Notice: OSC Rule - 45-503 - Trades to Employees, Executives and Consultants

NOTICE OF PROPOSED RULE UNDERTHE SECURITIES ACT
RULE 45-503
TRADES TO EMPLOYEES, EXECUTIVES
AND CONSULTANTS

Substance and Purpose of Proposed Rule

The substance and purpose of the proposed Rule is to provide exemptions from the registration and prospectus requirements of the Securities Act (the "Act") fortrades by issuers of their securities to employees of the issuer and affiliated entities of the issuer and officers and directors of the issuer ("executives") and thesubsidiary entities, Registered Retirement Savings Plans ("RRSPs") and Registered Retirement Income Funds ("RRIFs") of such persons, consultants of theissuer and their companies, partnerships, RRSPs and RRIFs and to and by trustees, custodians and administrators acting on behalf or for the benefit ofemployees, executives and consultants ("administrators"). The Rule also provides an exemption from the registration and prospectus requirements fordistributions by controlling shareholders of issuers of securities to such persons and entities. The Rule also provides exemptions from the registrationrequirements for trades by affiliated entities of issuers and, in the case of control person distributions, issuers as well, in furtherance of trades under theexemptions in the Rule. The Rule also provides registration exemptions for trades by employees and executives of an issuer and their subsidiary entities, RRSPsand RRIFs and consultants of an issuer and their companies, partnerships, RRSPs and RRIFs, and administrators, if the issuer has a de minimis market inOntario.

These exemptions incorporate and extend the existing exemptions in paragraph 19 of subsection 35(1) and clause 72(1)(n) of the Act, as amended by the RedTape Reduction Act (Ministry of Finance), 1997 which provide exemptions from the registration and prospectus requirements for trades made by an issuer insecurities of its own issue with its employees or the employees of an affiliate who are not induced to purchase by expectation of employment or continuedemployment, whether such trades take place directly between the issuer and the employee or through a trustee or an administrator of a share purchase planestablished for the benefit of employees of the issuer or its affiliates.

The proposed Rule incorporates and replaces the Rule In the Matter of Trades by an Issuer in Securities of its Own Issue to Senior Officers, Directors, PersonalHolding Companies and Registered Retirement Savings Plans and a Controlling Shareholder in Securities of an Issuer to Employees, Senior Officers,Directors, Personal Holding Companies and Registered Retirement Savings Plans (1997), 20 OSCB 1218, which came into force on March 1, 1997, which inturn incorporated the Blanket Ruling of the same name (1994), 17 OSCB 5518 (the "Blanket Ruling").

The Blanket Ruling provided exemptions from prospectus and registration requirements for certain trades to non-employee directors and non-employee seniorofficers, and their companies and RRSPs, subject to a condition, inter alia, that the issuance and terms of the securities complied with the rules of The TorontoStock Exchange governing stock options and stock purchase plans (the "TSE Rules"), whether or not such securities and the issuance of the securities wereotherwise subject to these requirements. In reformulating the Rule, this condition has been simplified. For issuers whose securities are listed on one of theToronto, Montreal, Alberta or Vancouver stock exchanges (the "Stock Exchanges"), this status alone will satisfy the applicable condition. For issuers whosesecurities are not so listed, certain of the requirements in the TSE Rules, including those relating to the maximum number of securities that can be reserved forissuance to any one insider and the insider's associates as incentives, and that can be reserved for issuance or issued to any insiders in the aggregate as incentives,without shareholder approval being obtained, and the non-transferability of options, have been revised and formulated as a condition of the exemptions.Exemptions are also provided for trades by issuers whose securities are listed or quoted on specified foreign stock exchanges or markets or who have a deminimis market in Ontario.

The proposed Rule also extends the exemptions to trades to other executive subsidiary entities and executive RRIFs.

In the case of employees who are executives, the proposed Rule imposes the same conditions on the availability of exemptions for trades to such persons as areproposed for the exemptions for trades of securities to non-employee executives. Accordingly, the proposed Rule makes unavailable the use of the exemptionscontained in paragraph 19 of subsection 35(1) and clause 72(1)(n) of the Act referred to above and replaces them with exemptions in the new Rule containingsuch conditions.

The proposed Rule contains certain requirements relating to the information to be disclosed in an information circular in connection with obtaining shareholderapproval of an incentive, incentive plan or amendment to an incentive or incentive plan, in the event such approval is required under the proposed Rule as acondition of an exemption.

The Blanket Ruling also provided exemptions from the prospectus and registration requirements for trades to employee companies and employee RRSPs. Theproposed Rule continues such exemptions, and extends the exemptions to trades to other employee subsidiary entities such as partnerships, to employee RRIFsand to consultants, consultant companies, consultant partnerships, consultant RRSPs and consultant RRIFs.

The proposed Rule also provides for exemptions from the registration and prospectus requirements of the Act for trades made by current and former employeesand executives of an issuer and their subsidiary entities, RRSPs and RRIFs, and consultants of an issuer and their companies, partnerships, RRSPs and RRIFs,and administrators, in a security of the issuer to current employees and executives of the issuer and their subsidiary entities, RRSPs and RRIFs and consultants ofthe issuer, and their companies, partnerships, RRSPs and RRIFs, and administrators, in circumstances where the issuer is not a reporting issuer and the price ofthe security being traded is established by a generally applicable formula or similar provisions contained in a written agreement among employees, executives orconsultants of the issuer who are shareholders of the issuer.

The proposed Rule replaces and clarifies subsections of the Regulation and the Blanket Ruling that provide for simplified disclosure of exempt trades.

The proposed Rule also provides for the fees payable for the securities acquired under the exemptions contained in the proposed Rule.

