concurrently on different private placement exemptions, except that concurrent relianceon clause 72(1)(p) of the Act and section 2.4 of the proposed Rule does not appear to be possible. Section 2.1 also provides the view of the Commission that, ifprospective purchasers are solicited with respect to a private placement of securities and the securities are ultimately sold to some of the purchasers under clause72(1)(d) of the Act or section 2.11 of the Rule and other purchasers under clause 72(1)(p) of the Act or section 2.4 of the proposed Rule, all persons solicitedwith respect to the private placement should be counted for the purposes of the "fifty" and "seventy-five prospective purchasers" solicitation rules in clause72(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 to achieve reporting issuer status and cautionsissuers that the filing of a securities exchange take-over bid circular does not necessarily result in reporting issuer status under the Act unless the securitiesexchange take-over bid circular filed complies 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 by companies governed by a statute of anyjurisdiction 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-cornered amalgamations.
Section 2.5 of the Policy sets out the Commission's view that "tacking" of hold periods is not permitted. As noted above, the proposed Rule provides for certainexceptions to this general prohibition.
Part 3 of the Policy provides the views of the Commission with respect to certain aspects of the interpretation of the private placement exemptions contained inclause 72(1)(d) and section 2.11 of the proposed Rule. Section 3.1 indicates that the exemptions contained in clause 72(1)(d) of the Act and section 2.4 of theproposed Rule are available to entities which are created or used, primarily for the purchase of securities without a prospectus and investment clubs only if eachmember, partner, beneficiary or shareholder of the entity, as the case may be, contributed at least $150,000 for the securities purchased under the exemption.Section 3.2 provides examples of liabilities which do not in the view of the Commission satisfy the requirements of subsection 3.2(2)(a) of the proposed Rulewith respect to whether the aggregate acquisition cost has been satisfied by the incurrence or assumption of liabilities by purchasers and the factors to be takeninto account in determining 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 the private placement exemption in section 2.11of the proposed Rule for units or blocks of securities having a minimum acquisition cost of $150,000 and notes that different resale provisions for differentsecurities which comprise the block or unit may result. Part 4 provides the views of the Commission as to the use of offering memoranda in connection withprivate placements. Section 4.1 sets forth the view of the Commission that the obligation to provide a contractual right of action for rescission or damagesapplies both when the offering memorandum is required to be provided under section 4.1 of the proposed Rule and when the offering memorandum is providedvoluntarily in connection with the exempt trades specified under clause 72(1)(c), (d) or (p) of the Act and section 2.11 of the proposed Rule. The Commissionalso provides its views as to the content of an offering memorandum, indicating the content of an offering memorandum is not prescribed apart from thecontractual right of action contemplated by Part 4 of the proposed Rule and the requirements relating to future oriented financial information as contemplated byNational Instrument 52-101 Future Oriented Financial Information. The Commission also notes that the use of the exemptions contained in each of clause72(1)(p) of the Act and section 2.4 of the proposed Rule contain requirements relating to the information to be provided to an investor. The Commissioncautions against providing preliminary offering material to investors before providing the "final" offering memorandum unless the contractual right of action isdescribed.
In section 4.2 of the Policy, the Commission notes that the contractual right of action, in order to correspond to the rights provided in section 130 of the Act,must include the right of an investor to hold the parties against whom it has a right of action, jointly and severally liable.
Part 5 of the proposed Policy indicates that the offering material used by the vendors of securities who rely on private placement exemptions is not generallyreviewed and commented upon by Commission staff.
Authority for Proposed Rule
The following sections of the Act provide the Commission with authority to adopt the proposed Rule and Forms. Paragraphs 143(1)8 and 20 authorize theCommission to make rules which provide for exemptions from the registration and prospectus requirements under the Act and for the removal of exemptionsfrom those requirements. Paragraph 143(1)11 authorizes the Commission to make rules regulating the listing or trading of publicly traded securities andparagraph 143(1)13 authorizes the Commission to make rules regulating trading or advising in securities to prevent trading or advising that is fraudulent,manipulative, deceptive or unfairly detrimental to investors. Paragraph 143(1)39 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 thisAct, the regulations or the rules and all documents determined by the regulations or the rules to be ancillary to the documents and paragraph 143(1)43 authorizesthe Commission to make rules prescribing fees.
Related Instruments
The proposed Rule and Companion Policy are related in that they deal with the same subject matter. The Companion Policy is related to Parts XII and XVII ofthe Act and Parts III and V of the Regulation.
Alternatives Considered
The Commission first published a version of Policy 6.1 in 1976. The policy clarified the Commission's interpretation of certain provisions of the Act and in somecases extended and in other cases restricted the availability of exemptions from the prospectus and registration requirements of the Act. The Commissionconsidered the most appropriate way in which to regulate exempt distributions and determined that certain provisions of Policy 6.1 should be preserved in a Ruleand that a number of the provisions of the Regulation and Replacement Rules which also regulate exempt distributions should be restated in the same Rule forease of reference by market participants. No other alternatives were considered.
Unpublished Materials
In proposing the Rule and the Companion Policy, the Commission has not relied on any significant unpublished study, report or other material.
Anticipated Costs and Benefits
As the proposed Rule and Forms do not impose any significant new obligations on market participants, it does not impose any incremental costs to thosecurrently imposed on market participants engaged in exempt transactions. By further clarifying requirements relating to exempt distributions and expandingcertain existing exemptions to reflect discretionary relief granted by the Commission in the past, and by adding to the proposed Rule certain provisions relating todistribution exemptions that are currently in the Regulation and Replacement Rules for ease of reference, it is anticipated that further benefits will be provided tomarket participants.
Based on the foregoing, the Commission believes that the benefits of the proposed Rule outweigh the costs, if any.
Regulations to be Revoked
The Commission will request the Lieutenant Governor in Council to revoke the following provisions in the Regulations:
(i) sections 14 (other than 14(e) and (g), 16, 17, 18, 19 (other than 19(5)), 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 67 and 68,
(ii) subsection 69(3),
(iii) clause 151(a),
(iv) Schedule I, Section 22, Section 25, and
(v) Forms 20 and 21 to the Regulation.
Comments
Interested parties are invited to make written submissions with respect to the proposed Rule. Submissions received by January 15, 1998 will be considered.
Submissions should be made to:
Daniel P. Iggers, SecretaryOntario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8
A diskette containing an electronic copy of the submissions (in DOS or Windows format, preferably WordPerfect) should also be submitted. As the Act requiresthat a summary of written comments received during the comment period be published, confidentiality of submissions received cannot be maintained.
Questions may be referred to:
Susan Wolburgh JenahManager, Market Operations
Ontario Securities Commission
(416) 593-8245
or
Iva VranicLegal Counsel, Market Operations
Ontario Securities Commission
(416) 593-8115
Text of Proposed Rule
The text of each of the proposed Rule, the Companion Policy and Forms follows, together with footnotes that are not part of the proposed Rule or Forms buthave been included to provide background and explanation.
Rescission of Policy
The proposed Rule will result in the rescission of Policy 6.1. The text of the proposed rescission will be as follows:
"Policy 6.1 is hereby rescinded."
DATED: October 17, 1997.
ONTARIO SECURITIES COMMISSION RULE
45-501
EXEMPT DISTRIBUTIONS
PART 1 DEFINITIONS1.1 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 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 Double Convertible Security, Convertible Security or Exchangeable Security 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 or Exchange 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 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 Security Exemptions 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 Offering Memorandum
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 Double Convertible Security, Convertible Security or an Exchangeable Security Acquired Under CertainExemptions
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 45-502F2
7.3 Fees for Form 45-501F1
7.4 Fees for Form 45-501F2
7.5 72(4) Reports
7.6 72(5) Reports
7.7 Fees for Trade Made Under Section 2.8
ONTARIO SECURITIES COMMISSION RULE 45-501
EXEMPT DISTRIBUTIONS(1)
PART 1 DEFINITIONS(2)
1.1 Definitions - In this Rule
"convertible security" means a security of an issuer that is convertible into or carries the right of the holder to purchase or of the issuer to cause the purchase of,a security of the same issuer;(3)
"double convertible security" means a security of an issuer that is convertible into or exchangeable for, or carries the right of the holder to purchase or of theissuer or exchange issuer to cause the purchase of a convertible security, an exchangeable security or another double convertible security;(4)
"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 the holder to purchase or of the exchange issuer to cause thepurchase of a security of another issuer that is a reporting issuer;(5)
"exchange issuer" means an issuer that distributes securities of a reporting issuer held by it in accordance with the terms of an exchangeable security of its ownissue;
"formal bid" has the meaning ascribed to that term in subsection 89(1) of the Act;
"government incentive security(6)" means
(a) a security, or unit or interest in a partnership that invests in a security, that is issued by a company and for which the company has agreed to renounce infavour of the holder of the security, unit or interest, amounts that will constitute Canadian exploration expense, as defined in subsection 66.1(6) of the ITA, orCanadian development expense, as defined in subsection 66.2(5) of the ITA, or Canadian oil and gas property expense, as defined in subsection 66.4(5) of theITA;
(b) a unit or interest in a partnership or joint venture that is issued in order to fund Canadian exploration expense as defined in subsection 66.1(6) of the ITA orCanadian development expense as defined in subsection 66.2(5) of the ITA or Canadian oil and gas property expense as defined in subsection 66.4(5) of theITA;(7)
(c) a unit or interest in a partnership or joint venture(8) the sole purpose of which is(9) to carry out a programme of mineral exploration designated by the Ministerof Natural Resources under the Ontario Mineral Exploration Program Act; or
(d) a security that entitles the acquiror to a unit of a limited partnership the sole purpose of which is to carry out scientific research activities as defined bysubsection 37(7) of Regulation 2900 under the ITA;
"hold period" means that period of either six, 12 or 18 months that would be applicable to a security if it had been acquired under an exemption referred to insubsection 72(4) of the Act;
"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 or more agreements among the issuer and the holders of itssecurities; and
(ii) are beneficially owned, directly or indirectly, by not more than 50 persons, counting any two 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 an affiliated entity of it and at all times since ceasing to be soemployed have continued to beneficially own, directly or indirectly, at least one share of the issuer; and
(c) has not distributed any securities to the public.(10)
"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 thisRule;
"72(5) trade" means a trade in a security under the exemption in clause 72(1)(f), (h), (i), (j), (k) or (n) of the Act, section 2.1 or 3.1 of Rule 45-502 Dividend orInterest Reinvestment and Stock Dividend Plans, section 2.2, 2.3, 3.1, 3.2, 5.1 or 8.1 of Rule 45-503 Trades to Employees, Executives, Certain Consultants andTheir Companies and RRSPS and Employee and Executive Trusts 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 with the terms of a convertible security or anexchangeable security or a double convertible security.(11)
1.2 Interpretation
(1) A person or company is considered to be an affiliated entity(12) of another person or company if one is a subsidiary entity of the other or if both are subsidiaryentities of the same person or company, or if each of them is controlled by the same person or company.
