1

INTRO TO COURSE; SOURCES OF LAW AND KEY REGULATORY AREAS

What is the OSC? The OSC is the regulatory body responsible for the administration of securities legislation in Ontario. It is a Crown corporation without share capitalIt is self-funded primarily through fees payable by market participants to the commission under the OSA. What is securities law? Law relating to the issuing of various financial instruments or claims to purchasers by business or financial organizations, with a view to raising capital. Also, deals with the trading of securities in certain circumstances such as take-over bids. Includes ongoing regulation of such organizations, generally with respect to disclosure after securities have been issued and governance. Also has application to holders of such securities in certain circumstances, as well as persons involved with the organizations in a managerial capacity in addition to persons who operate in the capital markets, such as broker/dealers and advisors. Broad, non-exhaustive definition of security in Securities Act (Ontario) What is Securities Regulations About? Largely statutory Law relating to the issuing of various types of financial instruments or claims known as securities by business or financial organizations to purchasers with a view to raising capital for enterprises One of the roles is to govern the capital-raising process basic assumption being an efficient capital-raising process for business enterprises is central to a healthy economy To achieve this objective, prospective investors must have confidence in the ability of security markets to act as an intermediary between investors and business enterprises A set of rules enhances confidence Thus securities regulation is an ongoing attempt to draw a balance between an efficient capital-raising process and the operation of efficient securities markets AND an acceptable comfort level for investors that business enterprises of one kind or another are a good place to invest savings Securities law assists in regulating economic activity by establishing legal requirements to be fulfilled by issues of securities on order to validly sell the securities to purchasers and creates exceptions to those rules Also clarifies responsibilities of issuers to purchasers and repurchasers of their securities in the secondary markets Also deals with legal requirements imposed on those in a special position in he issuer who wish to sell their securities It establishes other requirements for more general changes in control of the issuer by way of the sale of issuer securities Provides both civil and criminal remedies for breaches i.e. insider trading Regulates intermediaries in the market In sum, securities law is composed of 3 main strategies of regulation o (1) disclosure of info o (2) registration requirements o (3) after-the-fact enforcement by regulators or investors themselves Securities law only governs SOME aspects of the relationship between a business organization and its investors; prov and federal corporate and commercial law deal with others Sources of Law and Regulation [A] Provincial Securities Statutes Securities legislation in Canada has historically been promulgated by provincial (and territorial) legislatures pursuant to the authority of the provinces to legislate in relation to property and civil rights under s.92 of the Constitution Act, 1867 (eg Securities Act (Ontario)). Note recent initiative by the federal government to begin regulating securities matters in Canada involving a referral to the Supreme Court to determine whether such legislation would be intra vires its authority under the trade and commerce heading of the CA- on December 22, 2011 the SC released its decision determining that the draft legislation submitted to it encroached on provincial jurisdiction. Regulations, eg Ont. Reg. 1015 General Regulation Lieutenant Governor in Council has authority to make regulations under the OSA. [B] Regulations and Rules Securities commissions have rule-making authority pursuant to securities legislation authorizing such commissions to make local rules that have the force of law, subject to a notice and 90 day comment period and ministerial approval. OSC Rule 45-501 is an example. S.143 of the OSA enumerates the scope of the rule-making power which itemizes 60 areas in respect of which the OSC is

2 authorized to make rules Regulator sometimes seeks legislative amendment to engage in rule making on an issue not listed There is NO basket provision like in Alberta and BC Since regulator has SO much power, it is accompanied by a detailed set of procedures that must be followed ensuing transparency and consultation OSC required to publish all proposed rules along with specified accompanying material, and to provide at least a 90-day comment period for interested parties If the regulator makes material changes to the proposed rule, it is required to republish the rule and give a further opportunity for comment Once the rule is finalized, the regulator must deliver it to the minister who has 60 days to either approve or reject it or to return it to the regulator for further consideration

[C] National and Multilateral Instruments National and Multilateral Instruments (and Companion Policies) eg MI 11-102 Passport System, In an attempt to harmonize and reduce the amount of duplication required of market participants in matters where the regulation of more than one prov would apply, Canadian Securities Administrators (CSA), an umbrella organization of provincial and territorial securities regulators has begun promulgation They also represent joint responses to probs in securities markets so that securities regulations is more compatible from prov to prov NI is one that has been agreed to by all provs and terriroties MI is one that has been agreed to by some provs but not all Intended to be binding BUT since the CSA instruments do not have legal force, they must be implemented by rule of policy in each participating prov It is also possible that some provisions of an NI are not enacted in all provs [D] National and Local Policies National and local policies express authority in local legislation authorizing securities commissions to enact policies relating to securities regulation Examples are National policy 51-201, companion policies to national and multilateral instruments. Not rules or instruments but policies give guidance to issuers as to how regulators will enforce them Provide additional info about how regulators interpret the provisions of legislation or rules or provide guidance to market participants concerning the exercise of regulatory discretion National Policy (NP) statements are joint policy statements agreed to by the CSA Making of local policy statements is controversial because of a lack of explicit power to make them granted in statutes such as OSA [E] Staff Notices Protect investors and help to operate efficient capital markets Mechanism for the CSA or prov regulatory staff to communicate with market participants in a less formal manner often in relation to emerging regulatory probs hat are not subject of a policy or rule yet Also used to convey to market the results of staff investigations into how specific issues are handled by market actors [F] Self-Regulatory Organization Rules or Policies (SROs) Day-to-day regulation of capital markets in Canada relies heavily on SROs I.e. IIROC or Mutual Fund Dealers Association (MFDA) have power to discipline members for breaches of securities law IIROC also self regulates securities markets by way of universal market integrity rules (UMIRs) Stock exchanges i.e. TSX plays a role in establishing and maintaining listing standards for issuers [G] (Appellate) Court Decisions Determine issues such as what is a security; Authoritative and increasingly an imp source of law [H] Regulatory Tribunals [Regulatory Decisions, Orders, and Rulings] Most prov secs legislation grants prov commission power to hold hearings to review decisions made by regulatory staff [I] International Organization of Securities Commissions (IOSC) - Alberta, BC, Ontario, Quebec to cooperate together to promote high standards of regulation in order to maintain just, efficient and sound markets; to exchange info on respective experiences in order to promote development of domestic markets; to unite their efforts to establish standards and an effective surveillance of international securities transactions; to provide mutual assistance to promote integrity of markets by rigorous application of the standards and by effective enforcement against offences

3 Stock Exchange Rules [Important source of regulation of capital markets - ostensibly authority derives from contract (eg, listing agreement) but regulators may impose sanctions for non-compliance with exchange rules (see s.127 of OSA)]

DEFINITIONS: security; trade; distribution; reporting issuer; materiality

Contemporary examples of debate as to how far the definition of security extends Share is an obvious security but some are not obvious: (1) Viatical settlements/death bonds o A terminally ill policy holder (the viator) assigns the death benefit of his policy to a viatical settlement provider (the company) in exchange for an immediate payment of less than the expected death benefit of the policy o The offer typically amounts to between 50-80% of the policys face value o Terminally ill who need money now could sell life insurance policy and use money for treatment (2) Principal-protected notes o Extensive contractual guarantee that you will not lose principal o During the last several years the size of the market for PPNs grew significantly from less than 10B at the end of 1999 to over 30B by mid-2006 (3) Derivatives [relatively recent] o Derivatives have exploded in popularity in the last decade mainly as a result of an increased demand to hedge risk in volatile currency, interest rate, commodity and stock markets o Value taken by reference to another security/ item/ circumstance o Rights and warrants are types of derivatives o I.e. ski lodge biz is dependent on weather so enter into a weather derivative If 1-2 cm of snow pay the writer of the derivative a certain money o I.e. stock option way of incentivizing; granted as of particular date Stock option is exercisable to acquire 1 common share Options are securities: An option is an instrument that gives the holder the right to buy or sell an underlying interest in respect of a named issuer at an agreed price on or before an agreed date, but does not obligate the holder to do so p.35 if want to know about the different kinds of options o I.e. warrants common type of derivative Company will sell you a unit compromised of 2 or more securities (1 common share AND 1 warrant) Investor gets to play with 2 things (hoping common share value increases and hoping to make profit from warrant) Generally the price you pay for is just for common share and warrant is free Often investor sells common share immediately Sometimes there is a restricted period where you cannot sell so they hope the value or price decrease Definition of Security Definition of security in the Act is non-exhaustive includes and not means. o Broad approach intended to be a catchall so that purchasers of financial claims are protected from those who would seek to take advantage of them Defn is broad so we should look to caselaw Open-ended definitions: (broader) o (a): any document, instrument or writing commonly known as a security Geldermann: commonly known does NOT mean commonly known by the uninformed person on the street, but rather sophisticated analysts or securities lawyers o (b): any document constituting evidence of title to or interest in the capital, assets, property, profits, earnings or royalties of any person or company Often a key issue is whether the person acquiring the interest was making an investment as opposed to buying a commodity o (i): profit-sharing agreements. o (n): investment contracts more on this later. Specific definitions: o (c) of historical interest o (d): definition of option o (e): a bond, debenture, note or other evidence of indebtedness or a share, stock, unit, unit certificate, participation certificate, certificate of share or interest, preorganization certificate or subscription majority of instruments we would commonly consider securities would fi t under this subsection o (f): mutual fund unit

4 Securities may have different features Examples of securities commonly encountered in securities law practice: Shares of a corporation (most common) o 3 rights of a shareholder: 1) Vote 2) Distribution of assets upon dissolution 3) Receive dividend (NO obligation to receive dividend nor an obligation for company to repurchase your shares) o Other than this no obligation to pay anything [No rights to assets of corporation] o People buy shares for expectation price will go up and someone will buy it from you at a higher price Trust units -ETFs are trust units generally Partnership interests (least common); interest in the partnership is a security i.e. refer to Partnership Act in ON Howey (U.S. SC, 1946) definition of investment contract [clause (n)] Facts Howey co-owned Citrus Groves and Hower-in-the-Hills Service, which is a service company engaged in cultivating and developing these groves In order to raise money they offered a portion of their field to investors The price depended on the age of the tree in the portion Investors needed to hire a contractor, and most of them used Howey Hills (the sister co), although they were free to hire they own contractor Howey tried to argue all we are doing is selling real estate Decision: This is not a fee simple; it is an investment contract and thus a security Reasons It is held by Howey and managed by Howey The respondent companies are offering more than fee simple interests in land; the possibility to contribute money and share in the profits They are offering it to people who reside in distant localities and who lack the equipment and expertise of cultivating and harvesting These people have no desire to occupy the land or develop it themselves; they are contracted solely by he prospects of a return on their investment Even though you didnt have to use Howey Hills as the contractor, 40/50 saw it as a complete package Thus all the elements of a profit-seeking business venture are present: the investors provide capital and share in the earnings and profit, the promoters manage, control and operate the enterprise Dissent Accepted Howeys argument that there is 1) contract of land and 2) contract of services and they are separate Afraid regulators would case their powers too broadly Test (for investment contract formulated by the Court) If you have an investment of money in enterprise with profit coming solely from others, it is an investment contract and therefore a security and should be regulated under the Act All the efforts to realize profit came from others A person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party Hawaii (Sup Ct of Hawaii, 1971) definition of investment contract [clause (n)] Facts Corporations express purpose was to open a retail store which would sell merchandise only to people possessing purchase authorization cards Became a founder-member distributor by purchasing from HMC either a sewing machine or a cookware set for $320 Also an agreement that stated the distributor can earn money by distributing buyers cards and receiving 10% commission, earning $50 each time he recruits a distributor, $300 by establishing a new member as a supervisor, earning credits A person became a supervisor by purchasing BOTH a sewing machine and cookware set for $820 Supervisors earned higher fees and commissions than distributors Issue: Is a membership a security? YES this is an investment contract and thus a security Reasons Howey test is too mechanical to protect the investing public adequately

5 Courts become entrapped in polemics over the meaning of the word solely and fail to consider the m ore fundamental question whether the statutory policy of affording broad protection to investors should be applied even to those situations where an investor is not inactive, but participates to a limited degree in the operation of the business So the court interpreted solely loosely Court added that lack of managerial control of the enterprise is an economic reality of a securities Your only indirect way to make money was if you handed out cards but that doesnt mean you have control Court took the Howey test but added the risk element to it (your profit calculated differently) Portion of initial value is subject to the risk of enterprise (how well Hawaii manages your investment)

Pacific Coast Coin Exchange definition of investment contract [clause (n)] Facts Ability to buy bag of silver coins offered Purchase price dependent on market price at time of purchase Didnt have to pay for all of it up front; 90% chose buying on margin (borrowing money to pay for it) Pay certain %, broker buys rest and charges interest rate If you dont maintain margin they will sell your assets in margin to pay for it In this case, entered into hedging (contract with 3rd party who agreed to deliver coins) Issue: Is a sale of bag an investment contract and thus a security? YES Test [to determine whether an investment contract exists] 1) Common enterprise and o Such an enterprise exists when it is undertaken for the benefit of the supplier of capital (the investor) and of those who solicit the capital (the promoter) o In this relationship, the investors role is limited to the advancement of money, the managerial control over the success of the enterprise being that of the promoter; therein lies the community o In other words, the commonality necessary for the investment contract is that between the investor and the promoter there is no need for the enterprise to be common to the investors between themselves 2) Profit solely from others (solely interpreted loosely from Hawaii) o You buy it and are subject to credit risk/ creditors/ enterprise Dissent (Laskin) Howie and Hawaii were different; about land management and merchandise selling respectively Objecting to bringing every innocent transaction within the scope of securities legislation simply bc a perversion of them is covered by it (just like dissent in Howey) Albino (1991), 14 OSCB 365 Facts: Albino granted stock options, held them, found out company was going to lose contract Issue: Did he sell phantom stock options with knowledge? If it is not a security then not subject to the Act (insider trading) Were these phantom stock options (PSOs) a security? Yes Reasons: It was a security because of reasons in Pacific Coast case (securities traded in market and value of security not necessarily in Albinos control) Universal Settlements International Inc. (2006), 29 OSCB 7880 Issue They key issue was whether the viatical products offers to investors in ON are investment contracts If they are investment contracts, the prospectus and registration requirements of the Act apply Test (1) An investment of funds with a view to profit (2) in a common enterprise (3) where the profits are derived from the undeniably significant efforts of persons other than the investors Decision A unanimous panel of the OSC concluded that the instruments being offered for sale constituted securities Passed the 3 prong test In Hawaii the court stated that to negate the finding of a security the investor should have practical and actual control over the managerial decisions of the enterprise which was not the case here Definition of trade: OSA s.1(1) Non-exhaustive definition. Selling of a security for some type of consideration (a) focus on sales. (b) and (c) focus on traders/registrants.