Significant Changes

The subject matter of the proposed Rule is currently addressed by the existing exemptions in paragraph 19 of subsection 35(1) and clause 72(1)(n) of the Act, asamended by the Red Tape Reduction Act (Ministry of Finance), 1997, related provisions in the Act and in the Regulation and the Rule incorporating by referencethe Blanket Ruling.

The proposed Rule makes the following significant changes to the current regime:

The condition imposed by the Blanket Ruling in the exemptions for trades to non-employee senior officers and directors that the issuance and terms of thesecurities complied with the TSE Rules has been simplified. For issuers whose securities are listed on specified domestic stock exchanges, this status satisfies theapplicable condition; for issuers whose securities are not so listed, the conditions have been revised and simplified such that only certain requirements derivedfrom the TSE Rules, including those relating to the maximum number of issued securities that can be reserved for issuance or issued to any one related personand the related person's associates as incentives, and that can be reserved for issuance or issued to any related persons in the aggregate as incentives, withoutshareholder approval being obtained, and the non-transferability of options, must be met. The requirement for approvals by the Executive Director of theCommission has been removed.

The foregoing restrictions are also imposed on the existing registration and prospectus exemptions for trades to employees who are officers or directors. Theexisting exemptions, without such restrictions, continue for issuers whose securities are listed or quoted on specified foreign stock exchanges or markets or whohave a de minimis market in Ontario.

New registrations and prospectus exemptions are provided for trades to non-employee officers who are not senior officers, subject to the same restrictions as areimposed on the exemptions for trades to officers and directors.

New registration and prospectus exemptions are provided for trades to employee and executive RRIFs.

Exemptions from the registration requirements are provided for acts in furtherance of exempt trades by affiliated entities of the issuer and, in the case of controlperson distributions, by issuers as well. The Commission is, however, considering, as an alternative to providing this specific exemption in the Rule, whether itwould be appropriate to include in a policy a statement to effect to that acts by an affiliated entity in furtherance of a trade under an exemption are considered bythe Commission to be exempt as well. The Commission invites comments on this issue.

The existing exemptions are extended to trades to employees of affiliated entities (such as, for example, limited partnerships) in addition to employees of anaffiliates and to subsidiary entities of employees other than companies (again, for example, limited partnerships).

The registration and prospectus exemptions are extended to include trades to consultants and their companies, partnerships, RRSPs and RRIFs.

A new registration exemption is provided for trades by employees and executives and their subsidiary entities, RRSPs and RRIFs and consultants, theircompanies, partnerships, RRSPs and RRIFs, if the issuer meets a de minimis Ontario market test and the trades are executed through the facilities of a stockexchange outside Ontario or on the Nasdaq Stock Market ("NASDAQ") or the Stock Market Automated Quotation System of the London Stock ExchangeLimited ("SEAQ").

New registration exemptions are provided for personal transfers that are trades in securities, such as the transfer of a security among an employee, the employee'scompany, the employee's RRSP and the employee's RRIF.

New registration and prospectus exemptions are provided for trades by current and former employees and executives and their subsidiary entities, RRSPs andRRIFs and consultants, their companies, partnerships, RRSPs and RRIFs, and administrators, to current employees and executives and their subsidiary entities,RRSPs and RRIFs and consultants, their companies, partnerships, RRSPs and RRIFs, and administrators, for issuers who are not reporting issuers.

A more simplified and comprehensive system of disclosure of trades under the exemptions in the Rule and fee schedule for such trades is established.

As the foregoing items illustrate, the Commission has included in the proposed Rule provisions providing registration and prospectus relief in situations whichhave been the subject matter of Commission exemption orders in the past, so as to obviate the necessity for further exemption applications in the future. TheCommission invites comments as to whether there are any other situations in which exemption orders have been granted in the past granting registration and/orprospectus relief in this subject area which would be suitable for inclusion in the Rule.

Summary of Proposed Rule

Subsection 1.2(1) provides that, under the Rule, trades in securities of an issuer to or by a consultant include trades made to or by the consultant, the consultant'scompany, the consultant's partnership, the consultant's RRSP or the consultant's RRIF; trades to or by an employee include trades made to or by a subsidiaryentity of the employee, the employee's RRSP or the employee's RRIF; and trades to or by an executive include trades made to or by a subsidiary entity of theexecutive, the executive's RRSP or the executive's RRIF. Accordingly, provisions in the Rule providing for exemptions from registration and prospectusrequirements for trades to employees include exemptions for trades to or by employee subsidiary entities, employee RRSPs and employee RRIFs, for trades to orby executives include exemptions for trades to or by executive subsidiary entities, executive RRSPs and executive RRIFs, and exemptions for trades to or byconsultants include exemptions for trades to or by consultant partnerships, consultant companies, consultant RRSPs and consultant RRIFs.

Subsection 1.2(4) of the Rule provides that a person (which under the Act includes a partnership) or company is considered to be a subsidiary entity of anotherperson or company if (a) it is controlled by (i) that other, (ii) that other and one or more persons or companies, each of which is controlled by that other, or (iii)two or more persons or companies, each of which is controlled by that other; or (b) it is a subsidiary entity of a person or company that is that other's subsidiaryentity. Subsection 1.2(3) provides for an interpretation of when a company, partnership or limited partnership is considered to be controlled by a person orcompany.

Part 2 of the proposed Rule provides for exemptions from the registration and prospectus requirements of the Act for trades by issuers and employeeadministrators in securities of the issuer's own issue to employees and consultants (other than, in each case, executives) and employee administrators. It alsoprovides an exemption from the registration requirements for trades by an affiliated entity of the issuer in furtherance of a trade made under the foregoingexemptions and trades by employees, consultants and administrators if the issuer meets a de minimis Ontario market test.