(2) 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 percent of the votes for the election of directors are held otherwise than byway of security only, by or for the benefit of the other person or company and
(ii) the votes carried by such securities are entitled, if exercised, to elect a majority of the directors of the first-mentioned person or company;
(b) in the case of a partnership that does not have directors, other than a limited partnership the second-mentioned person or company holds more than 50percent of the interests in the partnership; or
(c) in the case of a limited partnership, the general partner is the second-mentioned person or company;
(3) A person or company is considered to be a subsidiary entity of another person or company, 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
(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(13)
(1) Sections 25 and 53 of the Act do not apply to a trade by a company licensed under the Insurance Act in 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 than three quarters of the premiums paid up to age 75 for a benefitpayable at maturity;
(c) an arrangement for the investment of policy dividends and policy proceeds in a separate and distinct fund to which contributions are made only from policydividends and policy proceeds; or
(d) a variable life annuity.
(2) For the purposes of subsection (1), "contract", "group insurance", "life insurance" and "policy" have the respective meanings ascribed to them by sections 1and 171 of the Insurance Act.(14)
2.2 Exemption for a Trade Among Control Persons or to the Issuer(15) - Sections 25 and 53 of the Act do not 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 person or company referred to in clause (c) of the definition ofdistribution 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 of the issuer.
2.3 Exemption for a Trade to a Promoter(16) - Sections 25 and 53 of the Act do not apply to a trade by an issuer in a security of its own issue to a promoter ofthe issuer or a trade by a promoter of the issuer to another promoter of the issuer in a security of the issuer.
2.4 Exemption for a Trade by a Promoter or Issuer in a Government Incentive Security(17) - Sections 25 and 53 of the Act do not apply to a trade by apromoter of an issuer, or by an issuer, in a security of the issuer that is a government incentive security, if
(a) in the aggregate in all jurisdictions, not more than 75 prospective purchasers are solicited resulting in sales to not more than 50 purchasers;
(b) prospective purchasers are given a contractual right of action;(18)
(c) before entering into an agreement of purchase and sale(19), the prospective purchaser has been supplied with an offering memorandum(20) that includesinformation
(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 years before the date of the offering memorandum of each officer,director and promoter of the issuer 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 the issuer,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 the issuer that a prospectus filed under the Act would provide and
(i) because of net worth and investment experience or because of consultation with or advice from a person or company that is not a promoter of the issuer andthat is an adviser or dealer registered under the Act, is able to evaluate the prospective investment on the basis of information about the investment presented tothe prospective purchaser by the issuer or selling securityholder; or
(ii) is a senior officer or director of the issuer or of an affiliated entity of the issuer or a spouse or child of any director or officer of the issuer or of an affiliatedentity of the issuer,
(e) the offer and sale of the security is not accompanied by an advertisement and no selling or promotional expenses have been paid or incurred for the offer andsale, except for professional services or for services performed by a dealer registered under the Act; and
(f) section 3.7 does not make the exemption unavailable.
2.5 Exemption for a Trade in Seed Capital or Government Incentive Securities(21) - Sections 25 and 53 of the Act do not apply to a trade in a security thatwas previously acquired under the exemption in clause 72(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 the trade 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 the not more than 50 purchasers.
2.6 Exemption for a Trade by a Control Person in a Security Acquired Under a Formal Take-Over Bid(22)
(1) Section 53 of the Act does not apply to a trade that is a control person distribution in a security that was 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 bid circular for the take-over bid;
(c) the trade is made within the period commencing on the day of the expiry of the bid and ending 20 days after that day;
(d) a notice of intention and a declaration prepared in accordance with Form 23 to the Regulation are 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 completion of the trade; and
(f) no unusual effort is made to prepare the market or to create a demand for the securities and no extraordinary commission is paid for the trade.
(2) Paragraph (1)(b) does not apply to a trade to another person or company that made a competing formal bid for securities of the same issuer for a per securityprice not greater than the per security consideration 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(23) - Sections 25 and 53 of the Act do not apply to a trade in a security thatis exchanged by or for the account of the offeror with a 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 in default under the Act or the regulations.
2.8 Exemption for a Trade on an Amalgamation, Arrangement or Specified Statutory Procedure(24) - Sections 25 and 53 of the Act do not apply to a tradein a security of an issuer in connection with
(a) a statutory amalgamation or arrangement; or
(b) a statutory procedure under which one company takes title to the assets of the other company that in turn loses its existence by operation of law or underwhich the existing companies merge into a new company.
2.9 Exemption for a Trade Upon Exercise of Conversion Rights in a Convertible Security(25) - Sections 25 and 53 of the Act do not apply to a trade by anissuer in an underlying security of its own issue to a holder of a convertible security or double convertible security of the issuer on the exercise by the issuer of itsright under the convertible security or double convertible security to cause the holder to convert into or purchase the underlying security or on the automaticconversion of the convertible security or double convertible security, if no commission or other remuneration is paid or given to others for the trade except forministerial or professional services or for services performed by a registered dealer.(26)
2.10 Exemption for a Trade Upon Exercise of Exchange Rights in an Exchangeable Security - Sections 25 and 53 of the Act do not apply to a trade by anexchange issuer in an underlying security to a holder of an exchangeable security or double convertible security of the issuer on the exercise by the exchangeissuer of its right under the exchangeable security or double convertible security to cause the holder to exchange for or purchase the underlying security or on theautomatic exchange of the exchangeable security or double convertible security, if the exchange issuer delivers to the Commission a written notice stating thedate, amount, nature and conditions of the proposed trade, including the net proceeds to be derived by the exchange issuer if the underlying securities are fullytaken up and either(27)
(a) the Commission has not informed the exchange issuer in writing within 10 days after the delivery of the notice that it objects to the proposed trade, or
(b) the exchange issuer has delivered to the Commission information relating to the underlying security that is satisfactory to and accepted by the Commission.
2.11 Exemption for a Trade in Units(28) - Sections 25 and 53 of the Act do not apply to a trade in securities of one or more issuers, other than issuers that aremutual funds or non-redeemable investment funds,(29) 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 an acquisition cost to the purchaser of not less than $150,000,provided that if the securities are of more than one issuer, the issuers are affiliated entities and are engaged in the same or related types of businesses;(30) 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 Execution Act(31) - Section 53 of the Act does not apply to atrade 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 intended auction of the securities is accompanied by a statementsubstantially as follows:
"These securities are speculative. No representations are made concerning the securities, or the issuer of the securities. No prospectus is available and theprotections, rights and remedies arising out of the prospectus provisions of the Securities Act, including statutory rights of rescission and damages, will not beavailable to the purchaser of these securities."
2.13 Exemption for a First Trade in a Double Convertible Security, Convertible Security or Exchangeable Security Acquired Under CertainExemptions(32) - Section 53 of the Act does not apply to a first trade in a double convertible security, convertible security or exchangeable security acquired by aholder under a 72(4) trade, if
(a) at the time of the trade the issuer of the double convertible security, convertible security or exchangeable security is a reporting issuer and is not in default ofthe Act or the regulations;
(b) either,
(i) the double convertible security, convertible security, exchangeable security or underlying security is listed and posted for trading, or traded on The TorontoStock Exchange or The Montreal Exchange and complies with the requirements of clause 433(1)(m) or (n), as the case may be, of the Insurance Act, and thedouble convertible security, convertible security or exchangeable security has been held at least six months after the later of the date of its acquisition by the selleror the date the issuer became a reporting issuer,
(ii) the double convertible security, convertible security, exchangeable security or underlying security is a bond, debenture, or other evidence of indebtednessissued or guaranteed by an issuer, or is a preferred share of an issuer, and complies with the requirements of clause 433(1)(k) or (m), as the case may be, of theInsurance Act and the double convertible security, convertible security or exchangeable security has been held at least six months after the later of the date of itsacquisition by the seller or the date the issuer became a reporting issuer,
(iii) the double convertible security, convertible security, exchangeable security or underlying security is listed and posted for trading, or traded on The TorontoStock Exchange or The Montreal Exchange and the double convertible security, convertible security or exchangeable security has been held at least one yearafter the later of the date of its acquisition by the seller or the date the issuer became a reporting issuer, or
(iv) the double convertible security, convertible security or exchangeable security has been held at least 18 months from the later of the date of its acquisition bythe seller 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 no extraordinary commission or consideration is paid for the trade;and
(d) the trade is not a control person distribution(33).