6 (d): control persons (e): anti-avoidance provision [any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the foregoing] o Advertising/sales pitches promoting stock where no exemption available Securities legislation defines trade in a non-exhaustive manner to include among other things: any sale or disposition of a security for valuable consideration, any receipt by a registrant of an order to buy or sell a security, and any act, ad, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the foregoing

Definition of Distribution: OSA s.1(1) Securities legislation defines distribution as including a trade in a security that has not been previously issued, a trade out of a control block and any transaction or series of transactions involving a purchase and sale of or a repurchase and resale in the course of or incidental to a distribution Securities not previously issued AND a reissue of securities purchased pursuant to exemptions from the prospectus requirement can both be considered distributions On reissue, the issuer might have material info not otherwise available to the public Once a determination is made that the transaction involves a security and a trade, the next question in many jurisdictions is whether the trade in that security constitutes a distribution Again, the importance of this determination is that a prospectus (or an exemption from the prospectus requirement) is necessary when securities are being distributed Legal significance of making a distribution of securities: OSA s. 53: no co can trade a security that is a distribution Clause (a): a trade in securities of an issuer that have not been previously issue Clause (c): a trade in previously issued securities of an issuer from the holdings of any control person (special rules for control persons); if you own 20% or more of securities, you are deemed to be a control person unless there is evidence to the contrary Clauses (d) and (e): transitional provisions Implications Section 53(1) of the OSA No person or company shall trade in a security on his, her or its own account or on behalf of any other person or company if the trade would be a distribution of the security, unless a preliminary prospectus and a prospectus have been filed and receipts have been issued for them by the Director. Definition of Reporting Issuer : OSA s.1(1) (b) has filed a prospectus and for which the Director has issued a receipt (most common way to become RI) (a) and (b.1) transitional provisions (c): exchanges as self-regulators (f): possibility for regulatory discretion

HISTORICAL AND CONSTITUTIONAL ISSUES; OBJECTIVES AND STRATEGIES OF REGULATION

Purposes of the OSA 1.1 The purposes of this Act are, (a) to provide protection to investors from unfair, improper or fraudulent practices; and (b) to foster fair and efficient capital markets and confidence in capital markets. Without vibrant capital markets, economy is in trouble because companies raise money through markets and without it, cannot grow Principles to consider 2.1 In pursuing the purposes of this Act, the Commission shall have regard to the following fundamental principles: (1) Balancing the importance to be given to each of the purposes of this Act may be required in specific cases. (2) The primary means for achieving the purposes of this Act are, o (i) requirements for timely, accurate and efficient disclosure of information, o (ii) restrictions on fraudulent and unfair market practices and procedures, and o (iii) requirements for the maintenance of high standards of fitness and business conduct to ensure honest and responsible conduct by market participants (3) Effective and responsive securities regulation requires timely, open and efficient administration and enforcement of this Act by the Commission. (4) The Commission should, subject to an appropriate system of supervision, use the enforcement capability and regulatory expertise of recognized self-regulatory organizations.

7 (5) The integration of capital markets is supported and promoted by the sound and responsible harmonization and coordination of securities regulation regimes. (6) Business and regulatory costs and other restrictions on the business and investment activities of market participants should be proportionate to the significance of the regulatory objectives sought to be realized.

Principal Goals of Securities Regulatory Regime- 3 objectives (albeit difficult to balance all 3) 1) Protect Investors o Original purpose of securities regulation was investor protection (it was thought that unwary investors who were willing to purchase securities should be protected from fraud from that company) 2) Promote fair, efficient and competitive capital markets 3) Ensure integrity and stability of the financial system Historical Overview of Canadian Securities Regulation (more detailed p.80-83) Inspiration from U.K. and U.S Varying focus on fraud, disclosure and blue sky approaches o First blue sky law was enacted in Kansas in 1911 o Needed to obtain permit from bank commissioner Shifting emphasis on public vs. private enforcement of securities law norms Provinces regulate persons involved in the trading of securities Started in UK mid 1800s statutes requiring companies to disclosure who directors and investors were Over the years, securities regulation has evolved, requiring companies to be licensed Disclosure to disclosure and licensing regime Before it was up to you to sue and now public regulator takes a more active role Constitutional Jurisprudence BNA division of powers [s.91 (trade and commerce)/s.92 (property and civil rights)] Tension between provincial securities commissions and federal govt has been a problem within the last 10 yrs Ultimately, securities law is about contracts and people doing biz when each other so pith and substance is prov Federal govt thinks the current system is inefficient and there should be a national securities act and regulator The US has a federal regulator (SEC) Always jurisdictional issues involved. Many transactions straddle provincial borders Caselaw below traces constitutional development of securities law in Canada Common theme is that each province has the right to regulate securities industry under s.92 Mayland v Lymburn (1930s) o RATIO: Because provinces have the power to regulate the securities industry, any company is subject to prov law (even if it is a federal company) o Alberta Securities Fraud Protection Act o Privy Council decided that the provincial securities legislation in question did not encroach on the federal legislative power with respect to criminal law (it falls under property and civil rights) R. v. Smith o RATIO: Court said pith and substance of OSA is property and civil, just because they issue penalties that are criminal like, does not mean this is encroachment o Company was charged under OSA for issuing a false prospectus and in ON you can go to jail for that R. v. McKenzie o RATIO: provincial securities law have extraterritorial effect if selling to someone in that jurisdiction A person may from outside the borders of a province do certain acts within the province so as to make himself liable to the provisions of the statute There seems to be no reason why a person cannot become subject to a licensing statute of a province without ever entering the province, constitutional questions aside. Although offences are local, the nature of some offences is such that they can properly be described as occurring in more than one place o Couple of ON brokers selling securities from their office in TO to someone in Manitoba o They were charged and convicted with unlawfully trading securities in Manitoba bc it violated Manitobas act o Court said by selling shares in Man, conducing securities activities in Man means subject to Man Act o Even though ON co complied with ON laws, must comply with laws in prov where you are issuing securities too o Must be registered in both provs as well o Can it effectively be denied that such solicitation took place, at least part in Manitoba? I think not Multiple Access v. McCutcheon o RATIO: if concurrent provisions, doesnt mean 1 has to take precedent over the other

8 Concurrent provisions re insider trading in OSA and Canada Corporations Act Defendant argued federal act should take paramountcy but court said the prov has the right to regulate securities industry Quebec vs. Ontario Securities Commission o RATIO: ON securities law be enforced in Que if Que company is involved in sale of securities in ON Pith and substance of the legislation involved in this case concerns property and civil rights in ON The legislative objective is to regulate the operation of the capital markets in ON for the protection of those who use them It can hardly considered fair and reasonable to suggest that only ON residents are subject to ON regulatory rules when operating in ON capital markets Global Securities v. BCSC o RATIO: Securities commissions have the right to cooperate with foreign regulators if it helps with regulation of the provinces securities o If BC can legitimately conduct its own investigation of foreign violations, certainly it can choose to have that task carried out by a foreign regulator o As many interveners pointed out, admin arrangements between provs and foreign authorities are common o The mere fact that the province is cooperating with the foreign authority in the pursuit of that purpose will not change the laws pith and substance Torudag v. BCSC o RATIO: BCSC has jurisdiction to regulate trading on the TSXVE if the matter of the notice of hearing has a real and substantial connection with BC That the Exchange chooses to process trades on a server located in TO does not diminish the real and substantial connection to BC o Before deal is publically announced, 2 ppl living in ON bought shares on the TSXV o After deal is announced, price went up o Court found Torudags and Chans participation in BC markets by making trades through the Exchange is sufficient to establish a real and substantial connection between the subject matter of the allegations in the notice of hearing and BC o In addition most of those who sold the shares to Torudags and Chan were residents of BC o o

Calls for a National Regulator p.119 of text for more details (all of below led to the reference) Porter Report (1964) o The Porter Commission hoped that the establishment of a federal agency would lead to greater agreement and cooperation, eliminating the duplication that the Commission saw as hampering effective securities regulation. In particular, the Commission hoped that the introduction of uniform federal standards would foster the adoption of similar standards in the provinces and free the provinces to focus on purely local matters by automatically clearing federally regulated issues. In its view, a single federal agency would improve cooperation with the United States Securities and Exchange Commission and would be responsible for and interested in the growth, development and efficiency of the whole Canadian securities industry CANSEC Proposal (1967) o CANSEC the Canada Securities Commission was to be a three-tiered structure (a council of ministers, CANSEC and administrative staff) designed to achieve uniformity in Canadian securities regulation through cooperation by the federal and provincial governments, rather than by forcing each province to surrender its regulatory activity in the field to a federal body. CANSEC would operate on an opt- in basis: no province would be required to join or remain in CANSEC. Moreover, participation by provinces would not involve a permanent surrender of power: A government which has passed an amendment in order to bring themselves into the scheme can repeal that amendment o In bringing CANSEC into existence, the OSC did not consider it necessary that the provincial laws themselves be substantively uniform; rather, similar schemes of administration and some modest degree of uniformity in securities legislation would suffice (p. 66). The provinces would retain jurisdiction over nearly all substantive issues, delegating to the commission authority only to deal with federal corporate, international and c riminal matters not clearly within provincial jurisdiction Proposals for a Securities Market Law for Canada (1979) o In 1979, the federal Department of Consumer and Corporate Affairs produced a three-volume study entitled Proposals for a Securities Market Law for Canada, which contemplated a national securities commission working in cooperation with the provinces. The study recommended the creation of a federal securities commission and the enactment of federal securities legislation and envisioned a nationa lly coordinated system of regulation that involves cooperation between a federal commission with federal jurisdiction and provincial and foreign commissions (vol. 2, at p. 5). It contemplated administration either by a federal commission, by a cooperative body developed through negotiations among the federal and provincial governments, or a body

9 lying on the spectrum between that and a single federal agency. 1994 Proposal o In 1994, the Premiers of the Atlantic Provinces asked the federal government to establish a national securities regulator. The proposal ultimately took the form of a draft memorandum of understanding (MOU) between the federal government and participating provinces, which was circulated among the provinces ((1994), 17 OSCB 4401). The MOU proposed the creation of a Canadian Securities Commission and envisioned a uniform securities regulatory structure which [would] apply comprehensively within and across all participating provinces (preamble). o Like the proposal to establish CANSEC, the MOU was premised on opting-in by the provinces and explicitly stated that no government would give up any jurisdiction by joining. Participating provinces were to have the ability to adopt regulations exempting certain securities from provisions of the federal legislation. The jurisdiction of provincial securities regulatory authorities in provinces which elected not to participate in the uniform securities regulatory structure would not be affected. Canada, however, committed to developing consultation and coordination mechanisms between the Canadian Securities Commission and the securities commission or equivalent office of any province which is not a Party to [the] agreement to maintain the benefits of harmonization of securities regulation in Canada and to promote further such harmonization in the future Wise Persons Committee Report o Recommends that Canada has a singular regulator in which both the federal and prov govts have significant roles o The WPC therefore recommended the enactment of a single, comprehensive code for the regulation of Canadian capital markets by the federal government. The single set of rules would cover all securities regulatory matters in Canada (p. 59). Provincial participation would be achieved through an obligation on the federal government to consult with the provinces before amending the legislation. o The WPC rejected the dual structure of securities market regulation recommended by the OSC proposal to establish CANSEC, Crawford Panel o The 2006 Crawford Panel on a Single Canadian Securities Regulator, established by the government of Ontario, endorsed the adoption of Canadian securities legislation (Blueprint for a Canadian Securities Commission Final Paper). The Panel proposed that uniform regulation would be achieved by all jurisdictions incorporating, by reference, legislation enacted by one province as the Canadian Securities Act and establishing a Canadian Securities Commission. A common body of securities law would then apply across the country. However, like the WPC, the Crawford Panel viewed the participation of all provinces and territories and the federal government as ideal but not necessary for the Commission to be established. The key was that there be an initial core group of Participating Jurisdictions that agrees to enact, or to enact through incorporation by reference, common legislation that establishes the [Commission] and delegates to it authority over capital markets regulation Expert Panel on Securities Regulation [aka the Hockin Panel] (came out in 2009) o the Expert Panel on Securities Regulation (the Hockin Panel) released a report that informed the Securities Act proposed by Canada in this reference o Like the Crawford Panel, the Hockin Panel recommended the establishment of a Canadian Securities Commission to oversee a single Securities Act for Canada. o The Hockin Panel envisioned the establishment of a comprehensive national regime of securities regulation (p. 60), to be brought into force in participating jurisdictions through the repeal of local legislation. o Voluntary provincial participation but the Commission consider should negotiating memoranda of understanding with non-participating jurisdictions to coordinate securities regulation. Canadian Securities Regulation Regime Transition Office o In response to the Hockin Report, the federal government established this, and prepared a draft Act implementing the Reports proposals. o On May 26, 2010, the Governor General in Council referred this draft legislation to the Court for an advisory opinion as to its constitutional validity. (DECISION IS BELOW)

Current debate re Constitutionality of Proposed Canadian Securities Act Reference Re Securities Act, 2011 SCC 66 Facts: Federal govt sought advisory opinion from the SCC as to whether the proposed Securities Act (developed by the Cdn Securities Regulation Regime Transition Office) falls within the legislative authority of the Parliament of Canada. (under the trade and commerce power) Decision Held: The Securities Act as presently drafted is not valid under the general branch of the federal power to regulate trade and commerce under s. 91(2) of the Constitution Act, 1867.

10 In a unanimous decision, the Supreme Court of Canada found that Ottawas plans for a national securities regulat or encroached upon provincial powers.

Reasons Pith and substance of the draft federal Act consisted of complete regulation of securities, instead of filling in the gaps regarding interprovincial issues that the provinces were incapable of safeguarding against. o The scheme was too involved in the daily operations of the securities industry, which are contractual, and therefore fell under the provincial jurisdiction of property and civil rights. o Duplicated or replaced provincial securities legislation did not complement The proposed Act was ultra vires the general trade and commerce power. o The Supreme Court examined this issue purely as a question of the constitutionality; the SCC noted that it did not look at whether a national securities regulator would be better for the public. As important as the capital markets and financial stability are in Canada, it did not justify a complete takeover by the federal government of the regulation of the securities industry. Local concerns o The SCC opined that the financial markets have not changed so much that provinces are no longer capable of regulating its activities, including registration and policing. o The basic nature of regulating securities, the SCC found, was primarily concerned with protecting investors and ensuring fairness of markets through participant regulation local concerns. o Further, the SCC noted that securities trading in Canada still had a local flavour, with mining listing comprising 2/3rd of the market in BC, large financial services companies making up half of ONs market, AB being primarily concerned with the energy sector such as oil and gas, and a quarter of technology listings coming from Que Left open the possibility that some regulation of securities was possible by the federal government under the T&CP Court said provinces and federal government should agree on an appropriate solution o It would be possible for the federal government and the provinces to work together and share the oversight of the securities industry. o The provinces would be responsible for the day-to-day elements, while the federal government would monitor the risk on a systemic level. o The federal government can work with the provinces to set up a national co-operative scheme that recognizes the power of the provinces. The SCC also pointed out that they have not been asked their opinion on the extent of the federal governments legislative authority over securities regulation under any other heads of federal power (e.g. criminal? Peace, order, and good government?), or the interprovincial or international trade branch of section 91(2) of the Constitution. Groia Memo on National Securities Regulator (based on the decision above) He summarizes the reasoning above Also points out that the SCCs decision undermines Finance Minister Flahertys efforts of the past five years to implement a national securities regulator. o Although the decision is not legally binding, a government has never disregarded the opinion

OVERVIEW OF REGULATORS AND MARKETS (STOCK EXCHANGES)

Empire Club Video- Tom Caldwell from Caldwell Securities Argues that regulators are killing the securities industry Essentially, financial and securities industry is becoming over-regulated in US and Canada Securities regulations need to be simple and clear He is arguing for a principled-based regulation: Principles they have to follow and if they dont, go after them opposed to having 1000s of rules and regulations saying what they have to do Priority for commissions should be efficient capital market whereas OSC says protection of investor is most impt 2 principles sources that regulate the securities industry (1) prov commissions (administers provincial securities laws) (2) stock market (brings buyers and sellers together) Issuer Profile Distinction between issuer and reporting issuer (issuer has filed a prospectus) Profile of reporting issuers in Canada from Wise Persons Committee, 2003 (CB p.144) o 2/3 of Canadian reporting issuers are reporting issuers in more than one jurisdiction o All companies have shareholders in more than one province o Approximately 30% are national issuers

11 Approximately 10% have market capitalization over $75 million 98% of total market capitalization of Canadian market [Number of shares x share price to determine market capitalization] This profile highlights the importance of Canadian capital markets to the domestic economy It also reveals that capital in Canada is still relatively concentrated Updated material from OSC Staff Notice 51-706 (2010) o # of reporting issuers in Ontario= 1400?; Hasnt changed much; Most public companies are small corps o Industry breakdown of Ontario reporting issuers o TSX: 30% of value are banks, insurance companies, 20% are mining so 50% is financial and mining Bigger Canadian companies are listed on more than one stock exchange (TSX and New York) Nicholls study for Task Force to Modernize Securities Legislation (2006): Key findings o Market cap of Canadian issuers about 3% of world market cap o Canadian public equity markets represent both ends of continuum o 177 Canadian issuers cross-listed on U.S. exchanges, and 48 on LSE o Significant % of Canadas largest non-financial public companies have controlling shareholders Gives them control and makes it difficult for someone to take over I.e. Rogers o