The Commission has determined to impose the same conditions on the use of the exemptions from registration and prospectus requirements in paragraph 19 ofsubsection 35(1) and clause 72(1)(n) of the Act for employees who are executives as are to be imposed for the exemptions for non-employee executives.Accordingly, section 2.1 provides that the exemptions contained in paragraph 19 of subsection 35(1) and clause 72(1)(n) of the Act are unavailable.

Section 2.2 provides for exemptions from the registration and prospectus requirements of the Act for trades by an issuer or an employee administrator insecurities of the issuer's own issue to employees and consultants (other than, in each case, executives) and employee administrators, if the participation of theemployee or consultant in the trade is voluntary. Subsection 1.2(6) provides that the participation of an employee or consultant in a trade is considered voluntaryif the employee or consultant is not induced to purchase the security, in the case of an employee, by expectation of the employee's employment or continuedemployment by the issuer or an affiliated entity of the issuer, and in the case of a consultant, by expectation of the individual consultant, the consultant's companyor the consultant's partnership being engaged or continuing to be engaged by the issuer or an affiliated entity of the issuer as a consultant.

This section provides the exemptions previously provided by paragraph 19 of subsection 35(1) and clause 72(1)(n) of the Act and extends the exemptions toemployees of affiliated entities, subject to the limitation the exemptions in this section are not available for employees who are executives.

This section also provides the exemptions previously provided by the Blanket Ruling for trades to employee companies and employee RRSPs and extends theexemptions to trades to other employee subsidiary entities and employee RRIFs, subject to the same limitation.

The exemptions contained in the Blanket Ruling for trades to employee companies and employee RRSPs applied to trades in securities "issued as incentives orcompensation mechanisms" and excluded "securities issued or distributed for the purposes of repayment or payment of debt". As these restrictions are notcontained in the exemption for trades to employees contained in paragraph 19 of subsection 35(1) and clause 72(1)(n) of the Act, they have been removed fromthe exemption for trades to employee companies, employee RRSPs and employee RRIFs.

The provision also extends the exemptions to consultants, consultant companies, consultant partnerships, consultant RRSPs and consultant RRIFs, subject to thesame conditions. In section 1.1, consultant is defined to mean, for an issuer, an individual other than an employee or an executive, who (a) provides ongoingconsulting, technical, management or other services to the issuer or an affiliated entity of the issuer under a contract with the consultant, the consultant companyor the consultant partnership, (b) possesses technical, business, management or other expertise of value to the issuer or affiliated entity, (c) spends a significantamount of time and attention on the affairs and business of the issuer or affiliated entity and (d) has a relationship with the issuer or affiliated entity that enablesthe individual to be knowledgeable concerning the business and affairs of the issuer. The term "consultant company" is defined as a company of which theconsultant is an employee or shareholder and "consultant partnership" is defined as a partnership of which the consultant is an employee or a partner. However,subsection 2.2(2) provides the exemptions are not available for trades made to a registrant in connection with a distribution.

This section also extends the exemptions to trades to and by employee administrators, clarifying and expanding the application of the amendments to paragraph19 of subsection 35(1) and clause 72(1)(n) of the Act contained in the Red Tape Reduction Act (Ministry of Finance), 1997. The term "employee administrator"is defined as a trustee, custodian or administrator acting on behalf or for the benefit of employees, consultants, employees and executives, employees andconsultants, executives and consultants, or employees, executives and consultants, of the issuer.

Section 2.3 provides a new exemption from the registration requirements for trades by an affiliated entity of the issuer in furtherance of a trade under section 2.2,such as acts taken by subsidiaries in furtherance of the issuance of securities by an issuer. Section 1.1 provides for the interpretation of the term "affiliated entity",which includes an affiliate as this term is interpreted under the Act but which has been expanded to include relationships among companies and other entities suchas partnerships and limited partnerships.

Section 2.4 provides a new exemption from the registration requirements of the Act for trades by employees and consultants, and employee administrators onbehalf of employees and consultants, in securities of the issuer's own issue, if the issuer meets, at the time of the acquisition of the security, a de minimis Ontariomarket test, and the trade is executed through the facilities of a stock exchange outside Ontario or on NASDAQ or SEAQ. The de minimis tests, set out insubsection 1.2(7), are that either (a) at the time of the trade, persons or companies whose last address as shown on the books of the issuer is in Ontario and whohold securities of the class of securities (i) did not hold more than 10 percent of the outstanding securities of the class of securities, and (ii) did not represent innumber more than 10 percent of the total number of holders of securities of the class of securities; or (b) at the time of the trade, persons or companies who arein Ontario and who beneficially own securities of the class of securities (i) did not beneficially own more than 10 percent of the outstanding securities of the classof securities, and (ii) did not represent in number more than 10 percent of the total number of holders of securities of the class of securities.

Part 3 of the proposed Rule provides for exemptions from the registration and prospectus requirements of the Act for trades by issuers and executiveadministrators in securities of the issuer's own issue to executives and executive administrators. It also provides an exemption from the registration requirementsfor trades by an affiliated entity of the issuer in furtherance of a trade made under the foregoing exemptions and trades by executives and administrators if theissuer meets a de minimis test.