2.14 Exemption for a First Trade in a Security Acquired in Connection with a Take-over Bid(34) - Section 53 of the Act does not apply to the first trade ina security previously acquired under the exemption contained in clause 72(1)(j) of the Act if
(a) when such exemption was relied upon, a securities exchange take-over bid circular for the securities was filed by the offeror under the Act;
(b) the trade is not a control person distribution; and
(c) the issuer was a reporting issuer before filing the securities exchange take-over bid.
2.15 Exemption for a First Trade in a Security Acquired to Facilitate Incorporation(35) - Section 53 of the Act does not apply to the first trade in a securitypreviously acquired under the exemption contained in clause 72(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 or Exchange is Qualified By Prospectus(36) - Section53 of the Act does not apply to the first trade in an underlying security issued or transferred in accordance with the terms of a double convertible security,convertible security or exchangeable security if
(a) a receipt was obtained from the Director for a prospectus qualifying the distribution of the double convertible security, convertible security or exchangeablesecurity; and
(b) the trade is not a control person distribution.
2.17 Exemption for a Trade in a Security of a Private Issuer - Sections 25 and 53 of the Act do not apply to a trade in a security of a private issuer.(37)
2.18 Further Exemptions(38)
(1) Sections 25 and 53 of the Act do not apply to a trade if the security being traded is a security of a company 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, debenture or other evidence of indebtedness of the Conseilscolaire 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 an exemption in clause 72(1)(a), (b), (c), (d), (f), (h), (i), (j),(k), (l), (m), (n), (p) or (q) of the Act whether or not the issuer is in default of any requirement of the Act or regulations if,
(a) the seller is not in a special relationship(39) with the issuer or, if the seller is in a special relationship with the issuer, it has reasonable grounds to believe thatthe issuer is not in default under the Act or the regulations; and
(b) the first trade otherwise qualifies for the applicable exemption in subsection 72(4) or 72(5) of the Act.
PART 3 REMOVAL OF CERTAIN REGISTRATION AND PROSPECTUS EXEMPTIONS
3.1 Removal of Private Placement Exemptions If Acquisition Cost Is Less Than $150,000(40) - The registration and prospectus exemptions contained inparagraph 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(41)
(1) The registration and prospectus exemptions contained in paragraph 5 of subsection 35(1) and clause 72(1)(d) of the Act and in section 2.11 are not availablefor a trade in a security unless the aggregate acquisition cost of the security is satisfied by the purchaser by the payment of cash or other immediately availablefunds 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 the purchaser, 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 or expectation that the liability or the obligation to pay it will bewaived; and
(b) the acquisition cost, including the liability that is incurred or assumed by the purchaser, has a fair value of not less than $150,000.
3.3 Removal of Exemptions if Purchaser Primary Purpose Entity(42) - The registration and prospectus exemptions contained in paragraph 5 of subsection35(1) and clause 72(1)(d) of the Act and section 2.11 are not available for a trade in a security if
(a) the purchasing entity is created or is being used primarily to permit purchases without a prospectus; and
(b) the share or portion of any member or partner of the partnership, syndicate or unincorporated organization, any beneficiary of the trust or any shareholder ofthe company of the aggregate acquisition cost to the purchasing entity of the securities being purchased is less than $150,000.
3.4 Removal of Exemptions for Investment Clubs(43) - The registration and prospectus exemptions contained in paragraph 5 of subsection 35(1) and clause72(1)(d) of the Act and section 2.11 are not available for a 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 purchasing entity of the securities being purchased is at least $150,000.
3.5 Removal of Asset Acquisition Exemption If Fair Value of Assets Is Less Than $150,000(44) - The registration and prospectus exemptions contained inparagraph 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(45) - The registration and prospectus exemptions contained in paragraph 21 of subsection 35(1) and clause 72(1)(p) ofthe Act are not available for a trade in a security if
(a) the solicitations referred to in the clause are made in the aggregate in all jurisdictions to more than 50 prospective purchasers, or
(b) the trade is to a parent, brother or sister of any director or senior officer of the issuer or of an affiliated entity of the issuer.
3.7 Determination of Number of Purchasers Under Seed Capital and Government Incentive Security Exemptions if Purchaser is a Primary PurposeEntity(46) - The exemptions in clause 72(1)(p) of the Act and section 2.4 are not available if an entity has been created, or is being used as a purchaser orprospective purchaser, primarily to permit the purchase of securities without a prospectus, and the number of members or partners of the partnership, syndicateor unincorporated organization, the number of beneficiaries of the trust, or shareholders of the company, as the case may be, exceeds the number of purchasersreferred to in the clause or section.
3.8 Removal of Exemption for Bonds, Debentures and Other Evidences of Indebtedness(47) - The registration and prospectus exemptions contained inparagraph 1(c) of subsection 35(2) and clause 73(1)(a) of the Act are not available for a trade in a bond, debenture or other evidence of indebtedness that issubordinate in right of payment to deposits held by the issuer or guarantor of the bond, debenture or other evidence of indebtedness.
3.9 Removal of Exemption for Securities of a Private Mutual Fund With a Promoter or Manager(48) - The registration and prospectus exemptionscontained 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 thedefinition of "private mutual fund" in subsection 1(1) of the Act if the mutual fund is administered by a trust company and there is a promoter or manager of themutual fund other than the trust company.
3.10 Removal of 72(4) Resale Exemption for Control Person Distribution(49) - The exemption in subsection 72(4) of the Act is not available for a trade that isa control person distribution.
3.11 Removal of Subsection 72(7) Exemption for Control Person Distribution(50)
(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 securityfor six months from the date of acquisition by the seller of the security or, if the security is an underlying security, six months from the date of acquisition by theseller of the double convertible security, convertible security or exchangeable security.
(2) Subject to subsection (3), if a seller has acquired a security, other than an underlying security, of a class under a 72(4) trade or 72(5) trade or under anexemption contained in clause 72(1)(h) of the Act, the exemption contained in clauses 72(7)(b) and (c) of the Act is not available for a trade in any security of thesame class until all 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 the seller under an exemption referred to in this subsection, if thesecurity, or if the security acquired under the exemption is a double convertible security, convertible security or exchangeable security, the underlying security, islisted and posted for trading or traded on The Toronto Stock Exchange 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 the seller under an exemption referred to in this subsection, if thesecurity or if the security acquired under the exemption is a double convertible security, convertible security or an exchangeable security, the underlying security,is a bond, debenture or other evidence of indebtedness issued or guaranteed by an issuer or is a preferred share of an issuer, and complies with the requirementsof 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 seller under an exemption referred to in this subsection, if thesecurity, or if the security acquired under the exemption is a double convertible security, convertible security or an exchangeable security, the underlying security,is listed and posted for trading or traded on The Toronto Stock Exchange or The Montreal Exchange or is a bond, debenture or other evidence of indebtednessissued or guaranteed 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 the seller 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 under the exemption in subclause 72(1)(f)(i) of the Act or section2.1 or 3.1 of Rule 45-502 Dividend or Interest Reinvestment and Stock Dividend Plans and the aggregate number of securities of an issuer acquired under theexemptions in subclause 72(1)(f)(i) of the Act and sections 2.1 and 3.1 of Rule 45-502 before the time of the trade in the financial year of the issuer by the sellerin which the trade is made does not exceed one percent of the number of the securities of the class of securities outstanding at the commencement of thatfinancial year.(51)
(4) If a seller has acquired a double convertible security, a convertible security or an exchangeable security under a 72(4) trade or 72(5) trade or an exemptioncontained in clause 72(1)(h) of the Act or sections 2.9 and 2.10 of this Rule, the exemption contained in clauses 72(7)(b) and (c) is not available for a trade in theunderlying security until all securities of the class of the underlying security owned by the seller have been held by the seller for the applicable period set out inclause (a), (b), (c) or (d) of subsection (2) from the date of acquisition of the last double convertible security, convertible security or exchangeable securityacquired by the seller 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, if the security was acquired by the seller from an affiliatedentity, the period of time that the security had been held by the affiliated entity before the transfer to the seller shall be included.(52)
3.12 Removal of Registration Exemption for Market Intermediaries - The exemptions from registration in subsection 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 to a market intermediary.(53)
PART 4 OFFERING MEMORANDUM(54)
4.1 Removal of Exemptions Contained in Clause 72(1)(d) of the Act and Section 2.11 - The exemptions contained in clause 72(1)(d) of the Act and section2.11 are not available for a trade in a security if there has been any advertisement of the securities in(55) printed public media, radio, television ortelecommunications, including electronic display, unless an offering memorandum is delivered to the purchaser before entering into an agreement of purchase andsale, the purchaser is given a contractual right 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 Offering Memorandum - The exemptions in clauses72(1)(c),(d) and (p) of the Act and section 2.11 are not available (56) for a trade, if the seller delivers an offering memorandum to the prospective purchaser,unless the prospective purchaser is given a contractual right of action and the contractual right of action is described in the offering memorandum.