SECURITIES MARKETS Primary vs. secondary markets (1) Primary market is a distribution o Capital is raised by issuers in primary markets (first offering of securities to public) o Takes effect where the issuer sells its own securities or sells them through the services of an underwriter o Private placement is a sale of securities by the issuer directly to the investors whereas initial public offering (IPO) occurs when an issuer is first offering securities to the public generally (2) Secondary market is for trading of securities of a reporting issuer after they have been issued pursuant to a distribution o If the securities were issued in private placement, the value of the securities being traded is determined between the buyer and the seller in accordance with the restrictions of the exempt market o Where the securities were issued through a public offering, shares are frequently traded through stock exchanges or other securities markets o Different regulatory rules apply depending on the type of market Company only used to have liability for primary market but now there is secondary market liability too Definition of marketplace Different types of trading systems where securities trade after distribution completed Broad definition of marketplace in OSA NI 21-101: Exchange traded security-listed on recognized exchange or quoted on a recognized quotation and trade reporting system OSA s.21 re stock exchanges: No person or company shall carry on business as an exchange in Ontario unless recognized by the Commission under this section. If you want to start a stock market, must get approval from the securities commission (year or more regulatory battle) and the securities commission regulates the exchange too TSX used to have a monopoly but not anymore Recognized stock exchanges in Canada - recognized by securities commissions Toronto Stock Exchange (TSX) (historical material at CB p.152-154) o There are minimum listing requirements o If you want a public company you want liquidity o The exchange thru which the shares of the largest Cdn issuers called sr equities, are traded o Canadian-based issuers represent approximately 96% of the cos listed on the TSX and TSX Venture Exchange o The TSX is the largest small-to-medium enterprise exchange in North American and second in the world o TSX provides an efficient, liquid market for a broad cross-section of Canadian issuers o TSX assists about 1500 issues through services designed to increase retail and institutional investors TSX Venture Exchange o Serving the public venture equity market, provides access to capital for companies at the early stages of their growth while offering investors a well-regulated market for market venture investments o Junior exchange; requirements are not as onerous; not a lot of liquidity o Small company like mining company for instance going public will list shares here Canadian National Stock Exchange (CNSX) o Became recognized in 2004

12 This is a stock exchange alternative to traditional stock exchanges where high costs and large capitalization requirements are often barriers to trading in a junior companys securities o Responding to the consolidation of stock exchanges in Canada, CNSX created a lower cost streamlined stock exchange, streamlining issuer regulations but maintaining disclosure standards o A lot of companies have no liquidity (not a lot of shares trading) o Small companies so it competes with TSX Venture Exchange o May not meet requirements of TSXVE so try to enlist here as the requirements are less stringent o Down side is not many companies are listed so not many people trading Montreal Exchange (derivatives i.e. auction; security for a security) o Bourse de Montreal o Evolved out of the Montreal Stock Exchange o It is now engaged in derivative securities and options trading and is owned by TMX group Quotation and Trade Reporting System -People arrange for trade to happen and then report it in (none in ON right now) Alternative Trading Systems in Canada o Not physical; only over Internet; Computer-based systems that automate the process of trading in securities o An ATS is defined as any automated matching system that brings together orders from buyers and sellers by using predetermined, established methods or rules National Instrument 23-101 Trading Rules [All rules for trading shares] Exchanges are self regulatory organizations exchanges established IIROC (Investment Industry Regulatory Organization of Canada) oversees investment dealers and trading marketplaces o If your broker does something wrong, make complaint to IROC who will take disciplinary action o Insider trading investigations, etc. Companies can be listed on more than one exchange (i.e. TSX and NYSE) Companies listed on an exchange must comply with the rules of that exchange - i.e. corporate governance practices o

TSX Company Manual Send TSX preliminary prospectus saying we want to list Once you get receipt for final prospectus, you are letting them know you want people to start buying and selling on stock exchange Original Listing Requirements o I.e. Certain value of assets, certain number of shareholders (for venture for instance need 300 shareholders), net tangible assets (to ensure it will survive) Maintaining a Listing Changes in Capital Structure Fees payable Venture Exchange and CNSX have their own listing requirements and rules TSX Company Manual Structure Part I Introduction Part II [Repealed] Part III Original Listing Requirements Part IV Maintaining a Listing General Requirements Part V Special Requirements for Non- Exempt Issuers Part VI Changes in Capital Structure of Listed Issuers Part VII Halting of Trading, Suspension and Delisting of Securities Part VIII - Fees Payable by Listed Companies Part IX Dealing with the News Media Part X o Special Purpose Acquisition Corporations (SPACs) o Provisions Respecting Conflict of Interest and Competitors of TMX Group Limited o Appendices o Forms o TSX Staff Notices Rules that apply to TSX but are not Commission Policies 1) If listed on the TSX, cannot do plurality voting anymore o Now have the right to vote or withhold each director individually o Also now if more ppl withhold vote, D should resign whereas before you only needed one vote to stay a D o If company doesnt have that policy, they have to explain why

13 o TSX is trying to make it more democratic o Company also must let TSX know which directors had more withheld votes 2) Certain number of directors must be independent o No ties to co bc that is better corp governance bc Ds are supposed to represent shhs and NOT management 3) Issuance of shares o If going to list more, apply to TSX 4) If you are a company that goes public and wants to incentivize employees to work harder, have option plan o Option to buy shares of company to employees from treasury not from TSX o Going to work harder so company is successful and price of shares go up, then if shares go up, can go to company and say I want to buy shares for the price you originally asked for o Then you sell it for a higher price o People become disgruntled because employees end up getting so much money o Cannot issue more than a certain percentage as option 5) TSX also makes you put your shares in Escro so you cannot trade right away (typical period is 3 years) o You are founder (CEO/biggest shareholder)

Market Intermediaries Dealers like RBC who participate in trading of securities have to register New registration rule (NI 31-103) Categories of individual registration - NI 31-103 Part 2 Categories of registration for firms - NI 31-103 Part 7 Distinction between markets and dealers Regulators Global International Organization of Securities Commissions (IOSCO) securities regulations from all over the world o Focuses on enforcement, international accounting, standards (lots of cross border stuff) o Not a regulator so thus no power really o Actively promoting harmonization of disclosure standards to facilitate cross-border trading and promote international cooperation in enforcement o IOSCO is a worldwide association of regulatory bodies with responsibility for securities regulation and the administration of securities laws o IOSCO aims to foster cooperation among its members, promote high standards of securities regulations, facilitate the exchange of info and encourage the establishment of standards and effective surveillance of intal securities transactions Provincial and territorial regulation in Canada o Canadas regulatory structure has become more integrated despite the fact that we still have 13 securities commissions o The Canadian system is characterized as largely as a closed system of securities regulation based on the idea that all distributions of securities must be qualified by a prospectus and its attendants regulatory oversight unless an exemption applies Standard setting at national level via National Instruments and National Policies How does an issuer navigate this myriad of securities statutes and regulations? Canadian Securities Commission Pearson v Boliden RATIO: But in respect of a misrepresentation in a prospectus, it would be the prov in whose territory the securities are distributed [This is more practical than the contracts most substantial connection rule] It also comports with what a reasonable investor would expect Passport System Passport system accepted by all provinces EXCEPT Ontario MI 11-101 (CBP. 181) One securities commission acts as principal regulator for all materials relating to reporting issuer The Principal regulator represents all other commissions If OSC principal regulator, other provinces recognize this o If other province principal regulator, still have to file materials with OSC o But if you choose ON, dont have to file with other provs o This is a multilateral instrument because ON doesnt follow it The purpose is to implement in the main area of securities regulation, a system that gives a market participant access to the capital markets in multiple jurisdictions by dealing with only one principal regulator and meeting the requirements of one set of harmonized laws

SEDAR

14 One advtg is the process of negotiation among diff regulators has allowed for considerable public policy debate on the impact of proposed standards in particular types of issuers, investors and the market more generally The disadvtg is the time and cost of building consensus on regulatory changes There is also the additional challenge of different regulators interpreting and enforcing nationally negotiated proportionate standards differently, although regulators in recent years have cooperated to a greater degree in their compliance and enforcement initiatives If the principal regulator refuses to issue a receipt for a prospectus, it will notify the filer and the non-principal regulators by sending a refusal letter thru SEDAR Where the principal regulator is passport regulator and the prospectus is NOT filed in ON, the prospectus is called a passport prospectus Where the principal regulator is the OSC and the prospectus is also filed in a passport jurisdiction it is also a passport prospectus Where the principal regulator is a passport regulator and the prospectus is also filed in ON the prospectus is referred to as dual prospectus o In this case, the OSC as a non-principal regulator will coordinate its review with the principal regulator [National Policy 11-202- 3.3 Dual Prospectus] o The receipt of the principal regulator will trigger a deemed receipt in each other passport jurisdiction where the prospectus is filed and will evidence the receipt of the OSC IF the OSC has made the same decision as the principal regulator NP 11-202 specifies that the principal regulator for a prospectus filing under this policy is the regulator of the jurisdiction in which the issuers head office is located Systems for Electronic Document Analysis and Retrieval (www.SEDAR.com) SEDAR provides public access to most of the documents filed by issuers as part of the continuous disclosure regime Every public company must be listed on SEDAR Send it to lawyer who files it on SEDAR National web-based filing system that facilitates electronic filing of reporting issuers documents including: press releases, prospectus, financial statements, material change reports, insider trading reports

Structure and Powers of OSC Part I of the Securities Act (Ontario); CB at p.170. Various regulatory activities conducted by OSC: Could organize by type of market sector or by type of regulatory activity (eg rule making, compliance, enforcement, adjudication) Contrast with AMF in Quebec (CB at p.178) Conflict between rule making and adjudication functions of securities commissions o Public perception that adjudicative process is unfair and lacks impartiality o Various studies have recommended an independent and national securities adjudicative body IIROC (SRO) Investment Industry Regulatory Organization of Canada THE ENFORCER (enforces rules in marketplaces) National self-regulatory organization which oversees investment dealers and trading activity on exchanges Protects investors and promotes market integrity Members of IIROC are dealers and exchanges i.e. TSX is a marketplace member that IIROC regulates Created in 2008 through consolidation of IDA and RS aimed at setting high quality regulatory and investment standards, protecting investors and strengthening market integrity while maintain efficient and competitive capital markets IRROC is a self-regulatory body acting in the public interest and subject to oversight by Cdn Securities Administrators Other Self-Regulatory Organizations (CB at p.182-186) MFDA Mutual Fund Dealers Association o Regulates mutual fund dealers o Instead of buying stock in individual company o MFDA regulates the operations, standards of practice, and business conduct of its members and their representatives with a mandate to enhance investor protection and strengthen public confidence in the Canadian mutual fund industry CDS Canadian Depository for Securities o Clearing settlement and payment for securities trades CIPF Canadian Investor Protection Fund o Deposit insurance for investors Insurance fund reimburses you if dealer goes bankrupt o It assists in setting standards for capital adequacy, liquidity and financial reporting for investment dealers

15 CPAB Canadian Public Accountability Board o Oversight program for accounting firms o Authorizes firm capable of and strong public companies o If you are going to be auditor of their company must meet standard o Post-Enron the accounting industry collaborated with securities regulators to set this up o Its mission is to contribute to public confidence in the integrity of financial reporting of reporting issuers by promoting high quality, independent auditing and it is responsible for developing and implementing an oversight program that includes regular inspections of the auditors of Canadas public companies

Critiques of the Canadian Regulatory System Inconsistencies in standards and enforcement For issuers, there are unequal investment opportunities across Canada because of the need to pay fees and seek regulatory approval in different jurisdictions- Issuers often make distribution determinations that bypass smaller provs bc of the transaction costs involved The challenges posed by the need to participate internationally, the need for enhanced enforcement and the need to reduce the amount of complexity in regulatory instruments may have overshadowed the once perceived benefits of regional regulation There have also been insufficient resources directed toward monitoring and enforcement which arguably encourage self-dealing and misconduct because the risk-benefit calculation may encourage parties to distribute without meeting securities law requirements The Wise Persons Committee also critiques it: o Compliance reviews can be allowed because of coordination difficulties o Investigations and enforcement proceedings may be impeded by non cooperative jurisdictions o Potential for multiple investigations and enforcement proceedings by diff regulators in respect of the same respondent o Unjustified variation among the provinces and territories in enforcement priorities and statutory protections o Differences in statutory enforcement provisions result in diff levels of investor protection across the country The Wise Persons Committee also lists structural limitations of the current system that need to be addressed: o (i) Inefficient allocation of resources o (ii) Coordination difficulties in multijurisdictional proceedings o (iii) Unjustified variation in enforcement priorities and statutory protection for investors

PROSPECTUS OFFERINGS: Primary Market

3 ways to distribute securities in Canada: (1) Prospectus o If you buy shares pursuant to prospectus then can sell the anytime to whoever (theory is once you file prospectus, enough info in public market 4 people to make an informed decision) free trading (2) Private placement (need prospectus exemption) o NOT free trading; it is a distribution if no prospectus filed so you MUST file prospectus OR get exemption to sell (3) Go to OSC and get exemption order (if you dont want to do prospectus and there is no clear prospectus exemption available) RARE If ON co wants to issue securities in Alberta, NS, must look at all 3 securities acts Overview of Process (1) Pre-filing (2) Organizational meetings, collection of corporate documents, minutes of board meetings (3) Waiting Period (4) Printing and distribution of commercial copies of preliminary prospectus, roadshows [where issuers disseminate info about an offering to a large audience], respond to comment letters from regulator (5) Formal due diligence, final pricing Introduction A prospectus is a document published by an issuer setting forth the nature and objects of an issuance of securities created by the Issuer, and inviting the public to subscribe to the issue. It is the principal document (there are other documents) required by law to be furnished to a prospective investor. It must contain full, true and plain disclosure of all material facts so that a prospective investor may make an informed valuation and investment decision. The form and content of the prospectus is governed by securities laws and regulations.