Section 3.1 provides for exemptions from the registration and prospectus requirements of the Act for trades by an issuer or an executive administrator insecurities of the issuer's own issue to executives and executive administrators, on certain conditions. As noted above, an "executive" is defined as an officer or adirector of the issuer. The exemption is available if (a) the issuer is a listed issuer and (b) the participation of the executive in the trade is voluntary. The term"listed issuer" is defined under the Rule as an issuer any of the securities of which are listed and posted for trading, or traded, on one of the Stock Exchanges.Subsection 1.2(6) provides that the participation of an executive in a trade is considered voluntary if the executive is not induced to purchase the security, in thecase of an executive that is a director, by expectation of the director's appointment, election or re-election as a director of the issuer, and in the case of anexecutive that is an officer of the issuer, by expectation of the officer's appointment or employment or continued appointment or employment as an officer of theissuer. The condition contained in the exemption for an executive that is a director, that the individual director is not induced to purchase the security byexpectation of a director's appointment, election or re-election as a director of the issuer, is a change from the Blanket Ruling, which did not contain thiscondition for the use of the exemptions for trades to directors.

This provision contains the exemptions previously provided by the Blanket Ruling for trades to non-employee senior officers and directors and their companiesand RRSPs and extends the exemptions to trades to other executive subsidiary entities and executive RRIFs. The exemptions in the Blanket Ruling were subjectto a condition, inter alia, that the issuance and terms of the securities complied with the TSE Rules, whether or not such securities and the issuance of thesecurities were otherwise subject to these requirements. In this provision, the condition has been simplified to be that the issuer is a listed issuer.

As the definition of "executive" includes non-employee officers, this provision extends the exemptions to non-employee officers who are not senior officers.

The exemptions contained in the Blanket Ruling for trades to non-employee senior officers and directors and their companies and RRSPs applied to trades insecurities "issued as incentives or compensation mechanisms" and excluded "securities issued or distributed for the purposes of repayment or payment of debt".As these restrictions are not contained in the exemption for trades to employees contained in paragraph 19 of subsection 35(1) and clause 72(1)(n) of the Act, forconsistency they have been removed from the exemption for trades to executives, their subsidiary entities, RRSPs and RRIFs.

This section also extends the exemptions to trades to and by executive administrators, clarifying and expanding the application of the amendments to paragraph19 of subsection 35(1) and clause 72(1)(n) of the Act contained in the Red Tape Reduction Act (Ministry of Finance), 1997. The term "executive administrator"is defined as a trustee, custodian or administrator acting on behalf or for the benefit of executives, employees and executives, executives and consultants, oremployees, executives and consultants, of the issuer.

Section 3.2 provides for similar exemptions if the issuer is not a listed issuer. The exemptions are available if (a) the participation of the executive in the trade isvoluntary and (b) the issuer complies with certain other requirements which are derived from certain of the TSE Rules relating to securities issued as incentives.These requirements are: (i) in the case of the issue of a security as an incentive, prior shareholder approval of incentives, incentive plans and amendments toincentives and incentive plans if certain limits on the number of shares reserved for issuance under stock options granted to related persons, the number of sharesissued to related persons within a 12 month period, the number of shares reserved for issuance under stock options to any one related person and the relatedperson's associates, and the number of shares issued to any one related person and the related person's associates within a 12 month period, are exceeded, (ii) inthe case of the issue of a security as an incentive, specification of the maximum number of securities which are issuable under the incentive or incentive plan and(iii) in the case of an option, that the option is non-transferable, subject to certain exceptions. The term "related person" is defined as an executive of the issuer oran associate of an executive of the issuer and the term "incentive" is defined to mean a compensation or incentive arrangement for an executive.

This section provides the exemptions previously provided by the Blanket Ruling for trades to non-employee senior officers and directors and their companies andRRSPs, and extends the exemption to trades to other executive subsidiary entities and executive RRIFs, for issuers who are not listed issuers, if such issuerscomply with the conditions set forth above. The exemptions in the Blanket Ruling were available subject to the condition that the issuance and the terms of thesecurities complied with the TSE Rules, whether or not such securities and the issuance of the securities were otherwise subject to these requirements. In thisprovision, the condition will be simplified to reflect the requirements set forth above.

Again, as the definition of "executive" includes non-employee officers, this section extends the exemptions to non-employee officers who are not senior officers.

As is the case with section 3.1, the restrictions contained in the Blanket Ruling that the exemptions applied to trades in securities "issued as incentives orcompensation mechanisms" and excluded "securities issued or distributed for the purposes of repayment or partial payment of a debt" have been removed.

Section 3.3 provides for similar exemptions for issuers whose securities are not listed on the Stock Exchanges and who do not meet the conditions set out insection 3.2 above (a) if the participation of the executive in the trade is voluntary and (b) if (i) the issuer is a foreign-listed issuer or (ii) the issuer meets one ofthe de minimis Ontario market tests set out above. A "foreign-listed issuer" is defined as an issuer any of the securities of which are listed on one of the AmericanStock Exchange, New York Stock Exchange or London Stock Exchange Limited or quoted on NASDAQ (the "Foreign Stock Exchanges").

Section 3.4 provides a new exemption from the registration requirements for trades by an affiliated entity of the issuer in furtherance of a trade under section 3.1,section 3.2 or section 3.3.

Section 3.5 provides for a new exemption from the registration requirements of the Act for trades by executives, and executive administrators on behalf ofexecutives, in securities of the issuer's own issue, if the issuer meets, at the time of the acquisition of the security, one of the de minimis Ontario market tests setout above, and the trade is executed through the facilities of a stock exchange outside Ontario or on NASDAQ or SEAQ.

Part 4 provides for requirements relating to the information to be provided by an issuer in an information circular if the issuer presents to its shareholders anincentive, incentive plan or an amendment to an incentive or incentive plan for approval as contemplated by section 3.2. These requirements are not formulated asa condition of the exemptions set forth in the proposed Rule but rather as "stand-alone" requirements as to appropriate disclosure.