4.3 Delivery of Offering Memorandum to Commission - If the inclusion of a contractual right of action in an offering memorandum is required by section 2.4,4.1 or 4.2 as a condition to the availability of an exemption, the seller shall deliver to the Commission a copy of the offering memorandum concurrently with orbefore the date on which a report of the trade referred to in subsection 72(3) of the Act or subsection 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(57) - An exemption contained in the Act or the regulations fromthe registration or prospectus requirements of the Act or the regulations that refers to a registered dealer is not available for a trade in a security unless the dealeris registered in a category that permits it to act as a dealer for the trade described in the exempting provision.
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(58) - A person or company may trade a security acquired under theexemption 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 the Director;
(b) if the first trade is made under an exemption in Ontario securities law(59) from section 53 of the Act; or
(c) if the issuer of the security is a reporting issuer and has been a reporting issuer 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 Toronto Stock Exchange or The Montreal Exchange if the securities arelisted on either of those exchanges at least seven days and not more than 14 days before the first trade made to carry out the distribution,
(A) a notice of intention to sell prepared in accordance with Form 23 of the Regulation disclosing particulars of the ownership, the number of securities to besold and the method of distribution, and
(B) a declaration signed by each seller as at a date not more than 24 hours before its filing and prepared and executed in accordance with the regulations andcertified as follows:
"The seller for whose account the securities to which this certificate relates are to be sold hereby represents that the seller has no knowledge of any materialchange which has occurred in the affairs of the issuer of the securities which has not been generally disclosed and reported to the Commission, nor has the sellerany knowledge of any other material adverse information in regard to the current and prospective operations of the issuer which have not been generallydisclosed",
(ii) the seller, unless exempted by the regulations, files within three days after the completion of any trade, an insider report under Form 55-101F1;
provided that the notice required to be filed under clause (i)(A) and the declarations required to be filed under clause (i)(B) shall be renewed and filed at the endof 60 days after the original date of filing and thereafter at the end of each 28 day period so long as any of the securities specified under the original notice havenot been sold or until notice has been filed that the securities so specified or any part 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 and no extraordinary commission or other consideration is paid inrespect of such trade.
6.2 First Trade in a Security Acquired Under Section 2.4, 2.5 or 2.11(60) - A person or company may trade a security acquired under an exemption containedin 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 the Director;
(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 of the security, the person or company has reasonable grounds to believethat the issuer is not in default under the Act or the regulations;
(iii) the hold period has elapsed from the later of the date of the acquisition by the seller of the security and the date the issuer became a reporting issuer;
(iv) no unusual effort is made to prepare the market or to create a demand for the securities and no extraordinary commission or consideration is paid for thetrade; 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(61) - A person or company may trade a security acquired under the exemptioncontained 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 the Director;
(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 a reporting issuer for at least 12 months,
(ii) in the case of a person or company that is in a special relationship with the issuer, the person or company has reasonable grounds to believe that the issuer isnot in default under the 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 and no extraordinary commission or consideration is paid for thetrade; and
(v) the trade is not a control person distribution.
6.4 First Trade In an Underlying Security of a Double Convertible Security, Convertible Security or an Exchangeable Security Acquired UnderCertain Exemptions(62) - A person or company may trade an underlying security issued on conversion or exchange of a double convertible security, convertiblesecurity or exchangeable security if any of the double convertible security, convertible security or exchangeable 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 the Director;
(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 of the security, the person or company has reasonable grounds to believe theissuer is not in default under the Act or the regulations,
(iii) the hold period has elapsed from the later of the date of the acquisition of the double convertible security, convertible security or exchangeable security bythe seller and the date the 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 and no extraordinary commission or consideration is paid for thetrade, 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(63) - A person or company may trade an underlying security acquired under section 2.9 or2.10 on a forced conversion or exchange of a double convertible security, convertible security or exchangeable security acquired by the holder under a 72(5)trade only
(a) if the first trade is made under a prospectus for which a receipt has been obtained from the Director,
(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 a reporting issuer for at least twelve months,
(ii) in the case of a person or company that is in a special relationship with the issuer, the person or company has reasonable grounds to believe that the issuer isnot in default under the 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 and no extraordinary commission or consideration is paid for thetrade, 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)(64) - A person or company may trade a security acquiredunder section 2.7, 2.8 or 2.17, after the issuer has ceased to be a private issuer or under subsection 2.18(1) after the issuer has ceased to be a private issuer forpurposes 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 the Director;
(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 a reporting issuer for at least twelve months as in the case of securitiesacquired under section 2.8 one of the amalgamating or merged corporations or one of the continuing corporations has been a reporting issuer for twelve months,
(ii) in the case of a person or company that is in a special relationship with the issuer, the person or company has reasonable grounds to believe that the issuer isnot in default under the 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 and no extraordinary commission or consideration is paid for thetrade, 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 circular in respect of the securities was filed by the offeror under theAct.
PART 7 FILING REQUIREMENTS AND FEES
7.1 Form 45-501F1(65) - Every report that is required to be filed under subsection 72(3) of the Act and subsection 7.5(1) shall be filed in duplicate and preparedin accordance with Form 45-501F1.
7.2 Form 45-501F2(66) - Every report that is required to be filed under clause 72(4)(c) of the Act and subsection 7.5(2) shall be filed in duplicate and prepared inaccordance with Form 45-501F2.
7.3 Fees for Form 45-501F1(67)
(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 of securities, other than special warrants, for which the report filedin Form 45-501F1 is filed, and
"B" is 0.04 percent of the aggregate gross proceeds realized in Ontario from the distribution of special warrants for which the report filed in Form 45-501F1 isfiled.
(2) The amount calculated under clause (1) is considered to be $100 if the report filed in Form 45-501F1 is filed for,
(a) a trade in securities if there is no change in beneficial ownership of the securities as a result of the 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 or2.11.
7.4 Fees for Form 45-501F2(68) - 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,(69) the seller shall, within 10 days of the trade, file a report prepared and executed in accordance withsection 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 withsection 7.2.
(3) If a trade is made under section 2.9, the issuer shall file the notice and pay the fees prescribed by section 20 of Schedule 1 to the Regulation, as if theunderlying security had been acquired in a distribution 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 section 21 of Schedule 1 to the Regulation as if the security had beenacquired in a distribution exempt from section 53 of the Act by clause 72(1)(h) of the Act.
7.6 72(5) Reports - The disclosure required by clause 72(5)(b) of the Act and sections 6.3, 6.5 and 6.6 may be made by the issuer by disclosing particulars of thedate of the trade, the number of securities purchased 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 the facts contained in the letter
if in either case the filing is effected before any resale of these securities.(70)
7.7 Fees for Trade Made Under Section 2.8 - If a trade is made under section 2.8 the issuer shall pay the fees prescribed by section 23 of Schedule I of theRegulation as if section 23 referred to section 2.8 instead of clause 72(1)(i) of the Act.
ONTARIO SECURITIES COMMISSION
COMPANION POLICY 45-501CP
TO ONTARIO SECURITIES COMMISSION RULE 45-501
EXEMPT DISTRIBUTIONS
PART 1 PURPOSE AND DEFINITIONS1.1 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 Tacking
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
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
COMPANION POLICY 45-501CP
EXEMPT DISTRIBUTIONS
1.1 Purpose - This policy statement sets forth the views of the Commission as to the manner in which certain provisions of the Act and the rules relating toprivate 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 clause 72(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 ofRule 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 Policy apply in respect of the corresponding registrationexemptions.
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 placementexemptions except that concurrent reliance on clause 72(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 45-501 impose various upper limits on the number ofpersons to whom securities can be offered or sold in reliance on these exemptions. A trade made in reliance upon an exemption other than these two exemptionsneed not be counted for the purposes of the limitations relating to the number of purchasers in clause 72(1)(p) of the Act or section 2.4 of Rule 45-501.However, if prospective purchasers are solicited with respect to a private placement of securities and the securities are ultimately sold to some of the purchasersunder clause 72(1)(d) or section 2.11 of Rule 45-501 and other purchasers under clause 72(1)(p) or section 2.4 of Rule 45-501, all persons solicited with respectto 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 becounted 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, the issuer becomes a "reporting issuer" within the meaningof subsection 1(1) of the Act. Second, reporting issuer status generally confers important benefits under the Act and the regulations, particularly in connectionwith the availability of certain prospectus exemptions and the running of hold periods on the resales of particular securities. The basis for conferring reportingissuer status on an issuer is that under Item 15 of Form 32 of the Regulation, a securities exchange take-over bid circular is required to contain prospectus-typedisclosure for the offeror or other issuer whose securities are being offered in exchange for the securities of the offeree issuer. This presupposes that thesecurities exchange take-over bid circular complies with the applicable requirements of the Act and regulations, including, without limitation, Item 15 of Form 32of the Regulation. The onus of ensuring that the circular contains the appropriate 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 necessarily result in reporting issuer status under the Act unlessthe securities exchange take-over bid circular filed complies with the applicable requirements of the Act and regulations including, without limitation, Item 15 ofForm 32 of the Regulation.