16 41-101: prospectus (national instrument) harmonized Securities legislation prohibits a person or issuer from distributing a security or trading in a security where the trade would be a distribution unless a prospectus is filed and receipted OR the distribution is exempt from the prospective requirement The prospectus process allows for scrutiny by a regulator of the documents prior to the public relying on them Different types of prospectuses for diff types of issuers but some prospective requirements are common to all: o Disclosure thru the prelim and final prospectus o Regulatory oversight of the process o The right of withdrawal and rescission for investors under certain circumstances o Stat liability for mireps and omissions in relation to the prospectus N1 41-101- General prospective requirements o Recognizes passport system creating a passport prospectus and dual prospectus Prospectus disclosure also required when there is a sale of securities by persons having a controlling interest in the securities of an issuer such person likely to have heightened info about the issuer and the disclosure requirements are imposed on their transactions The prospectus system was designed as an instrument to increase public confidence in public offerings Part of the stat framework is to provide the appropriate checks and balances in terms of what issuers need to include in the prospectus with the attendant time and cost of preparing materials, and how notice is to be given to potential purchasers in a meaningful and timely manner Prospectus required for an IPO [first offering of securities by an issuer entering the market] and a primary offering of securities [first offering of a particular set of securities by an issuer already in the market called a reporting issuer

Advantages of going public *going public means an issuer wants to issue securities and get them into the open system so they are freely tradable; becoming a reporting issuer Huge market for capital o The largest market for capital that issuer can use (rather than borrowing money and repaying it); it is equity; relatively cheap (minus cost of prospectus) o Amount of capital raised will probably exceed upfront costs of launching the IPO otherwise issuer wont pursue Dont have to satisfy onerous bank requirements as debtor, especially if high risk business Create base of interest for future capital needs o Once you are out there and allies follow you and people write about you, so in the future if you need capital, easier to obtain investment (try to create buzz and issuers try to get name out there) Liquidity for investors Established method for valuing shares (theoretically the true value of the shares will merge) Flexibility re employee compensation Ease of doing business o Reporting issuer has track record like financial statements so may help you land a contract opposed to private company who doesnt have public audited statements Prestige and enhanced visibility Disadvantages of going public Lose confidentiality, especially with respect to competitive advantages (FTP disclosure includes business secrets!) Reduced flexibility with respect to communication with shareholders o Illegal to selectively disclose material facts unless it is necessary in the course of business (grey area) Increased focus on short-term returns o Board and management are pressured to build returns, so there is manipulation to provide that appearance o Pressure can sacrifice long-term returns for short term gain Changes in control of voting shares o In private company, changes of having control change is less than public company o Number of shares to have control in public company is higher i.e. 5-10% because chances are others have less than that and they may not even show up to vote o Board may be out of a job if controlling shareholders change and want a new board o Shareholder activism is big today many disputes recently Cost and time involved in going public o Drafting and filing prospectus is expensive and time-consuming o There has been debate about the extent of disclosure required which has lessened in response to debate i.e. short prospectus for those who are eligible foundation is the assumption that issuers who are already reporting issuers are abiding by the continuous disclosure obligations of securities law; particularly, they are

17 filing annual info forms which provide extensive info to investors o TSX found median total cost est by issuers for launching IPO was 3.9M for operating co and 11M for special purpose issuers o Costs are smaller for smaller issuers but still expensive and time consuming esp when delays in seeking regulator approval in MULTIPLE markets passport system in Canada makes it easier now BUT still delays due to dual process in ON o Public offerings are time sensitive and untimely regulatory approval can seriously affect the pricing of securities bc there is often an opportune moment or market window in which to launce the securities o One of the risks associated with missing a market window is the deferral or outright cancellation of the IPO biz plans intended to follow the IPO would be completely ruined Costs involved in staying onside regulatory requirements o Accounting costs, regulatory filing fees, stock exchange fees o Significant chunk of issuers resources go towards regulatory costs Other costs such as press releases, auditors to look over financial statements etc. Market values the shares so if supply exceeds demand stock goes down

Prospectus Required to Become Reporting Issuer OSA 53. (1) No person or company shall trade* in a security on his, her or its own account or on behalf of any other person or company if the trade would be a distribution of the security, unless a preliminary prospectus and a prospectus have been filed and receipts have been issued for them by the Director. (2) A preliminary prospectus and a prospectus may be filed in accordance with this Part to enable the issuer to become a reporting issuer, despite the fact that no distribution is contemplated. *Note definition of trade includes any act in furtherance of a trade. Notes Some people want reporting issuer status but dont want to be listed on the stock market for reasons such as it is a bad time to enter the stock market o They would still be listed on SEDAR so everyone can see their financial records o S.52: non offering prospectus how to become a reporting issuer without a public offering Once a reporting issuer, you are one pretty much until the OSC says otherwise for instance You can be held liable for misrepresentation which includes omissions Having an underwriter is encouraged because they do extra due diligence they have vested interest from legal perspective AND a reputational incentive Examples of Types of Securities Qualified by Prospectus Common Shares o Simplest type of transaction can be IPO, secondary offering, or new issue (or combination) o Can include enhanced features, such as flow-through attributes for purposes of Income Tax Act Units o Term is generally used in the industry to indicate more than one type of security is being offered. The unit is not itself issued or qualified under the prospectus and is not a security; it is comprised of 2 or more securities. o Can be comprised of common shares and warrants, convertible debentures and warrants, different classes of preferred shares, warrants with different terms, etc. o Shares underlying the convertible security are usually not qualified under prospectus exemption is available. o Not really a security; it is a convention in investment banking rules o Issuer will sell CS but also a sweetener such as a warrant (1/2 or full, usually ) in order to attract investors Convertible Debentures o Debt that is convertible into equity in certain circumstances (ie, at option of holder, issuer, automatically upon occurrence of certain event) o Usually issued under indenture if prospectus offering. o If market price increases more than convertible debenture, then convert it and sell it at the higher price and take the difference for yourself Subscription Receipts o Often issued where some corp event is to occur: major acquisition, winning of contract, M&A transaction etc. o Issuer does not want to issue the underlying securities if event does not occur o Proceeds go into escrow pending satisfaction of escrow release conditions o Sub receipts are qualified by prospectus Special Warrants o Issued where it is anticipated that a prospectus (long form) will be filed to qualify securities underlying SW c/s or units before the restricted period is over

18 Often just a requirement to use best efforts to qualify underlying securities but a penalty bump if not qualified by a certain date o Rare; used to have to hold security for 12-18 months but now the restricted period is much smaller so it is not worth it to do special warrants Prospectus also qualifies other securities: o Over-allotment option (is itself a security) see Part 11, s. 11.1 of NI41-101 and Part 7, s. 7.2 of NI44-101); o Distribution of securities underlying the OAO; o Compensation options see Part 11 of NI41-101). Issued to underwriter, who gets additional compensation if the price rises o

What to Exclude in Preliminary Prospectus Not a draft, as in reality, most effort is spent on the prelim prospectus See OSA s.54 as to what can be excluded o (1) A preliminary prospectus shall substantially comply with the requirements of Ontario securities law respecting the form and content of a prospectus, except that the report or reports of the auditor or accountant required by the regulations need not be included. o (2) A preliminary prospectus may exclude information with respect to the price to the underwriter and offering price of any securities and other matters dependent upon or relating to such prices. BUT if the offering price or number of securities has been publicly disclosed in a foreign jurisdiction as of the date of a prelim long form prospectus, the issuer must disclose that info in the prospectus No express requirement to have an agent/ underwriter involved but most do and underwriter as name on it and it becomes available on SEDAR so underwriter is going to make sure they dont take a reputational hit If preliminary is so deficient that you are unable to file final, deal wont go through The supporting documentation typically includes a resolution of the Board authorizing the filing, the underwriting agreement, financial statements and certification notes by sr officers Preliminary prospectus must contain a caution that it is not final, often referred to as a red herring bc of the requirement to highlight in red ink and in italics at the top of the cover page p.239 for the words Risk-Based Approach Objective of the selective review system is to focus limited staff resources on material and relevant issuers thereby facilitating an effective and cost-efficient review process Regulators engage in selective review of prelim prospectuses NOT a review of all that are filed bc of finite resources There is initial screening process for determining scope of review if any A risk-based approach to securities regulation is a system designed to target those activities and market participants where probs are more likely to arise Prospectuses pursuant to IPOs continue to receive a full review as do those in instances where the prospectus appears to raise matters for which a full review would be beneficial Challenge for staff is to recognize the market participants and activities that pose the highest risk Certain indicators are useful in predicting where compliance probs may exist If initial review of situation demonstrates that few criteria are triggered we are unlikely to pursue it further BUT if enough present then proceed to review or investigate it in more detail During detailed review we conduct a much more thorough examination that is not limited to the subject matter of the initial criteria Regulator says common areas of risk, looks it over and decides to do 1 out of 3 reviews: o (1) Basic review Criteria designed to identify: those issuers whose disclosure is most likely to be materially improved or brought into compliance with regulations as a result of staff review AND prospectuses for which the Director may be obligated to refuse to issue a receipt o (2) Full review if sufficient combo of criteria satisfied we proceed full review constitutes a complete review of entire prospectus and any docs incorporated by reference all accounting, legal and financial aspects of a docs are examined for compliance with applicable securities and accounting regulation policies and practices Where ON is the issuers principal jurisdiction a full review also includes a review of the issuers continuous disclosure Some randomly selected for full review too o (3) Issue-oriented review (if specific issue at play, focus on that issue) Limited to a specific concern or a specific accounting legal or disclosure issue Only do this when criteria for full review are not met

19 o They can also decide that no review is required think this would be basic?! If you are an existing reporting issuer, prelim will probably list pricing info List of the prospectus review criteria currently used: o Issuers Corporate Structure and Underlying Business o Issuers Financial Condition or Results o Nature of the Offering o Matters Relating to Advisers or Corporate Governance

Receipt for Preliminary Prospectus 55. The Director SHALL issue a receipt for a preliminary prospectus forthwith upon the filing thereof. o SHALL indicates mandatory language with no exceptions; although it is not as simple as that; certain hard deadlines in process, financial statements must be current, also underwriter and investors arent going to hang around forever (markets can turn) thus everyone wants it done as quickly as possible o Once a prelim is filed, regulators have 10 days to review it o So auditors report doesnt have to be included in the prelim but a comfort letter is included which certifies to the regulator that the financial statements are not garbage Issuer Activity During Waiting Period - OSA ss. 65(2), 66 and 67 With the filing of a prelim prospectus, there is a mandatory waiting period after the receipt is issued, in which the activities of the issuer are restricted in terms of communicating with potential investors N1 41-101 specifies that waiting period means the period of time between the issuance of a receipt by the regulator for a prelim prospectus and the issuance of a receipt by the regulator for final prospectus 65. (1) waiting period means the period prescribed by regulation or, if no period is prescribed, the period between the Directors issuance of a receipt for a preliminary prospectus relating to the offering of a security and the Directors issuance of a receipt for the prospectus. (2) Despite section 53, but subject to Part XIII, it is permissible during the waiting period, [Under 53 cannot trade if it is distribution unless you have receipt for final BUT you can:] o (a) to distribute a notice, circular, advertisement or letter to or otherwise communicate with any person or company identifying the security proposed to be issued, stating the price thereof, if then determined, the name and address of a person or company from whom purchases of the security may be made and containing such further information as may be permitted or required by the regulations, if every such notice, circular, advertisement, letter or other communication states the name and address of a person or company from whom a preliminary prospectus may be obtained; o (b) to distribute a preliminary prospectus; and o (c) to solicit expressions of interest from a prospective purchaser if, prior to such solicitation or forthwith after the prospective purchaser indicates an interest in purchasing the security, a copy of the preliminary prospectus is forwarded to him, her or it. See the commentary in NI 41-101CP re advertising activities before and during the waiting period. See the proposed amendments to the prohibition on advertising before and during the waiting period. Notes During this period, the underwriter will take prelim prospectus and try to raise money (under writer such as RBC sends it to clients who think they may be interested in buying shares) The underwriter will build a book of commitments of everyone that wants to invest, although can only collect the money after you have the receipt for the final prospectus (on day of closing, funds are taken from you automatically) Underwriters will give people green sheets but will collect them when they leave Security regulators know this is happening so in comment letter will ask for the green sheet Any investor who is unhappy because green sheet was a lie can show it to OSC The amended act allows for summary sheets so long as only info from prospectus is on summary sheet and summary sheet is filed with prospectus 66. Any dealer distributing a security to which section 65 applies shall, in addition to the requirements of clause 65 (2) (c), send a copy of the preliminary prospectus to each prospective purchaser who, without solicitation, indicates an interest in purchasing the security and requests a copy of such preliminary prospectus 67. Any dealer distributing a security to which section 65 applies shall maintain a record of the names and addresses of all persons and companies to whom the preliminary prospectus has been forwarded. NI 41-101, Part 13; If you are sending around the notice that the preliminary prospectus is available during the waiting period, must follow the language in this Act 41-101CP, Part 6, especially s.6.3 6.5 [What the regulator expects in terms of conduct during waiting period] Principle regulator will use its best effort to review materials and provide first comment letter within 10 working days of the date of prelim receipt

20 In dual prospectus, ON needs 5 days to advise principal regulator of any concerns The waiting period allows regulators the opportunity to consider the filed prelim prospectus and to determine whether it complies with all the stat and regulatory requirements Prelim prospectus may be distributed during the waiting period The issuer or its underwriter can solicit expressions of interest from a prospective purchaser if prior to such solicitation or after the prospective purchaser indicates an interest, a copy of the prelim is forwarded to him or her POLICY rationale is that investors are given an opp to consider the offering by receiving the info in a timely manner along with the offering documentation that underpins the expected issue Must ensure to send any amended prospectus to the potential purchasers so they have accurate info Advertising is the most restricted during the waiting period POLICY rationale is that public might take the info in prelim as final rep as to the accuracy of indo underpinning offering before it has been vetted by sec regs However there is a fine line between testing the market for expressions of interest and advertising during wait period Although media communications are allowed to advise the public of the availability of prelim, securities commissions have warned that ad campaigns can be in violation of sec legislation Notice Re Cambior Inc. o RATIO: In determining whether a specific ad is prohibited, the Commission applies a factual test based on whether such advertising can reasonably be considered to be in furtherance of a trade o Filed a prelim but then had ads advertising in newspaper; told it was wrong so he stopped right away; his lawyers hadnt informed him so lawyers reprimanded. Commission didnt take further action. o PURPOSE of the ads permitted during the waiting period is to alert the public to the availability of the prelim

Pre-closing Receipt for final prospectus obtained, commercial copies of final printed and distributed, cooling-off period Issuer has ongoing obligation to amend if there is any material change in the biz and affairs of the issuer during the waiting period Issuer must not file a final prospectus more than 90 days after the date of the receipt for the prelim prospectus Post-closing Money and securities change hands, underwriter advises issuer when issue is out of distribution and how much sold in various jurisdictions On closing date: issue securities in exchange for fund Common to grant underwriters overallotment (for 30-60 days but usually 30) o This means they can sell up to 15% more if they allocated all their shares (green shoe option) What if you dont comply with prospectus requirements? Sanctions for failure to comply with the prospectus requirements can include cease-trading orders or cancellation or restriction of the partys registration In some jurisdictions the regulator can order that the person resign or be prohibited from acting as D or O There are also remedies for misuse of exemption provisions Direct issue (retaining underwriter is not required by law but recommended s.2.2 NI41-101CP)) o OSA s.59 underwriter must sign a certificate Underwriting Defined term; see OSA s.1: underwriter means a person or company who, as principal, agrees to purchase securities with a view to distribution or who, as agent, offers for sale or sells securities in connection with a distribution and includes a person or company who has a direct or indirect participation in any such distribution There are 3 main parties in the offering process: the issuer, the underwriter and the investor Most public offerings are underwritten by investment banking firms Underwriting is the process of selling securities in the market Typically the issuer works with an underwriter to develop the offering and to draft the prelim prospectus The underwriter usually determines the terms and price of the offering, given the market demand It also provides some governance advice in terms of changes to the biz plan to make it more attractive Only once receipt is obtained for prelim can issuer or underwriter test the market in terms of determining the level of interest in the securities among potential purchasers o Undertaking such testing prior any earlier would leave the issuer vulnerable to a charge of distributing without a prospectus or insider trading Public policy rationale underlying restrictions is to ensure there is no self-dealing or other misconduct in the period leading up to the distribution of securities

21 Underwriter as marker of credibility and possess network for finding buyers o Issuer cannot find investors easily (cannot advertise during waiting period) so that is the underwriters real role they connect issuer and the investor together o They use their reputation as experienced market participants to bolster the claims of the issuer regarding its present profitability and or future prospects o The due diligence investigation undertaken by an underwriter usually results in enhanced quality of disclosure in the prospectus and the underwriter can provide valuable advice regarding the pricing and marketing of securities Role of underwriter as gatekeeper, should be adversarial (from regulators perspective) but will only get money if offering closes so they have a vested interest which is a conflict of interest o Although an underwriter is a private market participant in that it assists the issuer, the underwriter has a public obligation to ensure that the required assurances and covenants are obtained and the integrity of the system is maintained o Also perform functions relating to info transfer for investors and thus referred to as gatekeepers of the securities law system o See excerpt from YBM Magnex at CB 231-232 To the best of knowledge standard is higher for issuer bc they have more direct knowledge than underwriter The phrase to the best of our knowledge, info and belief carries with it a requirement to obtain info before an underwriter can make that affirmation (Ames) An underwriter must go beyond statements of the issuers directors, officers and counsel and must avoid automatic resistance In Ames: In a sense the underwriter and the issuer are joint-venturers, but in another and more important sense they must be adversaries. That is the underwriter must seek out and question all relevant and material facts concerning the issuer and reasonably ensure himself that these facts are truly set before the investing public. Feit v Leasco: ..the underwriters must play devils advocate In this regard, the underwriter must challenge the disclosure the issuer purposes to make to the investing public Before the shares are sold, the issuer must settle the price of them with the underwriter bc they need an initial value