Part 5 provides for exemptions from the registration and prospectus requirements for distributions of securities of the issuer, including options, by a controllingshareholder to employees, executives, consultants, employee administrators and executive administrators, and by the administrators to employees, executives andconsultants.

Section 5.1 provides for exemptions from the prospectus and registration requirements for distributions of securities by a controlling shareholder to employees,executives, consultants, employee administrators and executive administrators, and by administrators to employees, executives and consultants, if (a) theparticipation of the employee, executive or consultant in the trade is voluntary, and (b) in the case of an option, that the option is non-transferable, subject tocertain exceptions.

This section provides the exemptions previously provided by the Blanket Ruling for distributions of securities by a controlling shareholder to employees andnon-employee senior officers and directors and their companies and RRSPs and extends it to distributions to other executive subsidiary entities, executive RRIFs,non-employee officers who are not senior officers and their subsidiary entities, RRSPs and RRIFs, consultants and their companies, partnerships, RRSPs andRRIFs, and employee administrators and executive administrators. However, as in the case of section 2.2, subsection 5.1(2) provides that the exemptions are notavailable for trades made to a registrant in connection with a distribution.

Section 5.2 provides a new exemption from the registration requirements for trades by an issuer or an affiliated entity of the issuer in furtherance of a trade undersection 5.1.

Section 6.1 provides for exemptions from the registration requirements for trades in a security of an issuer among an employee, the employee's subsidiary entity,the employee's RRSP and the employee's RRIF, among an executive, the executive's subsidiary entity, the executive's RRSP and the executive's RRIF and amonga consultant, the consultant's company, the consultant's partnership, the consultant's RRSP and the consultant's RRIF.

These are new exemptions which will allow for transfers that are trades in securities among an employee and his or her subsidiary entity, his or her RRSP and hisor her RRIF, among an executive, his or her subsidiary entity, his or her RRSP and his or her RRIF and among a consultant, his or her company, his or herpartnership, his or her RRSP and his or her RRIF, without a registration requirement, and, by virtue of the cross-reference to this section in the first tradeprovisions of the Rule (section 9.1), free of first trade restrictions in the event the other provisions in the Rule providing for first trade relief are not available, forexample, by reason of the fact the issuer of the securities has not been a reporting issuer for at least twelve months.

Section 7.1 of the proposed Rule provides that the exemptions contained in paragraph 10 of subsection 35(2) and clause 73(1)(a) of the Act are not available fora trade of a security of a subsidiary company of an employee or an executive or a consultant company if the company has acquired securities under an exemptioncontained in the proposed Rule and at the time of the trade holds the securities unless a trade of the securities acquired by the company to the purchaser wouldhave been permitted under section 9.1. This section has been included to prevent the use of a company as a mechanism to avoid the registration and prospectusrequirements through the transfer of the ownership of a company that has previously acquired securities under an exemption contained in the Rule.

Section 8.1 of the proposed Rule provides for exemptions from the registration and prospectus requirements for trades by current and former employees andexecutives and consultants of an issuer, employee administrators and executive administrators of securities of the issuer to employees, executives, consultants,employee plan administrators and executive plan administrators, if (a) the participation of the employee, executive or consultant in the trade is voluntary, (b) theissuer is not a reporting issuer, and (c) the price of the security being traded is established by a generally applicable formula or similar provisions contained in awritten agreement among employees, executives or consultants of the issuer who are shareholders of the issuer.

This section creates new registration and prospectus exemptions that will allow securities of an issuer to be traded by current and former employees andexecutives and their subsidiary entities, RRSPs and RRIFs, consultants and their companies, partnerships, RRSPs and RRIFs, employee administrators andexecutive administrators to employees and executives and their subsidiary entities, RRSPs and RRIFs, consultants and their companies, partnerships, RRSPs andRRIFs, employee administrators and executive administrators. As trades to employees are currently exempt from prospectus and registration requirements underparagraph 19 of subsection 35(1) and clause 72(1)(n) of the Act, and trades by current or former employees of the issuer or an affiliate of the issuer to the issuerare exempt from registration and prospectus requirements under paragraph 17 of subsection 35(1) and clause 72(1)(k) of the Act (and exempt from issuer bidrequirements under clause 93(3)(d) of the Act), the Commission has determined that it would be appropriate for non-reporting issuers to allow for registrationand prospectus relief for such trades directly.

Section 8.2 provides an exemption from the registration requirements for trades by an issuer or an affiliated entity of the issuer in furtherance of a trade undersection 8.1.

Subsection 9.1(1) provides that a person or company (other than an associated consultant or an investor consultant of the issuer of the security) may trade asecurity acquired under the prospectus exemption contained in section 2.2, section 3.1, section 3.2, section 3.3, section 5.1 or section 8.1 or in the circumstancesdescribed in paragraph 9.1(1)(d) 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 tradeis 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 issuerand 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 orcompany has reasonable grounds to believe that the issuer is not in default under the Act or the regulations, (iii) in the case of a security acquired under theexemption in section 2.2, section 3.1, section 3.2, section 3.3 or section 5.1, disclosure to the Commission has been made of the trade under section 2.1, section3.1, section 3.2, section 3.3 or section 5.1 in accordance with Part 10, (iv) no unusual effort is made to prepare the market or to create a demand for thesecurities and no extraordinary commission or consideration is paid for the trade and (v) the trade is not a control person distribution; or (d) if the trade is a tradereferred to in section 6.1 or section 8.1.