(3) Issuers should be aware that if the securities exchange take-over bid circular, as filed, does not substantially comply with applicable requirements and, if theadequacy of the disclosure is subsequently challenged and found to be substantively deficient, appropriate regulatory action will be taken by staff and theCommission, including the possibility of cease trading the securities of the issuer. As well, the resale exemption in section 2.14 of Rule 45-501 which turns on theuse 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 bid circulars being filed by shell as opposed to substantialcompanies for the purpose of attaining reporting issuer status in situations where the bid did not proceed and the circular did not contain prospectus leveldisclosure. For that reason, the first trade relief in section 2.14 of Rule 45-501 is conditioned upon the issuer being a reporting issuer before the filing of thesecurities exchange take-over bid circular. If a securities exchange bid is made by a shell offeror for a shell target, the Commission may take appropriateregulatory action. Issuers and their counsel are advised to consider speaking to staff before proceeding with a securities exchange take-over bid involving a shellofferor and shell target.
(5) The Commission is also aware that in certain cases issuers are making take-over bids by way of circular where an exemption from the circular requirements isotherwise available. While this is permitted under the Act, staff will monitor these transactions to see if they give rise to the concerns set out in this section.
2.3 Trades on an Amalgamation, Arrangement or Specified Statutory Procedure - Clause 72(1)(i) of the Act provides an exemption for trades in securitiesin connection with a statutory amalgamation or arrangement or other statutory procedure. The Commission is of the view that the reference to statute in thatclause refers to any statute of a jurisdiction or foreign jurisdiction under which the amalgamating corporations have been incorporated and exist and under whichthe transaction is taking place.
2.4 Three-Cornered Amalgamations - Certain corporate statutes permit a so-called "three-cornered merger or amalgamation" under which two companies willamalgamate and the amalgamating entities will receive shares of a third party affiliate of one amalgamating entity. Section 2.8 of Rule 45-501 exempts thesetrades as the exemption applies to any trade made in the context of an amalgamation.
2.5 Tacking - The Commission is aware that conflicting views exist as to whether a subsequent exempt purchaser can "tack" on the period of time during whichshares have been held by a previous exempt purchaser in order to reduce its "hold" period. The Act provides in subsection 72(4) that the hold period commencesfrom the date of the "initial exempt trade". The Commission is of the view that the phrase "initial exempt trade" in subsection 72(4) of the Act refers to the tradeunder which the seller acquired the securities and not to the initial exempt trade under the Act and that therefore tacking is not 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 the exemptions contained in clause 72(1)(d) of theAct and section 2.11 of Rule 45-501 relate to entities that have been created, or used, to permit purchases of securities without a prospectus and investmentclubs, respectively, if the share or portion of the aggregate acquisition cost of the securities of each member or partner of the partnership, syndicate orunincorporated organization, each beneficiary of the trust or each shareholder of the company is less than $150,000. The exemptions contained in clause 72(1)(d)of the Act and section 2.11 of Rule 45-501 are available to an entity that is created, or is used, primarily for the purchase of securities without a prospectus ifeach member, partner, beneficiary or shareholder, of the entity, as the case may be, contributes, at least $150,000 for the securities purchased under theexemption.
3.2 Satisfaction of Acquisition Cost
(1) The Commission notes that if the acquisition cost of a security is to be satisfied by the purchaser by the transfer of assets, having a fair value of not less than$150,000, the relevant exemption is that provided by paragraph 18 of subsection 35(1) and clause 72(1)(l) of the Act. Clause 72(1)(d) of the Act or section 2.11of Rule 45-501 are the relevant exemptions if the acquisition cost of not less than $150,000 is to be satisfied by the payment of cash or other immediatelyavailable funds such as certified cheques, bank drafts or wire transfers or the incurrence or assumption of liabilities or any combination thereof.
(2) The Commission is of the view that the following do not constitute liabilities that satisfy the requirements of paragraph 3.2(2)(a) of Rule 45-501:
1. Commitments assumed under various tax-oriented arrangements where the promoter or distributor has held out to the purchaser a hope or expectation thatpayment of the obligation will be waived.
2. Mortgages under which the purchaser does not have a direct and real obligation to make payments under the mortgage.
(3) In determining the fair value of liabilities assumed or incurred in satisfaction of the acquisition cost for the purposes of paragraph 3.2(2)(b) of Rule 45-501, itis appropriate to take into account the creditworthiness of the debtor, current interest rates, and the maturity date of the liability, including any representationsmade by the promoter or distributor as to the probable payment date.
3.3 Vendor's Certificate - The Commission will normally be satisfied that a vendor has exercised reasonable diligence for the purposes of the certificate requiredin Form 45-501F1 if the vendor relies, if appropriate, on statutory declarations or representations from the purchasers, unless the vendor has knowledge that anyfacts set 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 one issuer if the issuers are engaged in related businesses.One example of related types of businesses for the purposes of section 2.11 of Rule 45-501 would be the developer and operator, respectively, of a real estateproject. The Commission does not consider that one issuer engaged in mining and another issuer engaged in oil and gas are engaged in related types of businessfor purposes of section 2.11 of Rule 45-501.
(2) If the exemption in section 2.11 of Rule 45-501 is relied upon, varying resale provisions for different securities that comprise the block or unit may result. Forexample, one of the securities may be listed and posted for trading on a recognized stock exchange and meet the requirements of clauses 433(1)(m) or (n) of theInsurance Act and thus have a six month "hold period", while another security, while also listed and posted for trading on a recognized stock exchange, may notmeet these Insurance Act requirements and thus have a one year "hold period".
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 placement situations. There is an obligation under section 4.1 ofRule 45-501 to deliver an offering memorandum describing a contractual right of rescission or damages in respect of a proposed private placement under clause72(1)(d) of the Act or section 2.11 of Rule 45-501 if there has been any advertisement of the securities in printed public media, radio, television ortelecommunications, including electronic display such as the Internet. An offering memorandum describing the contractual right of action must also be deliveredto purchasers of "government incentive securities" in connection with sales of securities made in reliance on section 2.4 of Rule 45-501. Though the obligation toprepare an offering memorandum is quite limited in its reach, business practice may dictate the preparation of offering material, which constitutes an "offeringmemorandum" under Rule 45-501, which is delivered voluntarily to purchasers in connection with exempt trades under clauses 72(1)(c), (d) and (p) of the Actand section 2.11 of Rule 45-501. The obligation to provide a contractual right of rescission or damages applies both when the offering memorandum is requiredto be provided under section 2.4 or 4.1 and when it is provided voluntarily in connection with the specified exempt trades under clauses 72(1)(c),(d) or (p) andsection 2.11 of Rule 45-501. However, a document delivered in connection with a sale of securities made otherwise than in reliance on the above-notedexemptions does not attract the obligations of Part 4.
(2) The Commission does not prescribe what an offering memorandum should contain apart from the contractual right of action and the requirements relating tofuture oriented financial information as contemplated by National Instrument 52-101 Future Oriented Financial Information. The use of the exemptions containedin each of clause 72(1)(p) of the Act and section 2.4 of Rule 45-501 requires that each investor have access to substantially the same information concerning theissuer that a prospectus filed under the Act would provide.
(3) The Commission cautions against the practice of providing preliminary offering material to certain prospective investors before furnishing a "final" offeringmemorandum unless the material contains a description of the contractual right of action to be made available to purchasers in situations when such a right ofaction and description is required. The only material prepared in connection with the private placement other than a "term sheet" (representing a skeletal outlineof the features of an issue without dealing extensively with the business and affairs of the issuer) made available to investors should consist of an offeringmemorandum containing the contractual right of action and satisfying in all other respects the Act and the regulation.
4.2 Contractual Right of Action - The definition of contractual right of action stipulates that the right of action must reasonably correspond to the rightsprovided in section 130 of the Act. The Commission notes that the rights provided in section 130 of the Act include the right of an investor to hold the partiesagainst whom it has a 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 are obliged under subsection 72(3) of the Act andsubsection 7.5(1) of Rule 45-501 to notify the Commission, by way of the filing of a Form 45-501F1, of certain details of their trades, the offering material theyuse in connection 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 offering memoranda are not routinely reviewed byCommission staff, the decision relating to the appropriate disclosure in an offering memorandum rests with the issuer, the selling securityholder and theiradvisors. If Commission staff becomes aware of an offering memorandum that fails to disclose material information pertaining to parties involved in thetransaction, staff may seek to intervene to effect remedial action.
FORM 45-501F1(71)
Securities Act
Report of a trade under clause 72(1)(a), (b),
(c), (d), (l), (p) or (q) of the Act or
Section 2.4, 2.5 or 2.11 of Rule 45-501
(Note: Circle or highlight applicable clause)
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 corporation registered under theLoan and Trust Corporation Act acquires from a customer an evidence of indebtedness of the customer or an equity investment in the customer acquiredconcurrently 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 each purchaser, the amount or number of securities purchasedand the purchase price paid by each purchaser and such certified list will be provided on request to a duly authorized representative of theCommission or to securityholders who acquired securities pursuant to the prospectus exemption in clause 72(1)(p) of the Act or section 2.4 of Rule45-501 Exempt 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 Exempt Distributions)
Total Fee payable: $ .
8. After exercising reasonable diligence in its enquiries, the vendor believes that the vendor is entitled to the use of the exemption which is circledabove.