Pricing/ Types of underwriter/issuer relationship [3 levels of commitment on part of underwriting] (1) Bought deal: [Enhanced version of firm commitment] o Firm commitment is when underwriter is confident it can make a profit between the issue price from the issuer and the price it will receive from sale of securities [this profit is known as underwriters spread] o Bought deal is firm commitment early in the process- agreement to purchase 100% of offering made before preliminary prospectus is filed pursuant to bought deal engagement letter o Priced on entering into an engagement letter pre-filing and details are disclosed in the preliminary prospectus o Advtg of bought deal is that underwriter provides a firm commitment typically to purchase a large block of securities, signed before the prelim pros is filed Enforceable and short form must be filed within 4 biz days of signing agreement accompanied by media release announcing transactions [ NI 44-101 as amended in 2008] This exception to general prospectus rules is to facilitate the distribution of securities and to reduce the risk of the offering to the underwriter by allowing it to canvass potential purchasers early in the prospectus process o More recently NI 44-101 was amended to allow or solicitations of expressions of interest for over-allotment options o VERY rare on IPOs in Canada, but increasingly common on subsequent short-form prospectus offerings. o In bought deal underwriter is selling the securities o on IPO, fool to do a bought deal because havent done due diligence o underwriter has pretty much committed to buying securities subject to some loopholes i.e. 911, regulatory regime changes (2) Underwritten deals: o Priced in the context of the market (during waiting period) and disclosed in final prospectus o Commitment to purchase the securities, but subject to a market out clause o Under market-out clause, the underwriter can terminate the agreement if it determines, acting reasonably, that the securities cannot be marketed profitably o Similarly, a disaster-out clause allows the underwriter to terminate the agreement if a significant even affects the issuers biz or the capital markets

22 Although the market-out clause refers to the state of the financial markets in a general sense, the phrase must, if it is to be given meaning, be interpreted to refer specifically to the market in the specific shares to be placed o If it meant otherwise there would be illogical result that a market-out could be made where private placement could be readily made bc the co was favourably regarded but the general market conditions were poor o Further if it indeed refers to all markets, then presumably conditions adversely affecting all markets would have to exist before the market-out clause could be relied upon o No underwriter wants to use market outs because they are embarrassing and then no one will hire them in the future so they will ensure they have substitute purchasers and proceed to close, buying from underwriter, not company o Do prelim, go on road show to see initial interest, do due diligence, then they will enter into agreement to purchase securities (Not binding until later Engagement letter but no commitment) (3) Best efforts deals o priced in context of the market (during waiting period) and disclosed in final prospectus o no commitment to purchase usually min/max offerings [only commitment to use best effort to find investors] o Common type of Canadian IPO o See NI 41-101, Part 8 o Sells securities as an agent of the issuer o Underwriter takes a commission for those securities it is able to sell to purchasers in the market o There is a range of fees and underwriters can charge up to 7% of the offering price o Prelim will usually have bullets and no prices and in final it will say UP TO o Usually minimum number of proceeds but we wont receipt you so in prospectus it will say you are issuing a minimum of this and a maximum of this o They will over-allocate to 115% when soliciting and then they will cut people back (its a self-security) o Expectation is that investors are so excited that they are going to be on the buy side when it goes to stock market (created a buzz) o Over-allocation: cannot be more than 15% and usually have 30 days to exercise that option o I.e. Over-allocate 115%, sell 100% THEN can purchase up to 15% securities more from the company OR from the market if it is cheaper and deliver them to people that they over-allocated to o If share price went down, buy it from the market, they will get no commission if they buy it from the market but it may still be worth it depending on the price o Over-allocation is a security so prospectus must ALSO qualify over-allotment option (even if you end up buying from market so that it is open and transparent to investors) o

Conflict of Interest issues in Underwriting Financial services industry in Canada is highly concentrated giving rise to some risks of conflicts of interest in the underwriting and distribution process 33-105CP 1.2: General Policy Rationale for the Instrument o (1) Two of the basic objectives of securities legislation are to ensure that investors purchasing securities in the course of a distribution purchase those securities at a price determined thru a process unaffected by conflicts of interests and receive FTP disclosure of all material facts regarding issuer and secs offered The instrument is based upon the premise that those objectives are best achieved if the issuer and the underwriters deal with each other as independent parties free of any relationship that might negatively affect the performance of their respective roles o (2) The instrument also seeks to protect the integrity of the underwriting process in circumstances where there is a director or indirect relationship between the issuer or selling securityholder and the underwriter that might give rise to a perception that they are not independent of each other in connection with a distribution Instrument imposes 2 basic requirements in those circumstances 1. Full disclosure of the relationships giving rise to the potential conflict of interest is required to be given to investors 2. Independent underwriter is required in certain circumstances to participate in the transaction NI 33-105 [disclosure of conflict is MANDATORY]; right on cover page is notice of conflict, summary of conflict and reference to page numbers in prospectus where you get details; this way the investor can decide whether to invest knowing this info] o SO independent underwriter is defined in the Instrument to mean a registrant acting as direct underwriter in a distribution if the registrant does NOT have one of the relationships with the issuer or selling security holder described in this section Various types of potentially conflicted relationships: (a) Underwriter is issuer or selling security holder [very rare] This relationship represents the relationship with the highest degree of conflict between the 3

23 (b) Related issuer [an affiliate of issuer has relationship with underwriter] An issuer or selling security holder that is a related issuer of the registrant This relationship is created primarily as the result of cross-ownership between an issuer or selling security holder and the registrant Subsection 1.2(2) of the Instrument provides that an entity is a related issuer to another entity if one of them is an influential security holder of the other, or each of them is a related issuer of the same 3rd party (c) Connected issuer [may not be direct like contractual but may be a reason to believe that the underwriter has a conflict] Not a related issuer of registrant but has some other relationship with registrant that would cause a reasonable prospective of the securities being offered to question if the registrant and the issuer or selling security holders are independent of each other for the distribution May affect arms length negotiation of price of securities or otherwise compromise the underwriters independence not permitted unless disclosure of relationship is made. Expectation is free and open negotiation between underwriter and issuer, but sometimes, conflict of interest may hinder this and this hinders investor protection Role of independent underwriter YBM decision speaks to gatekeeping function of underwriter must conduct inquiries into prospectus disclosure in order to be in a position to sign certificate

Filing Requirements for PRELIMINARY Prospectus (see Part 9, s.9.1 of NI41-101): Signed copy of the Preliminary Prospectus; Copy of the articles, by-laws and any other document affect security holder rights; Material contracts; Any reports or valuations; Copy of a technical report in respect of material mineral property, if a mining issuer; Consent and certificate of technical report author(s); Copies of PIFs of officers and directors, together with completed Certificate and Consent to the form of PIF and Authorization to Collect, Use and Disclose Personal Information; o Consent to do crim background checks, social media (look you up on facebook, etc) Comfort letter of auditors (if auditors report is unsigned); Letter of issuer in accordance with section 7.2(2) of NP 11-202. o Issuer certifying underwriter is registered in each jurisdiction that the securities are being sold Filing fees Note section 55 of Securities Act (Ontario) SHALL issue receipts, however, not necessarily as automatic as it seems Filing Requirements for FINAL Prospectus (see Part 9, s.9.2 of NI41-101): signed copy of the prospectus; blacklined (to prelim) copy of the prospectus; o blackline is evidence you made changes to prelim (clearly shows what you added) making it easier for regulator to give you a receipt material contracts (or undertaking in lieu thereof); reports and valuations; [Any experts named in prospectus, consent to be named] consent of legal counsel; consent of auditors; undertakings (eg, BC and Alta (if applicable) with respect to breakdown of sales and additional fees); submission to jurisdiction, if applicable; signed letter of the Corp addressed to the OSC in accordance with 7.3(4) of NP 11-202; copy of conditional approval letter of stock exchange; consent and certificate of technical report author(s), if applicable Content of Prospectus OSA s. 56- Two components: o (1) FTP disclosure of all material facts; in compliance with securities laws [final and amended prospectus] o (2) Accompanied by financial statements, reports, other documents as required by regulators NI 41-101F1 o Form requirements o General instructions are online o Guidelines but still MUST disclose all material facts even if the instructions dont explicitly say that

24 There is additional guidance as to what is material This 1 form is prelim and final but you will fill things out sometimes only for prelim Cannot get around disclosure by hiding stuff in subsidiary companies that is still material and you must still disclose it Example of Long Form Prospectus o See Avigilon IPO prelim and final prospectus o There is warning on prelim right off the bat in red that this is subject to change o Dates are blank bc dont know when you will be issued receipt o Spread risk by creating syndicate o Opening language is where due diligence is found (auditors to the best of our knowledge, information and belief Meaning you have reviewed all the material documents of the company o There is likely a due diligence session where auditors ask questions to directors, experts etc, i.e. challenges in market you are expecting? Trying to elicit as much info from management of co. as possible o Liability only arises after final prospectus There is no statutory liability if have only filed prelim So auditors can guarantee due diligence on prelim even though they havent done most of it yet bc cannot be sued yet o In this example, Deloite already provided their report but that doesnt usually happen because auditor doesnt want to be embarrassed if regulators dont approve it o But since there was a report already, they had to include it o Prospectus is also used as a marketing tool (ads) Underwriter would put it together in a nice package Even promo stuff cannot be misleading though; fine line to walk o Statements about being listed on the stock market are prohibited unless you have actually applied o o o

Refusal to issue receipt - OSA s.61 (1) Public interest standard o Subject to subsection (2) of this section and subsection 63 (4), the Director shall issue a receipt for a prospectus filed under this Part unless it appears to the Director that it is not in the public interest to do so. o Very broad authority for the regulator under public policy perspective o For a full list of instances where receipt may be refused for a prospectus, see NI 41-101; OSA s.61(2) (2) Mandated refusal in certain circumstances o (a) the prospectus or any document required to be filed with it, (i) does not comply in any substantial respect with any of the requirements of this Act or the regulations, (ii) contains any statement, promise, estimate or forward-looking information that is misleading, false or deceptive, or (ii) contains a misrepresentation; o (b) an unconscionable consideration has been paid or given or is intended to be paid or given for any services or promotional purposes or for the acquisition of property; o (c) the aggregate of, (i) the proceeds from the sale of the securities under the prospectus that are to be paid into the treasury of the issuer, and (ii) the other resources of the issuer, is insufficient to accomplish the purpose of the issue stated in the prospectus; o (d) the issuer cannot reasonably be expected to be financially responsible in the conduct of its business because of the financial condition of, (i) the issuer, (ii) any of the issuers officers, directors, promoters, or control persons, or (iii) the investment fund manager of the issuer or any of the investment fund m anagers officers, directors or control persons; o (e) the business of the issuer may not be conducted with integrity and in the best interests of the security holders of the issuer because of the past conduct of, (i) the issuer, (ii) any of the issuers officers, directors, promoters, or control persons, or (iii) the investment fund manager of the issuer or any of the investment fund managers officers, directors or control persons; o (f) a person or company that has prepared or certified any part of the prospectus, or that is named as having prepared or certified a report or valuation used in connection with the prospectus, is not acceptable; o (g) an escrow or pooling agreement in the form that the Director considers necessary or advisable with respect to the securities has not been entered into; or

o Notes

25 Note: escrow is fear of dumping stock and running and the becoming becomes worthless so must enter into an escrow agreement (you cannot sell stock for a certain number of years if you are an insider) (h) adequate arrangements have not been made for the holding in trust of the proceeds payable to the issuer from the sale of the securities pending the distribution of the securities

Have to give them a hearing to let them be heard and tell them why were not offered a receipt i.e. drug from the US that cured Parkinsons was not given a receipt because our health board hadnt approved it [OSA 61(4)] I.e. in YBM, staff was not prepared to issue receipt for final prospectus unless YBMs income statement was confirmed by a Big Six accounting firm It may also refer a matter to the commission for determination where it appears to the director that a prospectus raises a material question involving the public interest or a novel question of interpretation that might result in the direct ors refusing to issue receipt commissions determination is usually binding on the director Tricor Holdings (CB at p.297-8): Regulator did not approve of controlling shareholder; thought it was bad influence YBM (CB at p.299-300) o Required Magnex to retain big 6 auditor, reviewed prelim for five months before issuing receipt o Issued receipt but held it up for 5 months because auditor was from a small company

Obligation to deliver prospectus and withdrawal rights 71 (1) A dealer not acting as agent of the purchaser who receives an order or subscription for a security offered in a distribution to which subsection 53 (1) or section 62 is applicable shall, unless the dealer has previously done so, send by prepaid mail or deliver to the purchaser the latest prospectus and any amendment to the prospectus filed either before entering into an agreement of purchase and sale resulting from the order or subscription or not later than midnight on the second day, exclusive of Saturdays, Sundays and holidays, after entering into such agreement (2) An agreement of purchase and sale referred to in subsection (1) is not binding upon the purchaser, if the dealer from whom the purchaser purchases the security receives written or telegraphic notice evidencing the intention of the purchaser not to be bound by the agreement of purchase and sale not later than midnight on the second day, exclusive of Saturdays, Sundays and holidays, after receipt by the purchaser of the latest prospectus and any amendment to the prospectus. o If you purchased, you have the right to withdraw within 2 days so dont close during those two 2, wait until after bc the amount of docs required for closing, earliest closing would probably be the day after the receipt o Underwriters dont want a lot of change between pre-filing and waiting period because then have to tell potential investors of changes o Investors that made an order or subscription for securities have a cooling off period in which to consider the final prospectus once a receipt is issued for it and the prospectus has been delivered to them [also in Form 41101 (30.1)] o This right is a form of consumer protection that encourages early subscriptions because the investor is automatically given the opportunity to reconsider, on the basis of an examination of the information in the final prospectus regarding the offering o The prospectus must advise purchasers of their right to withdraw or rescission Other key elements of prospectus filings Financial Statements o NI 41-101 Part 4 and Form 41-101F1 Item 32 o Requirement to audit (s.4.2(1)) o Approval by board (s.4.4(1)) Certificates o OSA ss.58 & 59 Form 41-101FI Item 37 o Prospectus must contain a certificate signed by the CEO, CFO and two directors o Policy rationale is to encourage director oversight, due diligence and care in the prospectus process o Officers must certify there is FTP disclosure of all material facts o Under securities legislation, selling securityholders are liable for misreps in a prospectus whether they sign the prospectus or not Full, True and Plain Disclosure: OSA s.56; OSA s.1 56. (1) A (final) prospectus shall provide full, true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed and shall comply with the requirements of Ontario securities law. Disclosure in securities markets encourages investing and therefore growth. Disclosure protects investors, aids in ensuring that securities markets operate in a free and open manner and ensures that a security will nearly correspond

26 to tis actual value. Too much disclosure or information overload can be counter-productive. The boundaries are identified by the concept of material facts.The test for materiality in the Act is objective and is one of the market impact. OSC decision in Coventree, para [198] o Full disclosure is achieved when disclosure is made of facts sufficient to permit investors to make an informed investment decision. all RELEVANT facts o True disclosure is achieved if the disclosure is accurate and not misleading and does not omit a fact that is either material itself or is necessary to understand the facts that have been disclosed. o Plain disclosure must be understandable to investors and in plain language. YBM and Sharbern, go to lecture on continuous disclosure