Subsection 9.1(2), however, imposes the "hold period" contained in subsection 72(4) of the Act if the security is acquired by an associated consultant or aninvestor consultant of the issuer under the prospectus exemption contained in section 2.2 or section 5.1. The term "associated consultant" is defined as aconsultant of the issuer or an affiliated entity of the issuer if (a) the consultant is an associate of the issuer or an affiliated entity of the issuer or (b) the issuer oran affiliated entity of the issuer is an associate of the consultant. The term "investor consultant" is a consultant who provides to the issuer or an affiliated entity ofthe issuer services provided by a registrant or services consisting of investor relations activities. Subsection 9.1(2) allows, in the case of the acquisition of anunderlying security, for the seller to "tack" from the acquisition by the seller of the initial security, for the purposes of compliance with the "hold period". The"hold period" requirements have been imposed on securities acquired by associated consultants or investor consultants under the exemptions in the Rule toaddress concerns of the Commission relating to "back-door" underwritings and potential conflicts of interest.

Part 10 of the proposed Rule incorporates, replaces and clarifies subsections 69(3), (4) and (5) of the Regulation which provide for simplified disclosure ofexempt trades under clause 72(5)(b) of the Act and extends the availability of simplified disclosure to the related exemptions contained in the proposed Rule.

Section 10.1 provides that the disclosure contemplated by section 9.1 for securities acquired under the exemptions contained in sections 2.2, 3.1, 3.2, 3.3 and 5.1of the proposed Rule shall be made in accordance with Part 10 and the disclosure contemplated under the Act for securities acquired on the exercise of serviceprovider options under the exemption contained in subclause 72(1)(f)(iii) of the Act may be made in accordance with Part 10. The Rule defines "service provideroption" as an option granted to an employee, an executive or a consultant.

Section 10.2 provides that the disclosure contemplated by section 10.1 may be made by the issuer or, in the case of securities acquired under the exemptioncontained in section 5.1, by the issuer or the person or company making the distribution, by disclosing the date of the trade, the number of securities purchasedand the purchase price paid or to be paid, either in an information circular or take-over bid circular filed in accordance with the regulations or a letter filed withthe Commission by a person or company certifying that the person or the company has knowledge of the facts contained in the letter, if in either case the filing iseffected before any resale of the securities.

Section 10.3 provides that disclosure may be made annually if the volume of trading in securities issued or sold in any calendar month in reliance on theprospectus exemptions contained in the proposed Rule and securities acquired on the exercise of service provider options in reliance on the exemption insubclause 72(1)(f)(iii) of the Act does not exceed one percent of the securities of that class that were outstanding at the beginning of the month in which thesecurities were issued or sold.

Section 10.4 provides that, if the volume of trading in securities issued or sold in any calendar month in reliance on the prospectus exemptions contained in theproposed Rule and securities acquired on the exercise of service provider options in reliance on subclause 72(1)(f)(iii) of the Act does exceed the thresholds setforth in section 10.3, disclosure may be made by the issuer for that month and the issuer may make disclosure in accordance with section 10.3 for the othercalendar months in the annual period excluding such month or months for which disclosure has been made under section 10.4.

Section 10.5 provides that, despite the provisions of Part 10, separate disclosure of a trade and resale shall be made in accordance with clause 72(5)(b) andsubsection 72(7) of the Act if the relevant employee, executive or consultant resells the securities and the resale is a control person distribution.

Section 10.6 clarifies that, for the purposes of Part 10, the disclosure may be made in a letter filed with the Commission disclosing the date of the trade, thenumber of securities purchased and the purchase price paid or to be paid and certifying that the person or the company has knowledge of the facts contained inthe letter.

Part 11 provides for the fees payable for securities acquired under the exemptions contained in the proposed Rule and, in the case of the exercise of serviceprovider options, subclause 72(1)(f)(iii) of the Act.

Under existing requirements, subsection 24 of Schedule 1 to the Rule provides that, if a purchase plan or arrangement is operated without a prospectus inreliance on the exemption in clause 72(1)(n) of the Act, the issuer shall pay a fee of $100 (a) on the date that the plan or arrangement is commenced; and (b) oneach anniversary of the date of commencement of the plan or arrangement, if securities were distributed in Ontario under the plan or arrangement during thetwelve-month period preceding the date of such anniversary. As well, paragraph F of the first part of the Blanket Ruling and paragraph D of the second part ofthe Blanket Ruling provide that if securities were issued or distributed pursuant to a purchase plan or arrangement in reliance on the Blanket Ruling, the issuer orcontrolling shareholder, as applicable, is to pay the fees prescribed by section 24 of Schedule 1 to the Regulation, as if the securities had been acquired pursuantto the exemption in clause 72(1)(n) of the Act.

Section 20 of Schedule 1 provides that if an issuer has, in reliance on the exemptions set out in subclause 72(1)(f)(iii) of the Act, distributed securities of its ownissue transferred or issued through the exercise of a right to purchase, convert or exchange previously granted by the issuer, the issuer shall, within thirty daysafter the 31st day of December of each year, file a notice stating the aggregate gross proceeds realized in Ontario from the distribution of securities under theexemption and pay a fee equal to 0.02% of the aggregate gross proceeds realized in Ontario from the distribution of the securities in reliance on the exemptionsince the date of the last notice filed under that section.

Under the proposed Rule, the issuer is required to pay a fee of $100 for securities issued or transferred under the exemptions contained in the proposed Rule andsecurities acquired on the exercise of service provider options in reliance on the exemption contained in subclause 72(1)(f)(iii) at the commencement of theservice provider plan or on the initial issuance of the security, and annually thereafter if securities are issued or distributed under these exemptions during thepreceding 12-month period, except for control person distributions. In the case of control person distributions, the person or company making the distribution isrequired to pay the fee, but the issuer may do so in which case such person or company is relieved of that obligation.