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 individual whose signature appears above, if different from name of vendor or agent above)
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 the trade(s), such ascommissions, discounts or other fees or payments of a similar nature. It is not necessary to include payments for 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 item and properly identified andsigned by the person whose signature appears on the report.
3. Fee: Cheque made payable to Minister of Finance
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
FORM 45-501F2
Securities Act
Report under subsection 72(4) of the Act or section 2.13, 6.2 or 6.4 of Rule 45-501 of a first trade
(Note: Circle or highlight applicable clause)
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, 6.2 or 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 the date of acquisition.
6. Certificate of Vendor.
The undersigned Vendor hereby certifies that the information given in this report relating to the Vendor is true and correct and that to the best of the Vendor'sinformation 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 the securities, and
(b) no extraordinary commission or consideration has been or has been agreed to be paid 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, if different 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 be cross-referred to the relevant item and properly identified andsigned by the person whose signature appears on the report.
2. Please file this report in duplicate. Cheques are payable to the Minister of Finance in the amount set out in section 7.4 of Rule 45-501 Exempt Distributions.
RULE 45-501
EXEMPT DISTRIBUTIONS
TABLE OF CONCORDANCE
This chart summarizes the proposed reformulation treatment of each of the instruments and sections of the Regulation listed below.
Item 1 of the chart describes the treatment of sections 14 to 32 and 67 and 68 of the Regulation to the Securities Act, subsection 69(3), clause 151(a) andsubsection 206(1) of the Regulation and sections 22 and 25 of Schedule I of the Regulation. Each of these sections will either be reformulated as part of theproposed Rule, included in a companion policy or revoked as no longer necessary or appropriate.
Items 2, 3, 4, 5, 6 and 7 of the chart list certain rules of the Ontario Securities Commission that are incorporated into the Rule.
Item 8 of the chart lists the items contained in Ontario Securities Commission Policy Statement 6.1 which are being adopted as a Rule or incorporated into thecompanion policy.
TD> Subsection 19(3) section 6.1 Subsection 19(4) section 6.3 Subsection 19(5) Rule 45-502 Dividend or Interest Reinvestment and Stock Dividend Plans,section 4.1 Subsection 19(6) section 6.2 Subsection 20(1) subsection 2.18(1) Subsection 20(2) subsection 2.18(2) Section 21 subsection 2.18(3) Subsection22(1) section 3.8 Subsection 22(2) section 3.9 Subsection 23(1) section 6.4 Subsection 23(2) To be revoked Section 24 section 3.10 Subsection 25(1)subsection 3.11(1) Subsection 25(2) subsection 3.11(2) Section 26 To be revoked Subsection 27(1) section 3.1 Subsection 27(2) To be revoked Section 28section 3.5 Section 29 To be revoked Section 30 section 5.1 Section 31 section 3.6 Subsection 32(1) Rule 14-501 Definitions Subsection 32(2) section 4.1Subsection 32(3) section 4.2 Subsection 32(4) section 4.3 Section 67 section 7.1 and Form 45-501FI Section 68 section 7.2 and Form 45-501F2 Subsection69(3) section 7.6 and Rule 45-502 Dividend or Interest Reinvestment and Stock Dividend Plans, Part 5 Clause 151(a) sections 2.1, 2.2, 2.3, 2.4 and 2.5Subsection 206(1) section 3.12 Section 22 of Schedule 1 section 7.3 Section 25 of Schedule 1 section 7.4 2 Rule In the Matter of Trades by Issuers UponExercise of Certain Conversion or Exchange Rights... (1997), 20 OSCB 1218 that incorporated Blanket Ruling (1994), 17 OSCB 2877 sections 1.1, 2.9, 2.10,2.16, 3.12, 6.4 and 6.5. 3 Rule In the Matter of Certain Proposed Amendments (1997), 20 OSCB 1220 that incorporated Blanket Order (1987), 10 OSCB 5936sections 1.1, 2.13, 6.4. 4 Rule In the Matter of Trades by Issuers in Connection with Securities Exchange Issuer Bids...(1997), 20 OSCB 1218 that incorporatedBlanket Ruling (1994), 17 OSCB 1975 sections 2.7, 2.8, 3.12 and 6.6. 5 Rule In the Matter of Trades in Securities of a Private Company Under the ExecutionAct (1997), 20 OSCB 1218 that incorporated Blanket Ruling (1985), 8 OSCB 127 section 2.12 6 Rule In the Matter of Dividend Reinvestment Plans (1997), 20OSCB 1218 that incorporated the Blanket Ruling (1994), 17 OSCB 1178 subsection 3.11(3) 7 Rule In the Matter of Certain Amendments (1997), 20 OSCB1218, that incorporated the Blanket Ruling (1983), 6 OSCB 3508 incorporated by reference in the Rule listed as item 3 and therefore reformulated in sections1.1, 2.13 and 6.4 8 OSC Policy 6.1 I.1
First sentence
Second sentence
Third sentence
Deleted
Companion Policy 45-501, section 1.1 used as basis for definitions in section 1.2
Deleted I.2
First sentence
Second sentence
Companion Policy 45-501, section 5.1
Deleted I.3 Deleted I.4 Deleted II.A Companion Policy 45-501, section 2.1 II.B.1 section 3.1 II.B.2
First sentence
Second, third and fourth sentences
section 3.2
Companion Policy 45-501, subsections 3.2(1), (2) and (3) II.B.3
First sentence
Second sentence
section 2.11
Companion Policy 45-501, section 3.4 II.B.4 section 3.3 II.B.5 Form 45-501F1 II.B.6 section 3.4 II.B.7 Companion Policy 45-501, section 3.3 II.B.8 section 3.7II.B.9 Deleted II.C.1 Companion Policy 45-501, subsection 4.1(1) II.C.2 Companion Policy 45-501, subsection 4.1(2) II.C.3 Deleted II.C.4 Deleted II.C.5Companion Policy 45-501, subsection 4.1(3) II.D section 1.1
definition of "government incentive security" II.E.1
First sentence
Second and fourth sentences
Third sentence
Deleted
Rule 45-501F1, Question 4 II.E.2 Deleted to reflect change of policy
Footnotes
1. This Rule is derived from the following rules of the Ontario Securities Commission:
(1) In the Matter of Trades by Issuers Upon Exercise of Certain Conversion or Exchange Rights and In the Matter of the First Trade in Securities AcquiredUpon Exercise of Such Conversion or Exchange Rights (1997), 20 OSCB 1218, that incorporated by reference, a Blanket Ruling of the same name (1994), 17OSCB 2877 ("Trades by Issuers on Certain Conversions or Exchanges"),
(2) In the Matter of Certain Proposed Amendments (1997), 20 OSCB 1220, that incorporated by reference a Blanket Order of the same name (1987), 10 OSCB5936 ("Hold Periods and First Trades For Convertible Securities and Underlying Securities"),
(3) In the Matter of Trades by Issuers in Connection with Securities Exchange Issuer Bids and In the Matter of Trades by Holders of Securities of a Companyto Another Company in Connection with an Amalgamation, an Arrangement or a Specified Statutory Procedure (1997), 20 OSCB 1218 that incorporated byreference a Blanket Ruling of the same name (1994), 17 OSCB 1975 ("Trades on Securities Exchange Issuer Bids and Amalgamations"),
(4) In the Matter of Trades in Securities of a Private Company Under the Execution Act (1997), 20 OSCB 1218 that incorporated by reference a Blanket Rulingof the same name (1985), 8 OSCB 127,
(5) In the Matter of Certain Amendments (1997), 20 OSCB 1218 that incorporated by reference a Blanket Ruling of the same name (1983), 6 OSCB 3508, and
(6) In the Matter of Dividend Reinvestment Plans (1997), 20 OSCB 1218 that incorporated by reference a Blanket Ruling of the same name (1994), 17 OSCB1178 ("Dividend Reinvestment Plans"),
and from Ontario Securities Commission Policy Statement No. 6.1 ("Policy 6.1"). In addition, the following provisions of the Regulation relating to exemptdistributions are restated in the Rule:
(1) sections 14 to 32 and sections 67 and 68 (excluding clauses 14(e) and 19(5) of the Regulation which are incorporated in proposed Rule 45-502 Dividend orInterest Reinvestment and Stock Dividend Plans, clause 14(g) which will be incorporated in a proposed amendment to Rule 32-503 Registration and ProspectusExemptions For Trades by Financial Intermediaries in Mutual Fund Securities to Corporate Sponsored Plans and sections 26, 27(2) and 29 which will berevoked);
(2) subsection 69(3);
(3) clause 151(a); and
(4) sections 22 and 25 of Schedule I.
Certain items contained in Policy 6.1 are reflected in the Companion Policy.
2. A general definition rule has been adopted as Rule 14-501 Definitions. It contains definitions of certain terms used in more than one rule. Rule 14-501 alsoprovides, among other things, that terms used in a rule and defined in section 1 of the Securities Act or subsection 1(2) of the Regulation will have the respectivemeaning given to them in the Securities Act or the Regulation, as appropriate. Rule 14-501 also incorporates terms defined in National Instrument 14-101Definitions. National Instrument 14-101 contains, among other things, definitions for terms used in more than one national instrument.