Materiality in Prospectus (FTP of material facts) Material Fact under s.1(1) of the OSA: a fact that would reasonably be expected to have a significant effect on the market price or value of the securities (this defn is broader then material change) There are several aspects to the material disclosure debate: o Problem created by line drawing in terms of both investor protection and certainty for issuers o Difficulty of issuers knowing when to disclosure o Amount of deference that courts should give to issuers business judgement regarding what is material Form 41-101F1, Information Required in a Prospectus, gives guidance on the degree of detail required: o Standard of materiality must be applied o Materiality is a matter of judgement in the particular circumstances and is determined in relation to an items significance to investors, analysts and other users of info o An item of info or aggregate of items is material if it is probably that its omission or misstatement would influence or change an investment decision with respect to the issuers securities o In determining whether info is material, take into account quantitative and qualitative factors The defn of material fact is broader than that of material change Amendment to Preliminary (or Final) Prospectus (Danier) , go to lecture on continuous disclosure FLI and FOFI [Future-Oriented Financial Information] i.e. Danier eg. refer to lecture on continuous disclosure Civil Liability for misrepresentation in prospectus 130. (1) Where a prospectus, together with any amendment to the prospectus, contains a misrepresentation, a purchaser who purchases a security offered by the prospectus during the period of distribution or during distribution to the public has, without regard to whether the purchaser relied on the misrepresentation, a right of action for damages against, o (a) the issuer or a selling security holder on whose behalf the distribution is made; o (b) each underwriter of the securities who is required to sign the certificate required by section 59; o (c) every director of the issuer at the time the prospectus or the amendment to the prospectus was filed; o (d) every person or company whose consent to disclosure of information in the prospectus has been filed pursuant to a requirement of the regulations but only with respect to reports, opinions or statements that have been made by them; and o (e)every person or company who signed the prospectus or the amendment to the prospectus other than the persons or companies included in clauses (a) to (d), or, where the purchaser purchased the security from a person or company referred to in clause (a) or (b) or from another underwriter of the securities, the purchaser may elect to exercise a right of rescission against such person, company or underwriter, in which case the purchaser shall have no right of action for damages against such person, company or underwriter. Further Public Policy Consideration: Is the prospectus reaching the goals it aims for? Are prospectus requirements too complex and expensive for less sophisticated investors? They may not have the info, skills and resources to fully analyze the prospectus In which case prospectus they are NOT meeting public policy goals they aim for Other Forms of Prospectuses Venture issuer doesnt have the same disclosure requirements dont have to file AIF If short form, still have to file AIF 63. (1) A person or company may, if permitted by the regulations, file a short form of preliminary prospectus, short form of prospectus, pro forma prospectus, preliminary simplified prospectus, simplified prospectus or pro forma

27 simplified prospectus under section 53 or 62 in the prescribed form and any such prospectus that complies with the applicable regulations shall, for the purposes of section 56, be considered to provide sufficient disclosure of all material facts relating to the securities issued or proposed to be distributed under the prospectus. Short Form Prospectus (NI 44-101) Short form is popular issuers who are already reporting issuers because they have already filed before or reporting issuers who arent public yet but are on SEDAR (can incorporate those documents on SEDAR by referring to them) It can expedite the raising of capital and lower costs of the offering Principle is that reporting issuers have a continuous disclosure public record so prospectus does not have to duplicate such disclosure [appropriate that the issuer be allowed to build on previously filed and reviewed documents] Issuer has continuous disclosure record that includes prospectus-type disclosure Allows issuers who are repeat issuers to make public offerings in a more timely way (eligible for RIs only) Investors protected by prior vetting of disclosure and by the specific requirements of the short form prospectus process Eligibility criteria set out on page 254 CB [must fit into criteria that the national instruments sets out] Substantially the same disclosure as a long form, but takes advantage of documents previously filed by reporting issuer with regulators from which disclosure would be duplicated in a long form prospectus Short-form provides info on the distribution plan, the intended market, what the proceeds will be used for, rights attaching to the securities, and other info relevant to the distribution Certain documents are required to be incorporated by reference (see ss. 11.1 and 11.2 of NI44-101F1), and are deemed to be incorporated by reference if not expressly so incorporated (see Part 3, s. 3.1 of NI44-101) o I.e. interim financials, annual info form, material change reports, biz acquisition report, etc. o the following documents are incorporated. Prospectus liability extends to all documents incorporated by reference so FTP facts just like long form Short Form Prospectus Filing Process Underwriter and issuer enter into binding letter of intent for the purchase and sale of the issuers securities to the UW (or to substituted purchasers). See Part 7, sections 7.1 and 7.2, of NI 44-101, permitting solicitations of expressions of interest (pre-marketing) for securities and over-allotment securities under conditions set out therein: o Enforceable agreement (issuer has agreed to purchase securities) o Agreement requires filing and obtaining of receipt for prelim within 4 business days of agreement; o News release announcing o Prelim must be sent to everyone who expresses interest; and o No sale of securities until final has been filed and receipted. File preliminary prospectus within 4 business days. [must say this in enforceable agreement] Regulators provide comments within 3 business days. (opposed to 10 bc you already filed with them so they already reviewed it; only looking at 22 pgs or so thus not too long) Clear comments from regulators. File final prospectus. [In final other than date, title and red writing not much is different] Close offering, usually about 7 days after filing of final. o Cooling off period is 2 biz days (lawyers scrambling to get all docs takes about 7 days usually) so a week between prelim and final and a week between final and closing Not bought deal for IPO so no short form But if you are co that already has a good rep (your shares selling well already) and you just wanted to sell additional shares to raise capital then beneficial to do short form bc its quicker bought deal Once binding letter of intent, can act in furtherance of a trade CAN premarket securities If not bought and instead best efforts then doesnt meet requirements Shelf Prospectus (NI 44-102) Must be short form eligible (NI 44-102, s.2.2) Two components, base and supplement [diff from prelim and final] Most disclosure is in base supplement contains disclosure specific to the security to be qualified Supplement does not need to be approved by regulators supplement contains info with respect to securities such as how many and the price [Since it doesnt need approval you can get it done in one day if you want ] Not issuing securities now; dont know when you will Shelf prospectus can qualify a series of distributions over a max. two year period (NI 44-102 s.2.2(3) and s.3.1) Information required in base shelf prospectus (NI 44-102, s.5.5) Information that may be omitted from base shelf prospectus (NI 44-102, s.5.6)

28 Advtg is that in order to distribute the securities, only a supplement updating info is required which doesnt need review from OSC Adam Pritchard, Well-Known Seasoned Issuers in Canada o In 2005 SEC relaxed the restrictions imposed on public offerings by allowing well-known seasoned issuers to have automatic shelf registration o While in the US, 30% of listed issuers fit into that category, only 17% of Cdn cos listed on the TSX are eligible and only 7% of total cos listed on TSX AND TSXVE

PREP Prospectus (NI 44-103) Post-receipt pricing Issuer not required to be short form eligible Specific to a certain security, unlike shelf prospectus [specific security type must be disclosed in base i.e. debenture but not number or price] Shorter period to file supplement than shelf prospectus [few months- 90 days opposed to 25 mos i.e.] Base and supplement as well Capital Pool Company Prospectus (OSC Policy 41-601) An initiative of the predecessor to the TSXVE Use TSXVE form of prospectus, which has been approved by the securities commissions TSXVE staff reviews prospectus, rather than securities commissions but receipt comes from regulators CPC has no ongoing business, so no financial statements and much of prospectus contains prescribed language Capital pool cos have no other assets other than cash and have not commenced biz activity The CPC Operating Agreement allows a capital pool co to list on the TSXVE subject to specific conditions File CPC prospectus with the whole purpose being to look for business to acquire within a certain period of time, become reporting issuer and listed on TSXVE so liquidity to investor Usually RTO- CPC will incorporate subsidiary and 2 of them amalgamate and then issue shares Multi Jurisdictional Disclosure System (MJDS) (NI 71-101) p.266 Facilitate cross-border sales using documents required in the home jurisdiction NI 71-101 (governs application of MJDS rules to U.S. issuers wishing to issue securities in Canada) since 1990 Intent is to permit cross-order finance without too many restrictions If you want to do financing in US and you are Cdn investor, have their regulator rely on the regulator here sort of like a passport system with the US can file prospectus, raise money, have OSC review it, use that prospectus to raise money in US and you are compliant with theirs Only thing is that some of their dates are different (lag of 1 day from receipt and ) so file prospectus, then file supplement like day later Underlying principle of mutual recognition Canadian & US Issuers can use domestic offering documents in other jurisdictions with a foreign wrapper Eligibility requirements for Canadian issuers wishing to issue securities in U.S o Foreign private issuer o Reporting issuer in Canada for one year o Public float of U.S. $75 million Canadian prospectus + relevant U.S. Form (often Form F-10) Financial statements issues o Either IFRS or reconciliation to US GAAP in certain circumstances No SEC review (each jurisdiction depends on issuers domestic jurisdiction for review) Continuous disclosure requirements (Canadian disclosure + Form 40F) Significant benefit to Cdn issuers in terms of having timely and cost-effective access to the US capital markets The MJDS prospectus is similar to a shelf prospectus and based on the same policy consideration as a short formconsiderable info about the issuer is already available in the market Policy rationale of mutuality is that Cdn and US regulatory systems are similar and the framework should facilitate offerings in both jurisdictions Prospectus Requirements in a Secondary Offering Prospectus is required where there is a sale of previously issued securities by a person distributing within the meaning of securities legislation where the person has not received an exemption Securities legislation requires control persons distributing their securities to file a prospectus Control person includes the person or group of ppl who have sufficient control over voting rights of the issuer to materially affect the control of that issuer A sale by persons in control is considered a distribution bc of the control person or groups ability to influence the

29 issuer, with the resultant risk of improper disclosure in order to enhance the value of security Control person may be selling a large percentage of shares which can affect market price Also the exit of a control person has a signaling effect in the market in terms of info that might be possessed by the control person Hence enhanced disclosure requirements are aimed at reducing info symmetries

PROSPECTUS OFFERINGS: secondary market/stock exchanges

Secondary Market: where stocks trade after the IPO TMX Group Limited is a public company that owns TSX and TSXVE Listing Application Company must apply to the TSX or TSXVE to be listed and meet initial listing requirements A new issuer submits a listing application when it files its preliminary prospectus bc it may take a while seeing how the TSX has their own approval process and people want to ensure there is a market for their shares to be sold in TSX reviews listing application as securities commissions review the preliminary prospectus Issuer must apply to the Exchange to list shares every time it issues shares or shares convertible for listed shares, and in other circumstances Sign listing agreement which obligates you to follow the rules of that Exchange i.e. even when filing prospectus, looking at OSC rules AND stock exchange rules TSX Premier exchange in Canada; for bigger companies TSX Company Manual sets out minimum listing requirements for new companies. Also sets out ongoing requirements for companies for maintaining listing. (The exchange would have a bad reputation if they allowed any company to be listed because many of them would probably go bankrupt) o 3 categories of companies Industrial Mining Oil and Gas o Profitable Companies net tangible assets of at least $2 million earnings of at least $200,000 pre-tax cash flow of at least $500,000 adequate working capital to carry on the business and appropriate capital structure working capital = short term assets short term liabilities o different listing criteria for different companies o public distribution requirements TSX wants to ensure liquidity in the securities must have at least 1 million freely tradable shares having an aggregate market value of at least $4 million held by 300 public holders holding one board lot each Want to ensure there are enough shares and people so that there will be a market TSX wants a liquid market

TSXVE TSX Venture Exchange is a venture capital market for emerging companies. Smaller company because minimum requirements are less and then as they grow, they will probably enlist on the senior exchange (TSX) Unique feature no actual revenue required; consequently, TSXVE lists many junior mining exploration companies. Note definition of venture issuer that we will discuss extensively with respect to continuous and timely disclosure requirements not directly connected to listing on TSXVE. TSX Venture Exchange Corporate Finance Manual sets out initial listing requirements o Tier 1 (Industrial, Tech or Life Sciences): Dont necessarily need revenue has a requirement because they are most likely start -ups net tangible assets of $5,000,000 or 5,000,000 in revenue significant interest in business or primary asset to carry on business history of operations or validation of business adequate working capital or financial resources to execute business plan for 18 months following

30 listing and $200,000 in unallocated funds public float of at least 1,000,000 shares held by 250 shareholders each holding a board lot with 20% of shares held by public shareholders Tier 2 (Industrial, Tech or Life Sciences): $750,000 (lot less than 1M) of net tangible assets or $500,000 in revenue or $2,000,000 in arms length financing significant interest in business or primary asset to carry on business history of operations or validation of business adequate working capital or financial resources to execute business plan for 12 months following listing and $100,000 in unallocated funds public float of at least 500,000 shares held by 200 (instead of 300) shareholders each holding a board lot with 20% of shares held by public shareholders

Stock Exchange Rules TSX Company Manual Part VI Sec. 606. Prospectus Offerings [other sections apply as well] (a) Listed issuers proposing to issue securities of a listed class pursuant to a prospectus must file one copy of the preliminary prospectus with TSX concurrently with the filing thereof with the applicable securities commissions. The notice requirement contained in Subsection 602(a) will be satisfied by the filing of the preliminary prospectus, together with a letter which must state: (i) whether any insider has an interest, directly or indirectly, in the transaction and the nature of such interest; (ii) whether and how the transaction could materially affect control of the listed issuer; (iii) the anticipated number of purchasers under the offering; and (iv) whether an "if, as and when issued" market may be requested. (b) TSX will generally accept notice of distributions by way of prospectus. TSX may, however, apply the provisions of Section 607 to a prospectus distribution. In making such a decision TSX will consider factors such as: o i) the method of the distribution; o ii) the participation of insiders; o iii) the number of places; o iv) the offering price; and o v) the economic dilution. (c) Prior to the filing of the final prospectus, TSX will notify the listed issuer of any required additional documentation. If TSX accepts the offering, TSX will so advise the securities commissions. (d) The additional securities will normally be listed as soon as the prospectus offering has closed. Upon request, the listing may take place prior to the closing of the offering. TSX staff will advise the listed issuer of the requirements in this regard. Any trading that takes place prior to closing will be on an "if as and when issued" basis. Stock Exchange Rules TSXVE TSX Venture Exchange Corporate Finance Manual Policy 4.2 Section 1.4 Minimum Subscription o The Exchange will require, unless the Distribution is entirely a secondary Distribution, a minimum amount net to the Issuers treasury of $200,000 either as an underwritten or as an agency offering. The minimum amount of the offering must be sufficient to accomplish the purposes of the offering and such minimum must be specified. The offering may be cancelled by the Exchange if the minimum amount is not reached. 1.5 Pricing o (a) If Listed Shares are being offered, then the offering price will generally be the Market Price at the date of the final receipt for the Prospectus. While the offering price will not normally exceed a 20% discount to the Market Price, it must in no case be less than $0.05. Price of security subject to certain rules TSX/TSXVE Stock Exchange Policies - Management Must have solid board of directors {bc they are responsible for running the co} o Can refuse listing if OSC doesnt like Os and Ds Must have at least 3 directors- at least 2 of which are independent ( NI 52-110) o Independent meaning Ds that dont have a real tie to the co bc supposed to be representing stakeholders of co o (see definition not management, holds less than 10% of the shares and no material business relationship) Directors and officers must submit PIFs {looks at experience, credibility, etc} o Exchange conducts security and background check {hire co to check PIFs} Might take a while to verify especially if 1 director is from outside Canada so file PIF first If there is a red flag with a PIF, they wont let you be director

31 CPC directors must be Canadian or US citizens

Other TSX/TSXVE Requirements: Continuous disclosure Timely disclosure Corporate governance Requirements for private placements and prospectus offerings Restrictions on incentive stock options Fees

PROSPECTUS EXEMPTIONS
Introduction Closed system in Ontario: Distribution of securities requires a prospectus (s. 53(1)) or an exemption from prospectus requirements. Must always comply with securities laws when issuing a security. Company can issue securities by way of public offering (prospectus) or private placement (exemption) If you buy securities on the exempt market, it is not freely tradable The exempt market is imp to issuers and investors bc enables capital to be raised on flexible and cost-effective term Exempt market consists of two basic levels: transactions that take place directly between issuers and investors, AND reselling those securities to other investors (where the initial rationale for an exemption might no longer apply) Restrictions governing when issuers can issue securities without a prospectus apply to both non-reporting issuers and reporting issuers Policy Objectives of Prospectus Exemptions p.316 (1) Perceived regulatory need to address specific problems of startup small, or medium-sized issuers by allowing them more flexibility than the prospectus system provides to generate initial amounts of working capital (2) Acknowledgement that some wealthy and or sophisticated investors are capable of making investment decisions without the info that a prospectus provides o Assumption is that such investors are capable of acting rationally in their own economic self-interest and will seek out directly from the issuer or its reps any info they consider relevant to their investment decision making (3) Where issuers are issuing securities to those with whom they have a pre-existing relationship, it is considered that the prospectus requirements may be relaxed o Basic assumption is that investor either has or has access to adequate current info about the issuer and its financial prospects (4) Some types of securities are so safe that a prospectus is considered to be redundant i.e. govt bonds 3 most fundamental pts to be noted about registration requirements: A trade triggers the registration requirements If securities sold without a registrant, must be an exemption available Registration exemptions found in s. 34-45 of OSA and Rules 45-501, 502, 503 Private Placements Both reporting issuers and private companies do private placements. Securities subject to hold period. Use the term private placement to distinguish from prospectus offering but private placement is NOT a defined term in securities legislation Reasons for doing a private placement o (1) Cheaper o (2) Quicker (no need for an offering document like a prospectus or offering memorandum) Give you more certainty, in public, can agree to invest but 2 months from now disclosure can affect appetite for investment, but in private can get money quickly o (3) Minimal regulatory oversight (if a listed company, need approval of Exchange to list shares). No review of offering document by Commission just post-closing filings. If listed on TSX and want to list more shares, get permission from TSX to ensure you are complying with their rules Tell OSC and press release but other than that, little regulatory involvement for private placement Hold period when doing private placement unless another exemption so people not likely to do it If you are investing in public company, can go to SEDAR If you are investing in private company, must get info from private company get their financial statements, you