The fees under the proposed Rule will replace the fees for securities acquired on the exercise of service provider options in reliance on the exemption containedin subclause 72(1)(f)(iii) now set out in Section 20 of Schedule 1. The fees set out in Section 20 of Schedule 1 shall remain in force for securities acquired on theexercise of options other than service provider options.

Authority for Proposed Rule

The following provisions of the Act provide the Commission with authority to make the proposed Rule.

Paragraphs 8 and 20 of subsection 143(1) of the Act authorize the Commission to make rules that provide for exemptions from the registration and prospectusrequirements under the Act and for the removal of exemptions from those requirements. Paragraph 11 of subsection 143(1) of the Act authorizes theCommission to make rules regulating the listing or trading of publicly traded securities including requiring reporting of trades and quotations and paragraph 13 ofsubsection 143(1) of the Act authorizes the Commission to make rules that regulate trading or advising in securities to prevent trading or advising that it isfraudulent, manipulative, deceptive or unfairly detrimental to investors. Paragraph 39 of subsection 143(1) authorizes the Commission to make rules requiring orrespecting the media, format, preparation, form, content, execution, certification, dissemination and other use, filing and review of all documents required underor governed by the Act, the regulations or the rules and all documents determined by the regulations or the rules to be ancillary to the documents, including (i)applications for registration and other purposes, (ii) preliminary prospectuses and prospectuses, (iii) interim financial statements and financial statements, (iv)proxies and information circulars, and (v) take-over bid circulars, issuer bid circulars and directors' circulars.

Paragraph 43 of subsection 143(1) of the Act authorizes the Commission to make rules that prescribe the fees payable to the Commission, including those forfiling, for applications for registration or exemptions, for trades in securities, in respect of audits made by the Commission, and in connection with theadministration of Ontario securities law.

Alternatives Considered

In April 1994, the Commission issued a blanket ruling that exempted trades made by an issuer in securities to a non-employee senior officer or director of theissuer or an affiliate of the issuer or to a personal holding company controlled by such executive or to an RRSP established by such executive from theapplication of sections 25 and 53 of the Act, subject to certain terms and conditions. In November, 1994 the Commission issued a replacement blanket ruling, theBlanket Ruling, that provided the foregoing exemptions, and added a further exemption from sections 25 and 53 of the Act for trades made by an issuer insecurities of its own issue to a personal holding company controlled by an employee of the issuer or affiliate of the issuer or to a Registered Retirement SavingsPlan established by an employee. The Blanket Ruling also provided an exemption for trades made by a controlling shareholder in securities of an issuer to anemployee, executive, executive company, employee company or RRSP, subject to certain terms and conditions. On March 1, 1997, a Rule incorporating byreference the Blanket Ruling came into force.

The Commission determined that the exemptions contained in the Rule incorporating the Blanket Ruling have been useful and should continue to be preserved inthe form of a Rule. As the Rule which incorporates by reference the Blanket Ruling expires in 1998, the Commission determined that it was appropriate that aRule be implemented to replace it.

In addition, the Commission further determined that it would be useful for similar exemptions to be provided from the registration and prospectus requirementsfor securities issued to employee and executive RRIFs, to consultants, consultant companies, consultant partnerships, consultant RRSPs and consultant RRIFsand to non-employee officers and their subsidiary entities, RRSPs and RRIFs, subject to certain terms and conditions. However, in the case of consultants thatare "associated consultants" or "investor consultants", the Commission determined that it was advisable to impose on securities acquired by such consultantsunder the exemptions contained in the Rule the hold period contained in subsection 72(4) of the Act, to address concerns of the Commission relating to"back-door" underwritings and conflicts of interest.

The Commission also determined that it would be useful to simplify the condition to which certain of the exemptions in the Blanket Ruling were subject. Ratherthan requiring compliance with all of the TSE Rules, the Commission determined that, for issuers whose securities were listed on the Toronto, Montreal, Albertaor Vancouver stock exchanges, such listing was sufficient for this purpose. For issuers whose securities were not so listed, shareholder approval will be requiredas a condition of the exemption if specified percentage limits of the aggregate number of shares that could be reserved for issue, or issued, to any one relatedperson and the related person's associates, and related persons in the aggregate, as incentives, are exceeded.

The Commission also determined that these conditions should also be imposed on the use of the exemptions contained in paragraph 19 of subsection 35(1) andclause 72(1)(n) of the Act for employees who are officers or directors and on the exemptions contained in the Rule for non-employee officers.

The Commission also determined that it would be useful to continue to provide the registration and prospectus exemptions contained in paragraph 19 ofsubsection 35(1) and clause 72(1)(n) of the Act, and the Blanket Ruling, for trades to employees and non-employee executives, for issuers whose securities arenot listed on the Stock Exchanges and who did not meet the conditions for non-listed issuers set forth in the Rule, where such issuers were listed or quoted onthe Foreign Stock Exchanges or had a de minimis market in Ontario.

The Commission also determined that it may be useful to provide an exemption from the registration requirements for trades by affiliated entities in furtheranceof trades under all of the foregoing exemptions. However, the Commission is considering, as an alternative to providing the specific exemption relief in the Rule,whether it would be appropriate to include in a policy a statement to the effect that acts by affiliated entities in furtherance of a trade under an exemption areconsidered by the Commission to be exempt as well. As noted, the Commission invites comments on this issue.

The Commission also determined that it would be useful to provide exemptions for trades to employees of affiliated entities and employee and executivesubsidiary entities.

The Commission also determined that it would be useful to provide an exemption from the registration requirements for trades by employees and executives andtheir subsidiary entities, RRSPs and RRIFs, consultants and their companies, partnerships, RRSPs and RRIFs, and employee administrators and executiveadministrators on behalf of employees, executives and consultants, respectively, if, at the time of the acquisition of the security, the issuer has a de minimismarket in the Province of Ontario, and the trade is executed through the facilities of a stock exchange outside Ontario or on NASDAQ or SEAQ.