3. This definition is based on the definition in Trades By Issuers on Certain Conversions or Exchanges.
4. This is a new definition.
5. This definition is based on the definition in Trades By Issuers on Certain Conversions or Exchanges.
6. The term "government incentive security" is defined in subsection 16(2) of the Regulation with reference to those securities designated by the OntarioSecurities Commission. The government incentive securities are currently designated by the Commission under Part D of Policy 6.1. Those designated securitiesfrom Part D of Policy 6.1, in respect of which incentives are still available under the relevant legislation, have been included in the definition rather than create aseparate designation instrument. The following government incentive securities contained in Policy 6.1, Part D have been deleted as they are no longer availableunder the applicable legislation:
1. Units or interests in a project or in a partnership the sole purpose of which is to invest in a project or projects which, as of December 31, 1981, qualified as amultiple-unit residential building under the ITA.
2. Units or interests in a motion picture film or a video tape, or in a partnership the sole purpose of which is to invest in one or more motion picture films orvideo tapes, which is eligible for certification as a certified feature production or a certified short production under the regulations made under the ITA.
3. Securities issued by a company registered as a small business development corporation under the Small Business Development Corporations Act (Ontario).
4. Securities which entitle the acquiror thereof to a scientific research tax credit pursuant to the ITA; provided that the amount designated by the issuer undersubsection 194(4) of the ITA in respect of such securities is 100% of the aggregate acquisition cost of such securities to the first registered holder.
No additional incentive securities have been added in this definition other than clause (b).
7. This government incentive security has been added to the definition so as to include units or interests in a partnership or joint venture that fund the types ofexpenses referred to in paragraph (a), consistent with the rationale underlying the existing designated government incentive security in paragraph (a).
8. Only units or interests in a partnership or joint venture enable the holder of a security to receive a grant or monetary benefit under the Ontario MineralExploration Program Act, not units or interests in any type of person or company.
9. The existing designation of this government incentive security listed as (e) in Policy 6.1, Part D has been amended to include the condition that the solepurpose of the partnership or joint venture is to carry out the required programme, to conform to the condition in paragraph (d).
10. This definition is based on a similar provision in the Securities Act (British Columbia) and is included here for use in a new exemption for distributions byunincorporated private entities for which there is not currently an exemption in Ontario. This definition is more restricted than the definition in the Securities Act(British Columbia) as it brings into the definition of "private issuer" only those entities which have not distributed any securities to the public and which haverestricted the distribution of all shares. The Securities Act (British Columbia) deals only with the distribution or restriction on the distribution of "equitysecurities".
11. This definition is based on the definition in Hold Periods and First Trades for Convertible Securities and Underlying Securities and has been amended toinclude securities issuable in accordance with the terms of an exchangeable security or a double convertible security.
12. Subsections 1.2(1), (2) and (3) contain provisions to assist in interpreting the term "affiliated entity" which is used in the Rule. These provisions are basedon subsections 1(2), (3) and (4) of the Act but are broader as they extend to unincorporated entities.
13. This section restates the existing exemptions in clauses 14(a) and 151(a) of the Regulation as part of the Rule.
14. This section restates subsection 16(1) of the Regulation as part of the Rule.
15. This section restates the existing exemptions in clauses 14(b) and 151(a) of the Regulation as part of the Rule.
16. This section restates the existing exemptions in clause 14(c) and 151(a) of the Regulation as part of the Rule.
17. This section restates the existing exemptions in clauses 14(f) and 151(a) of the Regulation as part of the Rule. The existing exemptions have been amendedto impose a requirement parallel to that imposed for an exempt trade under clause 72(1)(p) of the Act as currently set out under section 31 of the Regulation,which has been restated as section 3.6 of the Rule. In addition, it has been amended such that the filing of Form 45-501FI is not a condition of relying on theexemption. Finally, it has been amended to delete a portion of subparagraph 14(f)(ii)B of the Regulation permitting sales to a parent, brother or sister of a seniorofficer or director of the issuer or an affiliate of the issuer. The same revision has been made with regard to the use of the exemption in clause 72(1)(p) of theAct, imposed under section 3.6 of the Rule.
18. The term "contractual right of action" will be defined in amended Rule 14-501 Definitions to mean "a right of action, that
- is against an issuer if it is selling securities,
- is against a selling securityholder,
- is against an issuer and selling securityholder if they are both selling securities,
(d) is available to an investor to whom an offering memorandum containing a misrepresentation is delivered by or on behalf of the seller of securities,
(e) is exercisable on notice against the person or company that granted the right of action not later than 180 days after payment is made for the securities or afterthe initial payment, if a payment subsequent to the initial payment is made under a contractual commitment assumed before, or at the same time as, the initialpayment,
(f) reasonably corresponds to the rights provided in section 130 of the Act applicable to a prospectus and may be subject to defences available under subsection(2) of that section, and
(g) includes a provision stating that the right is in addition to any other right or remedy available at law to the investor."
This definition is based on subsection 32(1) of the Regulation. It has been amended to include the right of action against the seller of the security. It has also beenchanged to extend to the period within which notice can be given after the payment for the securities from 90 days to 180 days.
19. Subparagraph 14(f)(i) of the Regulation provides that each investor to whom securities are sold must receive an offering memorandum. The wording hasbeen revised to clarify that the offering memorandum must be provided before the purchaser enters into an agreement of purchase and sale.
20. The term "offering memorandum" will be defined in amended Rule 14-501 Definitions to mean "a document purporting to describe the business and affairsof an issuer that has been prepared primarily for delivery to and review by a prospective purchaser so as to assist the prospective purchaser to make aninvestment decision for a security being sold in a distribution to which section 53 of the Act would apply but for the availability of one or more of the exemptionscontained in clause 72(1)(c),(d) or (p) of the Act or section 2.4 or 2.11 of Rule 45-501 Exempt Distributions or section 2.1 of Rule 45-504 ProspectusExemption for Distributions of Securities to Portfolio Advisors on Behalf of Fully Managed Accounts, but does not include a document setting out currentinformation about an issuer for the benefit of a prospective purchaser familiar with the issuer through prior investment or business contacts."
This definition is based on the definition in subsection 32(1) of the Regulation but has been changed to refer to sections of the Rule which restate and replaceclauses of the Regulation that are to be deleted. It has also been changed to delete the excluded documents listed in paragraph (b) of that definition as these arenot documents which have been prepared primarily to assist prospective purchasers in making an exempt purchase.
21. This section restates and modifies the existing exemptions in clauses 14(d) and 151(a) of the Regulation as part of the Rule. As redrafted this exemption isbroader than the exemption in clause 14(d) of the Regulation as the exemption is no longer only available for securities acquired from the issuer. Commissionstaff have concluded that there was no policy rationale for the restriction. In addition, the wording contained in clauses 14(d) and 151(a) of the Regulation, and inForm 45-501F1 (formerly Form 20), has been amended such that the filing of Form 45-501F1 is not a condition of relying on the exemption.
22. This section restates the provisions of section 18 of the Regulation as part of the Rule. Clause 18(1)(e) has been changed to specify that the report requiredto be filed is an insider report. This requirement, as changed, corresponds to the requirement in subclause 72(7)(b)(ii) of the Act and now, in conformity withsubclause 72(7)(b)(ii) of the Act, this report must be filed within three days.
23. This section and section 2.8 incorporate the prospectus and registration exemptions provided in Trades on Securities Exchange Issuer Bids andAmalgamations. The provisions of section 2.7 have been amended from those contained in the Blanket Ruling so that compliance with the issuer bid provisionsof the Act is not a condition to the exemption.
24. This section creates a new broader exemption for trades made in connection with an amalgamation and extends the prospectus and registration exemptionscurrently available under clause 72(1)(i) and paragraph 35(1)15 of the Act and in the rule Trades on Securities Exchange Issuer Bids and Amalgamations.
25. This section and section 2.10 restate the prospectus and registration exemptions for trades by an issuer on forced conversion or exchange contained inTrades by Issuers on Certain Conversions or Exchanges and extends those provisions to cover double convertible securities.
26. This language is contained in Trades by Issuers on Certain Conversions or Exchanges and parallels the language in clause 72(1)(f)(iii) of the Act. Thefiling of the notice and payment of the fee, that are conditions subsequent stipulated in Trades by Issuers on Certain Conversions or Exchanges, have beenmoved to subsection 7.5(3) as these are no longer to be conditions of relying on the exemption.
27. These conditions parallel the conditions set out in subclause 72(1)(h)(ii) of the Act.
28. This section creates a new exemption, based on item 3 of paragraph B of Policy 6.1 and the exemptions in paragraph 5 of subsection 35(1) and clause72(1)(d) of the Act, for trades of blocks or units of more than one type of security of one issuer, or more than one issuer if the issuers are affiliated entities andengaged in the same or related businesses, if the acquisition cost test is met. The requirement to file a report in respect of this trade arises under subsection 7.5(1)and parallels the existing reporting requirement in subsection 72(3) of the Act in respect of the exemption contained in clause 72(1)(d) of the Act.
29. Issuers that are mutual funds or non-redeemable investment funds have been excluded from the exemption in section 2.11 as it was not contemplated thatthis exemption would permit pooled fund investments. The term "non-redeemable investment fund" will be defined in amended Rule 14-501 Definitions to mean"an issuer
(a) whose primary purpose is to invest money provided by its securityholders;
(b) substantially all of the investments of which, other than cash, are in securities, derivatives, contracts or financial instruments;
(c) that does not invest for the purpose of exercising effective control, seeking to exercise effective control, or being actively involved in the management of theissuers in which it invests, other than other mutual funds or non-redeemable investment funds; and
(d) that is not a mutual fund."