32 decide what is material or not Youll get comfort from subscription agreement from which is the agreement you sign when buying shares Subscription by private company will list any info in reps and warranties i.e. shares and directors so later on if you find it is not true, you can sue them (it is comfort for you) Disclosure is not an on or off switch some substantive disclosure requirements may be retained in order to satisfy the terms of an exemption

NI 45-106 Each prov commission had own prospectus exemptions before but then 10 years ago National Instrument 45-106 Prospectus and Registration Exemptions o Sets out prospectus and registration exemptions o S.25 of the OSA requires that a person engaged in the business of trading in securities be registered with a securities commission [Anyone involved in a trade must be registered or needs a registration exemption] Registration exemptions usually parallel prospectus exemptions NI 45-106 consolidated exemptions in Canada into one rule, but some additional exemptions available in 45-501 OSC Corporate Law Requirements Dont forget the corporate law requirements o necessary corporate approvals o issuing shares for value Always look at corp law requirements bc if issuing securities, corp is also governed by corporate law requirements Some companies have limit of how many common shares they can issue (esp in US) but a lot of them say unlimited Private placement for a company, look at corporate statutes, articles and shareholders agreement o Usually gives shhs a pre-emptive right Private Placement Exemptions Private Issuer Exemption Accredited Investor Minimum Investment Friends, Family, Business Associates (all provinces except ON) Founder, Control Person and Family (only ON) GIS Pre-Existing Relationships Offering Memorandum Most Common Exemptions (1) Private issuer/capital raising exemptions o Company that meets certain requirements can issue shares to certain ppl (2) Accredited investor/sophisticated buyer exemptions (most common) o Accredited investor: someone that the OSC thinks can make their own decision as to investing and not having to rely on prospectus (3) Exemptions based on pre-existing relationships Subscription agreement: says I am accredited investor or private issuer (check off relationship) o Company doesnt have obligation to verify it Small Issuer Exemptions [if you are a small co]

(1) private issuer exemption (NI 45-106 s.2.4)

(3) Accredited Investor (NI 45-106 s.2.3)

(2) founder, control person and family exemption (NI 45-106 s.2.7)

33 Private Issuer Exemption NI 45-106 CP Part 2. Premised on assumption that close personal friend/business associate (who are some of the parties) knows director, officer etc. well enough to be in a position to assess their capabilities and trustworthiness. Definition of private issuer [NI 45-106, s.2.4(1)] (a) Issuer that is NOT a reporting issuer or investment fund; (b) whose securities, other than non-convertible debt securities, o (i) are subject to restrictions on transfer that are contained in the issuers constating documents or security holders agreements, and o (ii) are beneficially owned, directly or indirectly, by not more than 50 persons, not including employees and former employees of the issuer or its affiliates, provided that each person is counted as one beneficial owner unless the person is created or used solely to purchaser or hold securities of the issuer in which case each beneficial owner or each beneficiary of the person, must be counted as separate beneficial owner and that (c) that o (i) has distributed securities only to persons described in the subsection o (ii) has completed a transaction and immediately following the completion of the transaction, its securities were beneficially owned only by persons described in subsection (2) and since the completion of the transaction has distributed its securities only to persons described in subsection (2) restrictions on transfer of securities. Usually transfer requires approval of majority of directors or shareholders. o Articles of a company has provision saying shareholders needs approval of Board or shareholders if want to transfer shares o The requirement for restriction on share transfer is intended to enable to issuer to control or at least be aware of any changes or increases in the number of shareholders in the entity issuer cannot have more than 50 shareholders excluding employees and former employees o Just because you have more than 50 shareholders does NOT make you a public company just means you cannot rely on this prospectus exemption [remember you are only public if you file prospectus] o Intention is to limit use of the exemption to issuers with a numerically small number of security holders who might otherwise seemed to be in need of investor protection, but who will not receive a prospectus bc of the more pressing goal of supporting entrepreneurial activity has distributed its securities only to persons described in s.2.4(2) Who can buy? o S.2.4(2) the Prospectus requirement does not apply to a distribution of a security of a private issuer to a person who purchase the security as principal and is (a) a director, officer, employee, founder or control person of the issuer; (b) a director, officer or employee of an affiliate of the issuer, (c) a spouse, parent, grandparent, brother, sister, child or grandchild of a director, executive officer, founder or control person of the issuer, (d) a parent, grandparent, brother, sister, child or grandchild of the spouse of a director, executive officer, founder or control person of the issuer, (e) a close personal friend of a director, executive officer, founder or control person of the issuer, (f) a close business associate of a director, executive officer, founder or control person of the issuer, (g) a spouse, parent, grandparent, brother, sister child or grandchild of the selling security holder or of the selling security holders spouse, (h) a security holder of the issuer, (i) an accredited investor, (j) a person of which a majority of the voting securities are beneficially owned by, or a majority of the directors are, persons described in paragraphs (a) to (i), (k) a trust or estate of which allow the beneficiaries or a majority of the trustees or executors are persons described in paragraphs (a) to (i), or (l) a person that is not the public. raises the question of who is the public? Who is the public? 45-106 CP s.3.6(1): o Whether or not a person is a member of the public must be determined on the facts of each particular case. o The courts have interpreted the public very broadly in the context of securities trading. o Whether a person is a part of the public will be determined on the particular facts of each case, based on the tests that have developed under the relevant case law (2 leading cases below) US Case: Ralston Purina (RP) Facts: RP was a big US co who wanted to reward a few good employees by offering shares to them (over 500 ppl they offered to and some were in different states) didnt do it by prospectus; said these ppl are NOT the public

34 Issue: Need to file a prospectus or can they rely on the private exemption? Who is the public? Reasons SEC said even though these ppl are employees they are still the public because they needed protection of prospectus to make decision on whether to invest (some people were employees all the way in Arkansas) US Supreme Court held that the sale constituted a distribution to the public and thus were subject to the Securities Act In discussing the meaning of to the public, the court noted that the security need not be made available to the whole world and to the public applies whether the offer is made to many persons or to only a few persons Test (NEED TO KNOW TEST) Key question is whether the persons who are offered the security need to know the kind of info the prospectus would provide Piepgrass Facts: Solicited some shareholders from previous co then solicited friends of ppl he knows Decision: CA in AB said NO those ppl are public bc no common ground or associates Test (COMMON BONDS TEST): not friends, not associates, no common bonds of interest or association Private Issuer exemption ctd Rationale for prohibition on commissions/finders fees o can use the services of a dealer just cant pay a commission o NI 45-106CP Part 3 indicates that the use of registrants, finders or advertising to solicit purchasers under the private issuer exemption may give rise to a presumption that the relationship required for the use of these exemptions is not present No reporting requirements to use this exemption o Within 10 days after you close, you have to say I raised money from these people in these provs but dont have to file report if private issuer exemption (just make sure you follow securities law or may run into issues later) Founder, control person and family exemption S.2.7 of NI-45-106 o (a) founder o (b) affiliate of founder o (c) spouse, parent, etc. o (d) control person of issuer Applicable only to Ontario. Definitions applicable No limit on value of offering No reporting requirement Cannot use to issue to close friends and business associates Other provinces have s.2.5 family, friends and business associates [ON thinks that it is too broad] No limit on number of shareholders Side note: subscription agreement and certificate (if you are lawyer, ensure all investors sign certificate) o Certificate is proof you were able to rely on exemption o Sign certificate that says what you are purchasing, resident in ___, permitted purchase described in N1 and schedule that sets out categories and you tick off the category that applies Wealthy/Sophisticated Investor Exemptions (1) Accredited investor exemption (NI 45-106 s.2.3) Definition of accredited investor Similar to accredited investor in the U.S. Variety of institutions covered (i.e. banks, governments, registered dealers, pension funds, investment funds, portfolio manager, etc) Financial institutions such as banks are designated as accredited investors Applies to individuals as well. Individual must purchase as principal. Get them to sign accredited investor certificate and tick of whatever applies Go to 45-106 for defn Accredited investor individuals [must fall into one of these categories] Income test [subparagraph (k) of definition] o Individual with net income of $200,000 in each of 2 most recent calendar years or $300,000 combined with spouse and expects to exceed level in current year

35 Essentially the commissions view is that if you get them to sign certificate, you have done your job even if the accredited investor is lying (unless it is obvious this is under review right now) Net asset test [subparagraph (j) of definition] o individual who together with spouse owns (1) financial assets with a realizable value before taxes but net of (2) related liabilities of at least $1,000,000 o typically falls under this category o then go to 45-106 CP look up financial asset i.e. is house financial asset? NO o if worth 1M bc of house, doesnt apply o Financial assets held in trust or other types of investment vehicles for benefit of the individual may raise questions as to whether the individual beneficially owns the financial assets. o Financial asset test [branch (l) of definition] Definition of financial assets Definition of related liabilities o Factors indicative of beneficial ownership (NI 45-106 CP s. 3.5) (a) physical or constructive possession of evidence of ownership of the financial asset; (b) entitlement to receipt of any income generated by the financial asset; (c) risk of loss of the value of the financial asset; and (d) the ability to dispose of the financial asset or otherwise deal with it as the individual sees fit. o

Substantive rule re accredited investors NI 45-106 s.2.3 o Anti-avoidance rule (s.2.3(5)) Cannot get together with friends and agree to invest together and rely on $150,000 rule Securities can continue to circulate among accredited investors without triggering a prospectus or resale requirement Disclosure requirements for accredited investor exemption Reporting requirement in NI 45-106 s. 6.1 (Form 45-106F1) o Once private placement closes, file report with securities commission (if you relied on any of the exemptions) within 10 days of closing But see NI 45-106 s.6.2 -When report not required: o 6.2 (1) An issuer is not required to file a report under section 6.1(1)(a) [Report of exempt distribution] for a distribution of a debt security of its own issue or, concurrently with the distribution of the debt security, an equity security of its own issue, to a Canadian financial institution or a Schedule III bank. o (2) An investment fund is not required to file a report under section 6.1 [Report of exempt distribution] for a distribution under section 2.3 [Accredited investor], section 2.10 [Minimum amount] or section 2.19 [Additional investment in investment funds] if the investment fund files the report not later than 30 days after the financial year-end of the investment fund. (2) Minimum investment exemption (NI 45-106, s.2.10) You may not be an accredited investor but you may have $150,000 so you have an exemption OSC Rule had repealed this when it adopted accredited investor exemption in 2001 but brought it back thru NI Assumed if investor could afford an investment of $150,000 [must be cash], was sophisticated enough to evaluate investment without mandated disclosure (or have enough money so they could hire someone to advise them) Anti avoidance rule to ensure that an entity is not created to amalgamate the contributions of a number of smaller investors so as to defeat the policy underpinning of the exemptions Reporting requirement s.6.1 Is the policy rationale here reasonable? They are all bright line tests no in between; either fall into category or you dont Economic impact of former OSC Rule 45-501 OSC Study One Step Forward Overall size of prospectus-exempt market grew when new prospectus exemptions introduced in Ontario Range of transaction sizes broadened, with almost half being valued at $150,000 and below New rule gives the issuer much more flexibility in fund raising OSC is examining effectiveness of this exemption Overall the value of investment increased from an annual avg of 6.2B during the 1995-1998 period to 20.97 B for the 11 mos after Rule 45-501 came into force in 2001 CSA Staff Consultation

36 Staff of the CSA is conducting a review of the minimum amount and accredited investor prospectus exemptions o Esp accredited investor prospectus exemption. Is it the right defn. Do they adequately protect investors? Review a reaction to the recent financial crisis Exemptions premised on investor having a certain level of sophistication, ability to withstand a financial loss, ability to get financial advice and incentive to evaluate. What is the appropriate level of minimum investment to warrant no need for a prospectus? o $150,000 threshold was set in 1987. Equivalent to $265,00 of todays $. should they bump it up? Accredited investor thresholds based on US thresholds set in 1982. $200,000 then is $443,000 today. o is $200,000 too low? In Australia, it is $500,000. [substantially higher]

OSC Staff Consultation Paper 45-710 Consideration for New Capital Raising Exemptions November 10, 2011 OSC published Consultation Note 45-401 to review accredited investor and minimum amount ($150,000) exemptions o Asked for feedback. As a result, expanded the scope of the public consultation to review other possible exemptions o Expanded scope also in response to JOBS Act (Jump Start our Business Startups) in the U.S. o Reason was try to stimulate US economy; get it out of recession If easier to to raise money, help economic growth, provide jobs to ppl, etc. o Also reviewing implementing offering memorandum exemption in Ontario Dual Mandate o Investor protection & Fostering fair and efficient capital markets Crowd Funding o In process of being implemented in U.S. o Waiting for SEC to set out the rules o To help small US companies raise money, create a new funding model for small US companies who want to raise less than $1M (raise small amount of money from large number of people on internet thru portal) Five models of crowd funding o (1) Donation model I want to raise this much money, here is my money and then they donate and get nothing in return o (2) Reward model Donate but perk such as access to info in return (still do NOT have a security interest) o (3) Pre-purchase model If you donate some money to my watch company, I will give you a watch when my company starts up o (4) Peer-to-peer lending model Lend money over Internet o (5) Equity securities model (SEC focuses on this one) Allows companies to raise small amounts of money from individuals and issue securities in return NOT freely tradable U.S. Model everything below focuses on equity model (last option) o U.S. issuers only o Company can raise up to $1 million in 12 month period o No investor can invest greater of $2,000 or 5% of annual income or net worth if annual income or net worth less than $100,000 Want to ensure investors dont put too much money in (protect investors) bc remember if you are security regulator, you want to promote efficient market but also want investor protection o No investor can invest more than 10% of annual income or net worth if over $100,000 o Resale restrictions for 1 year o Must be conducted through an intermediary who is registered with the SEC bc intermediary will ensure there is minimum disclosure o Prescribed disclosure [disclosure on risks] o Disadvantages Can only raise 1M (but at least it is something) May have lots of shareholders like 350 so may lose control of company (bc have to spread it out) OSC also considering implementation of OM exemption o Limits on amount raised o Prescribed disclosure o Lots of pressure on OSC because of US example a lot of innovators will go to US and we will lose jobs, etc o 45-106: offering memorandum (like a prospectus but it is a document that gives certain info to prospective investors, not to OSC)

37 Exemption is if you give it to potential investors, can raise money from them All other provs allow this exemption except ON