The Commission also determined that it would be useful to provide exemptions for trades by current and former employees and executives and their subsidiaryentities, RRSPs and RRIFs, consultants and their companies, partnerships, RRSPs and RRIFs, and employee administrators and executive administrators, of asecurity of the issuer to current employees and executives and their subsidiary entities, RRSPs and RRIFs, consultants and their companies, partnerships, RRSPsand RRIFs, employee administrators and executive administrators, if (a) the issuer is not a reporting issuer, (b) the price of the security being traded wasestablished by a generally applicable formula or similar provisions contained in a written agreement among employees, executives or consultants of the issuerwho were shareholders of the issuer and (c) the participation of the employee, executive or consultant in the trade was voluntary.

The Commission also determined that it would be useful to incorporate the disclosure system for exempt trades to employees, executives, consultants, employeeadministrators and executive administrators in the proposed Rule and in so doing also clarify certain aspects of the existing simplified disclosure requirementscontained in subsections 69(3), (4) and (5) of the Regulation.

Unpublished Materials

In proposing the Rule, the Commission has not relied on any significant unpublished study, report or other written materials.

Anticipated Costs and Benefits

The Blanket Ruling has been useful to issuers, as it has provided for exemptions from registration and prospectus requirements for trades of securities tonon-employee directors and senior officers, and also clarified that such exemptions were available to companies and RRSPs of such individuals and of employees,and provided for similar exemptions for trades by a controlling shareholder to such persons and companies on the basis of the policy reflected in the exemptionscontained in paragraph 19 of subsection 35(1) and clause 72(1)(n) of the Act.

The proposed Rule has simplified compliance with the conditions on the use of certain of the exemptions that were contained in the Blanket Ruling, bydetermining that, for issuers whose securities were listed on the Toronto, Montreal, Alberta or Vancouver stock exchanges, such listing is sufficient for thispurpose, and for issuers whose securities are not so listed, by providing that the conditions would be restricted to those contained in the proposed Rule.

The proposed Rule does impose the same conditions on the use of the exemptions contained in paragraph 19 of subsection 35(1) and clause 72(1)(n) of the Actfor employees who are officers or directors as are proposed for the exemptions for non-employee officers and directors derived from the Blanket Ruling, forissuers who do not have a de minimis market in Ontario. These conditions are that either the securities are listed on one of the Toronto, Montreal, Alberta orVancouver stock exchanges or that certain conditions be met including the maximum number of securities that can be reserved for issuance to any one relatedperson and the related person's associates as incentives, and that can be reserved for issuance or issued to any related persons in the aggregate as incentives,without shareholder approval being obtained. These constitute new conditions on the use of the exemptions currently contained in paragraph 19 of subsection35(1) and clause 72(1)(n) of the Act for trades by issuers in securities of their own issue with employees who are officers or directors. The proposed Rule doesnot otherwise impose any significant new obligations on market participants.

As the proposed Rule provides for further exemptions, on the same policy basis, for trades to consultants, non-employee officers, employee administrators andexecutive administrators, employees of affiliated entities, employee and executive subsidiary entities and employee and executive RRIFs, extends the registrationexemptions to trades by affiliated entities in furtherance of exempt trades, and provides a registration exemption for trades by employees, executives andconsultants where there is a de minimis market in Ontario, obviating the necessity for individual exemption applications in all these cases, and also simplifies andclarifies the disclosure system and fee obligations for securities traded under the exemptions in the proposed Rule and securities acquired on the exercise ofservice provider options under the exemption contained in subclause 72(1)(f)(iii) of the Act, it is anticipated that further benefits will be provided to issuers.

The proposed Rule provides for the same fees to be paid in connection with the issue of securities to employees and executives and their companies and RRSPs,and the distribution of securities to such persons or companies by controlling shareholders, in reliance on the exemptions in the Rule as is currently the case undersection 24 of Schedule 1 to the Regulation and the Blanket Ruling. The same fees are extended to the issue or distribution of securities to other employee andexecutive subsidiary entities, employee and executive RRIFs, consultants, consultant companies, consultant partnerships, consultant RRSPs and consultantRRIFs and employee administrators and executive administrators under the new exemptions contained in the proposed Rule. By removal of the current fee of0.02% of aggregate gross proceeds realized in Ontario from the distribution of securities in reliance on the exemption in subclause 72(1)(f)(iii) of the Act for theexercise of service provider options, the proposed Rule provides for consistency as to the fees payable in this regard.

Based on the foregoing, the Commission believes that the benefits of the proposed Rule justify the costs, if any.

Revocation and Amendment of Regulation

The Commission proposes to revoke subsections 69(3), (4) and (5) of the Regulation, and section 24 of Schedule 1 to the Regulation, and to amend section 20of Schedule 1 to the Regulation to exclude from that provision fees relating to securities acquired on the exercise of service provider options. Fees relating tosuch securities are addressed in the proposed Rule.

Comments

Interested parties are invited to make written submissions with respect to the proposed Rule. Submissions received by May 22, 1998 will be considered.

Submissions should be made in duplicate to:

Daniel P. Iggers, Secretary

Ontario Securities Commission

20 Queen Street West

Suite 800, Box 55

Toronto, Ontario

M5H 3S8

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

Questions may be referred to:

Cynthia Rogers

Legal Counsel

Ontario Securities Commission

(416) 593-8261

Proposed Rule

The text of the proposed Rule follows, together with footnotes that are not part of the Rule but which have been included to provide background andexplanation.

DATED February 20, 1998.