30. The Companion Policy provides guidance as to the Commission's interpretation of "related types of businesses".
31. This section restates and replaces the rule of the Commission In the Matter of Trades in Securities of a Private Company under the Execution Act. SeeNote 1. The exemption also provides relief for trades in securities of a private issuer by a sheriff.
32. This section restates the prospectus exemption contained in Hold Periods and First Trades for Convertible Securities and Underlying Securities. This rulestipulates that the relevant hold period for a convertible security acquired under certain exemptions gets the benefit of the status of the underlying security. It isnow clear from the wording of this provision that the relevant hold period runs from the date of acquisition of the security by the seller so that a seller cannottack on the amount of time the securities have been held by someone else in a previous exempt trade. Included in the definition of 72(4) trade are the sectionreferences from section 23 of the Regulation (correcting the incorrect reference in section 23 of the Regulation to clause 14(g) or (h) of the Act which shouldhave referred to clauses 14(d) and (f) of the Regulation (now sections 2.4 and 2.5 of the Rule)). This also refers to section 2.11, as the exemption in section 2.11is an expansion of the exemption contained in clause 72(1)(d) of the Act. This exemption has been expanded to include first trades in exchangeable securitiesacquired under an exemption which has a subsection 72(4) or equivalent resale restriction and first trades in double convertible securities. The filing of a report isno longer a condition to relying on this exemption.
33. The term "control person distribution" is defined in Rule 14-501 Definitions to mean a trade described in clause (c) of the definition of "distribution" insubsection 1(1) of the Act.
34. This section incorporates the provisions of clause 17(a) of the Regulation as part of the Rule and restricts its use to an offeror who was, prior to thetake-over bid, a reporting issuer.
35. This section restates the provisions of clause 17(b) of the Regulation as part of the Rule.
36. This exemption restates the second paragraph of the third ruling in Trades by Issuers on Certain Conversions or Exchanges and has been amended tocontemplate double convertible securities and to delete the provisos that at the time of the trade the issuer is a reporting issuer and no unusual effort is made toprepare the market or to create a demand for the securities and no extraordinary commission is paid.
37. This is a new exemption which provides an exemption for non-corporate private issuers parallel to the private company exemptions in paragraph 35(2)10and clause 73(1)(a) of the Act.
38. This section restates sections 20 and 21 of the Regulation as part of the Rule.
39. The term "special relationship" will be defined in amended Rule 14-501 Definitions such that when used in reference to a person or company in a specialrelationship with a reporting issuer, it shall be interpreted in accordance with subsection 76(5) of the Act.
40. This section restates subsection 27(1) of the Regulation as part of the Rule. Subsection 27(2) of the Regulation has not been carried forward as it related totrades made before 1989.
41. This section imposes requirements on the use of the exemption in paragraph 5 of subsection 35(1) and clause 72(1)(d) and the exemption created bysection 2.11 of this Rule to ensure that the acquisition cost, whether satisfied by the payment of cash or other immediately available funds or the incurring orassumption of liabilities, reflects an actual commitment by the purchaser of the required amount. This section restates the provisions of paragraphs II.B.1 and 2 ofPolicy 6.1.
42. This section imposes restrictions on the use of the exemption in paragraph 5 of subsection 35(1) and clause 72(1)(d) of the Act and section 2.11 of the Ruleif the purchasing entity is created or is used primarily to rely on the exemption if individual investors have contributed less than the required minimum acquisitioncost. This requirement is based on paragraph II.B.4 of Policy 6.1.
43. This is a new provision based on the provisions of Policy 6.1.
44. This section restates section 28 of the Regulation as part of the Rule, amended so as to replace the term "value" with "fair value" to conform with clause72(1)(l) of the Act.
45. This section restates section 31 of the Regulation as part of the Rule and also removes the registration exemption. Paragraph (b) is a new provision.
46. This section is based upon the provisions of paragraph II.B.8 of Policy 6.1.
47. This section restates the provisions of section 22(1) of the Regulation as part of the Rule.
48. This provision restates the provisions of subsection 22(2) of the Regulation as part of the Rule.
49. This section restates the provisions of section 24 of the Regulation as part of the Rule.
50. This section restates section 25 of the Regulation as part of the Rule and has been amended to include clause 72(1)(f) trades. The provisions of subsection25(2) have been amended to include the further exemptions provided in Rule 45-502 Dividend or Interest Reinvestment and Stock Dividend Plans, Rule 45-503Trades to Employees, Executives, Certain Consultants and Their Companies and RRSPS and Employee and Executive Trusts and to provide the tacking reliefand restrictions similar to those provided in sections 2.13 and 6.4 in respect of convertible instruments held by control persons so that the relevant hold periodcommences upon the date of acquisition of the convertible or double convertible or exchangeable security.
51. This section restates and replaces the provisions of Dividend Reinvestment Plans which is a rule concerning the availability of the exemptions in clause72(7)(b) and (c) of the Act to control block securityholders who participate in dividend reinvestment plans.
52. This is a new provision which reflects relief granted by the Commission in the past to allow tacking among control group affiliates.
53. This provision is consistent with subsection 206(1) of the Regulation.
54. This Part incorporates and amends the provisions of section 32 of the Regulation and extends the provisions to cover the exemption under section 2.11 ofthe Rule. See footnotes 18 and 20.
55. This has been amended to contemplate internet advertisements.
56. The reference in the corresponding provision of subsection 32(3) of the Regulation to clause 14(f) has been deleted as clause 14(f) (reformulated in thisRule as section 2.4) already includes the contractual right requirement.
57. This section restates section 30 of the Regulation as part of the Rule.
58. This section restates the provisions of subsections 19(1) and 19(3) of the Regulation as part of the Rule.
59. The term "Ontario securities law" is defined in subsection 1(1) of the Act as "(a) this Act, (b) the regulations and (c) in respect of a person or company, adecision of the Commission or Director to which the person or company is subject. The term "regulations" is defined in the Act to mean the regulations madeunder this Act and, unless the context otherwise requires, includes the rules.
60. This provision restates the provisions of subsections 19(2) and 19(6) of the Regulation as part of the Rule and imposes first trade restrictions.
61. This section restates the provisions of subsection 19(4) of the Regulation as part of the Rule with minor changes to the wording.
62. This section restates section 23 of the Regulation as part of the Rule modified to include trades in securities acquired under subclause 72(1)(h)(ii) of theAct and to reflect the provisions of Hold Periods and First Trades for Convertible Securities and Underlying Securities. This section also restates the resaleprovisions of Trades by Issuers on Certain Conversions or Exchanges that stipulates that the first trade in securities acquired by the vendor under subclauses72(1)(f)(iii) or 72(1)(h)(ii) of the Act on a forced conversion or exchange by an issuer is a distribution exempt under certain conditions to address a situationwhere the convertible, double convertible or exchangeable security was acquired in a 72(4) trade.
63. This section restates the first trade requirements of Trades by Issuers on Certain Conversions or Exchanges.
64. This section restates the first trade provisions of Trades on Securities Exchange Issuer Bids and Amalgamations and establishes first trade requirementsfor securities of a private issuer after it has ceased to be a private issuer.
65. Form 45-501F1 will replace the existing Form 20. This provision replaces section 67 of the Regulation.
66. Form 45-501F2 will replace the existing Form 21. This provision replaces section 68 of the Regulation.
67. This section is required because the existing Regulation (section 22 of Schedule 1) refers to a fee payable on filing of the Form 20, which is being replacedby Form 45-501F1.
68. This section is required because the existing Regulation (section 25 of Schedule 1) refers to a fee payable on filing of the Form 21, which is being replaced by Form 45-501F2.
69. The reporting requirement in respect of the exemption contained in section 2.11 parallels the existing reporting requirement in subsection 72(3) of the Actin respect of the exemption contained in clause 72(1)(d) of the Act.
70. This section amends and restates subsection 69(3) of the Regulation.
71. Part E.1 of Policy 6.1 provides for additional situations when the OSC will allow question 4(b) to be completed in addition to those set out in the Form 20.In addition, E.1 contemplates that, if the conditions for completing question 4(b) exist and this question is completed, the Commission will not make the Form 20available for public inspection and will not publish in the OSC Bulletin names and addresses of the purchasers of the securities. Form 45-501F1 has been revisedto provide that the name and address of the purchaser is only required to be disclosed if the information is requested by staff at the Commission or a purchaser ofsecurities under the exemption in clause 72(1)(p) of the Act or section 2.4 of the Rule. However, it is proposed that 45-501FI would be available for publicinspection under the Act. Subsection 140(2) of the Act allows the Commission to hold material or a class of material required to be filed by the Act in confidenceprovided that the Commission is of the opinion that certain conditions are met. It is considered that the blanket form of confidentiality provided by Policy 6.1 isnot appropriate as the Commission is of the view that it is required to exercise its discretion under subsection 140(2) on a case by case basis. Similarly, in achange from Policy 6.1, Form 45-501F2 (formerly Form 21) will be available for public inspection, unless a specific request for confidentiality is made and theCommission exercises its discretion under subsection 140(2) of the Act.