Government Incentive Securities Rule 45-501 s. 2.1 Ontario only From time to time govts offer tax incentive for investment in certain biz ventures Substantive Requirements o Prospectus exemption to help mining and resource industry (mining is big in Northern ON so rest of the provs dont care of this exemption) Disclosure Requirements o Number of disclosure obligations especially the offering memorandum requirement and the report of trading Definition of GIS Compromise between investor protection and other policy objectives Resource financing to facilitate issuance of flow through shares Tax shelter meant to promote the activities of junior exploration issuers in the resource sector and northern communities by making it easier for them to raise capital GIS exemption is necessary to make tax shelter as meaningful as possible in practice bc without it, a prospectus would have to be provided to investors availing of the shelter bc securities of the exploration entity are being distributed Flow thru shares: only pay tax on half of capital gain (gives ppl incentive to invest) Flow thru shares encourages ppl to invest in oil, gas, mining cos If invest in flow thru shares, if that co spends in ___, can deduct that from income 10,000(income)-5000(buy $5000 worth of shares= 5000 pay income tax on 5000 only Many ppl buy flow thru shares right before they file taxes If you have capital gain though get income treatment not capital gain treatment so they get you when you sell shares Can only deduct capital loss from capital gain, not income Substantive Rule re GIS Maximum of 75 investors may be solicited Maximum of 50 investors may purchase o Anti-avoidance rule (s.2.1(2)) counts the beneficial holders. Investor has access to prospectus-like information and must either be able to evaluate information about investment because of net worth, investment experience or consultation with investment advisor OR be executive officer/director or spouse/child of such o Dont have to write prospectus o Just access (basically co has to make themselves available for due diligence purpose) No publicity/advertising Promoters limited to using GIS exemption once every calendar year Disclosure and GIS exemption Investors must ALSO be supplied with offering memorandum [that sets out info i.e. who are Os and Ds] Report required within 10 days of trade (s. 6.1, 6.2, Form 45-501F1) send to OSC ONLY on initial purchase if sell it on TSX for eg it is not flow thru shares Exemptions based on pre-existing relationships Stock Dividends (NI 45-106 s.2.31 and s.2.2) NI 45-106 s.2.31 o Securities issued as dividend payment to security holders o Issuer distributes securities of RI held by it to its security holders as dividend in kind o But also there is exemption for another reporting issuer I.e. private company has 6 shareholders, private co provides tech to public co and public co in return offers 1 M shares of their co to the 6 shareholders NI 45-106 s.2.2 o dividends/interest/cash payments applied to acquire additional securities o Note limitation: the aggregate number of securities listed in a financial year under the optional plan must NOT exceed 2% of the issued and outstanding securities of the class o Dividend reinvestment plan I.e. BCE declares dividend of $100 to shareholder; shareholder says I want to buy more stock so instead of sending cheque, BCE Issues shares o Dont want to rely on accredited investor bc then would have to sign that form

38 o Can also add more of your money to purchase shares

Reorganizations (NI 45-106 s.2.11) NI 45-106 CP s.4.2: Explain how security regulator reviews it and approves rules Various possibilities/ types of reorgs of a biz entity that involve the issuing of securities- they include amalgamations Also include arrangements under stat procedures such as those provided under corporate statutes or under statutes such as the Companies Creditors Arrangements Act that regulates the reorg of biz entities in financial difficulty o In financial difficulty cases, debt obligations exchanged for equity as biz tries to rehabilitate itself financially o Rationale for providing an exemption for this is that regulators do not want to add to the difficulties of an issuer in financial distress and creditors may have other avenues of access to info about the issuer thru the terms of their debt agreements Plan of arrangement: want to do something under corporate law but nothing there so need shareholder approval to go to court to allow a reorg that normally wouldnt be allowed under co rporate statute I.e. 54M shares reduced to 1 and sold it to 1 person I.e. RTO: Private co has 100 shareholders public (shelf) co has 50,000 shares and co issues 5M shares to private co o Ultimately private co owned 100% by public co but 5M and 50,000 shares in public co, and most shares owned by private co shareholders o Sign share purchase agreement or 3 corner amalgamation I.e. In 3 corner, public co sets up subsidiary and private co amalgamates with subsidiary o In exchange for shares, public gives private..? o Same result at the end of the day Conversion, exchange or exercise (NI 45-106 s.2.42) E.g. options, convertible debt, convertible preferred shares Issuers will often issue securities that carry with them a conversion or exchange feature whereby the securities initially issued can be converted into or exchanged for other securities, or can carry an option to acquire additional securities Regulators concerned with the abuse in the use of this exemption- that is, issuers might used convertible securities as a way of issuing equity, while circumventing the disclosure rules that would normally be required for that issue Warrant/ option gives ppl right to buy shares at a fixed price anytime within the next 2 years Warrant: CS might be high risk so adding a warrant is an incentive to take it o Warrant: fixed price and fixed time so when share price goes up, its a jack pot Option: Sort of same thing issue it to employees to encourage them to work hard and build value in co Advtg of using a prospectus is that these warrants are freely tradable so common share and warrants are listed on stock exchange sometimes Convertible preferred shares o A lot of private co investors want preferred shares o Instead of normal common shares they get preferred to co upon dissolution o If the co is sold for 4M, before common shh get any money, these guys get money back (protects investment) o BUT say co is worth more, they just get what they invested back and common shh would get the rest o Preferred gives ppl opportunity to protect investment but still option of converting from preferred to common shareholder, so need exemption to convert Rights Offerings (NI 45-106 s.2.1) This exemption is designed to allow issuers the opportunity to offer to their existing security holders the right to buy additional securities based on the number of securities already held by these security holders Useful financing method bc issuing shares to ppl who already showed an interest Go to existing shhs, give them the right to buy additional CS i.e. for every share you own, 90 cents for 1 additional share Written notice to regulator 10 days before and give rights info on circular that you provide to shh Rights offering circular (45-101F) contains some prospectus-like info that is given to the shh AND regulator Exemption covers both granting of right and issue of securities pursuant to right See NI 45-101 s. 2.2 and 45-101 CP 1.2 for grounds on which rights offering exemption not available NI 45-101 s. 2.2 - The rights offering prospectus exemption is not available to an issuer for a rights offering in any of the following circumstances: o (1) If it would result in an increase of 25% in the number of outstanding securities of the class to be issued upon exercise of the rights o (2) The issuer has entered into an agreement to compensate a person or company for soliciting the exercise of rights issued under the rights offering that provides for payment of a higher fee for soliciting the exercise of rights by holders of rights that were not securityholders of the issuer immediately before the rights offering than the fee payable for soliciting the exercise of rights by holders of rights that were securityholders at that time.

39 (3) The rights offering is conditional on a minimum amount of proceeds being raised and the exercise period for the rights is more than 45 days after the acceptance date. o (4) The issuer is not a reporting issuer in any jurisdiction and the exercise period for the rights is more than 60 days after the acceptance date. o (5) The issuer is a reporting issuer in any jurisdiction and the exercise period for the rights is more than 90 days after the acceptance date. o (6) The issuer is a reporting issuer in any jurisdiction and the exercise period for the rights is less than 21 days after the date on which the rights offering circular is sent to securityholders under paragraph 3.2(a). o (7) The issuer is a reporting issuer in any jurisdiction and has not filed financial statements required to be filed under Canadian securities legislation. 45-101 CP 1.2- (1) The reviewing authority may exercise its statutory power to object to a rights offering being made in reliance on the rights offering prospectus exemption if: o (a) the rights offering is for the purpose of financing the reactivation of a dormant or inactive issuer; o (b) the rights offering is for the purpose of financing a material undertaking that would constitute a material departure from the business or operations of the issuer as at the date of its last annual financial statements o (c) excessive consideration is payable to the managing dealer, to any soliciting dealer or for a stand-by commitment; or o (d) the reviewing authority believes that, in the circumstances, reliance upon the exemption is not otherwise appropriate. o

Distributions to Employees/officers/directors/consultants (NI 45-106 Division 4) Issue shares to employees or employees of its affiliates as incentive (make them shareholders) Probably wont be accredited investors so need exemption S. 2.24: if participation in the trade is voluntary 1 key thing is cannot coerce ppl See NI 45-106 s.2.23(2) - participation in a distribution is considered voluntary if: o (a) employee is not induced to participate by expectation of employment or continued employment of the employee with the issuer or a related entity of the issuer, o (b) executive officer is not induced to participate by expectation of appointment, employment, continued appointment or continued employment of the executive officer with the issuer or a related entity of the issuer, o (c) consultant is not induced to participate by expectation of engagement of the consultant to provide services or continued engagement of the consultant to provide services to the issuer or a related entity of the issuer, and o (d) employee of a consultant is not induced by the issuer, a related entity of the issuer, or the consultant to participate in the distribution by expectation of employment or continued employment with the consultant. Offering Memoranda (OM) Definition of OM: OSA s.1: Document purporting to describe the business and affairs of an issuer that has been prepared primarily for deliver to and review by a prospective purchaser so as to assist the prospective purchaser to make an investment decision in respect of securities being sold in a distribution to which section 53 would apply but for the availability of one or more of the exemptions contained in ON securities law. It EXCLUDES a document setting out current information about an issuer for the benefit of a prospective purchaser familiar with the issuer thru prior investment or business contacts. 45-501 CP (5.1)(2) The Commission is of the view that the phrase prepared primarily for delivery to and review by a prospective purchaser in the definition of offering memorandum means the document is prepared in contemplation of soliciting an investment from the prospective purchaser. Broad defn any doc you put together to give to investors to help you raise money is OM OM- Non Ontario Provinces 45-106 (2.9): what has to be in OM, then you can raise money from people in those provs EXCEPT ON Disclosure requirements in non ON provs include (i) delivering OM to purchaser and (ii) getting them to sign risk acknowledgement Distinction between OM exemption in non-Ontario (see NI 45-106 s.2.9) o 2.9 (1) In BC, NB, NS and Newf, the prospectus requirement does not apply to a distribution by an issuer of a security of its own issue to a purchaser if: (a) the purchaser purchases the security as principal, and (b) at the same time or before the purchaser signs the agreement to purchase the security, the issuer (i) DELIVERS AND OM to the purchaser in compliance with subsections (5) to (13), and (ii) obtains a signed RISK ACKNOWLEDGEMENT from purchaser in compliance with subs 15. o (2) In AB, Man, NWT, Nunavut, PEI, Qu, Sask and Yukon, the prospectus requirement does not apply to a distribution by an issuer of a security of its own issue to a purchaser if:

40 (a) the purchaser purchases the security as principal, (b) the purchaser is an eligible investor or the acquisitio n cost to the purchaser doesnt exceed $10k, (c) at the same time or before the purchaser signs the agreement to purchase the security, the issuer (i) DELIVERS AND OM to the purchaser in compliance with subsections (5) to (13), and (ii) obtains a signed RISK ACKNOWLEDGEMENT from purchaser in compliance with subs 15. (d) if the issuer is an investment fund, the investment fund is (i) a non-redeemable investment fund, or (ii) a mutual fund that is a reporting issuer. Basically, group 2 provs impose more onerous eligibility requirements they restrict the use of this exemption to eligible investors unless the transaction doesnt exceed 10,000 o Eligible investor is broader than accredited investor o Lower income assets or alternatively become eligible by obtaining advice from an eligibility advisor o Anti-avoidance assumption

Use of OM in Ontario In ON an OM can only be used in connection with another exemption In Ontario the only exemption where the OM is mandatory is the GIS exemption As a matter of practice though, vendors often prepare an OM as a way of giving info to potential investors No prescribed disclosure BUT if you issue OM, must give a statutory right of action (if untrue can get money back or can sue for damages) If you are using OM to sell in other provinces and ON and doing it thru accredited investors which is a listed exemption, dont have to follow OM rules for ON because there are none really, just follow the rules of the other provinces in 45106 (2.9) One of the biggest issues is trying to figure out what an OM is o Did you prepare document for delivery to prospective purchaser? If yes then OM so make sure it complies o If just describing terms then not OM; If just financial statements then not OM bc have to make them anyway so primary purpose is not got prospective purchaser Contents of GIS OM Rule 45-501 s. 2.1(1) (1) The prospectus requirement does not apply to a distribution by an issuer of a GIS if: o (a) not more than 75 prospective purchasers are solicited resulting in sales to not more than 50 purchasers, o (b) prospective purchaser has been supplied with an offering OM that includes the following info: (i) identifying every O and D (ii) identifying every promoter (iii) giving the particulars of the professional qualifications and associations during the 5 yrs before the date of the OM of each O, D and promoter of the issuer that are relevant to the offering, (iv) indicating each of the Ds that will be devoting his or her full time to the affairs of the issuer, and (v) describing the right of action referred to in section 130.1 of the Act o (c) 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 bc of consultation with or advice from a person that is not a promoter of the issuer and that is a registered dealer or registered adviser under the Act, is able to evaluate the prospective investment or (ii) is an exec O or D of the issuer or of an affiliate of the issuer or a spouse or child of a director or executive officer of the issuer or of an affiliate of the issuer, o (d) the offer and sale of the security is NOT accompanied by an ad and no selling or promotional expenses have been paid or incurred for the offer and sale except for professional services or for services performed by a registered dealer under the Act, and o (e) the promoter, if any, has not acted as a promoter of any other issue of securities under this exemption within the calendar year. (2) For the corporation, partnership, trust or other entity is counted as 1 (prospective) purchaser unless the entity has been created primarily for the purpose of purchasing a security of the issuer, in which event each beneficial owner of an equity security of the entity or each beneficiary of the entity, is counted as a separate (prospective) purchaser Basically, in GIS OM, should include info relating to officers, directors and promoters of the issuer and describe t he right of action referred to in s.130.1 of the Act If an issuer distributed a security the issuer must file a report within 10 days after the distribution Contents of Non-GIS OM in Ontario

41 Commentators note OM has never really been well prescribed in ON except in case of GIS However tendency for OM to look like prospectus in order to avoid liability of misrep (bc there is stat right of action) Little prescribed content (see OSC 45-501 Part 5 and OSC 45-501 CP Part 5) o OSC 45-501 CP (5.4)(1) Ontario securities legislation generally does not prescribe the content of an offering memorandum (other than GIS). The decision relating to the appropriate disclosure in an offering memorandum generally rests with the issuer, the selling security holder and their advisors. o Unless GIS, can pretty much put whatever you want OSC 45-501 (5.1) Application this Part only applies to a distribution made in reliance on an exemption from the prospectus requirement in o (a) section 2.3 of NI 45-106 [Accredited investor], o (b) section 2.4 of NI 45-106 [Private issuer], o (c) section 2.7 of NI 45-106 [Founder, control person and family - Ontario], o (d) section 2.8 of NI 45-106 [Affiliates], o (e) section 2.10 of NI 45-106 [Minimum amount investment], o (f) section 2.19 of NI 45-106 [Additional investment in investment funds], and o (g) section 2.1 [Government incentive security]. If exemption is not listed then dont have to follow the rules or send it to OSC Stat right of action below though

OM: Statutory Right of Action (OSA s.130.1) and (45-501 s.5.2) Must put the statutory right of action requirement on either front or back of the OM OSA 130.1 (1) When an OM contains a MISREPRESENTATION, a purchaser who purchases a security offered by the OM during the period of distribution has, without regard to whether the purchaser relied on the misrepresentation (DEEMED RELIANCE) the following rights: o 1. The purchaser has a right of action for damages against the issuer and a selling security holder on whose behalf the distribution is made. (DAMAGES) o 2. If the purchaser purchased the security from a person or company referred to in paragraph 1, the purchaser may elect to exercise a right of rescission against the person or company. If the purchaser exercises this right, the purchaser ceases to have a right of action for damages against the person or company. (RESCISSION) Grounds of liability o Misrepresentation o Deemed reliance Remedies o 1. Damages (I.e. if already sold shares, sue for damages); Maximum damages is the amount you paid for it o 2. Right of rescission Defences o Purchaser knowledge o Depreciation not due to misrepresentation (If shares went down argue that the reason shares fell was because the whole economy went down, NOT due to misrep) o Not receiving proceeds 45-501 s.5.2 Right of action for damages and right of rescission o (1) The rights referred to in s. 130.1 of the Act apply in respect of an OM delivered to a prospective purchaser. o (2) BUT do not apply if the person relied on accredited investor exemption and if the prospective purchaser is (a) a Canadian financial institution or a Schedule III bank, (b) the Business Development Bank of Canada incorporated under the Business Development Bank of Canada Act (Canada), or (c) a subsidiary of any person referred to in paragraphs (a) and (b), if the person owns all of the voting securities of the subsidiary, except the voting securities required by law to be owned by directors of that subsidiary. 5.3 Description of rights in offering memorandum If a seller delivers an offering memorandum to a prospective purchaser in connection with a distribution to which the rights referred to in section 130.1 of the Act apply, the rights must be described in the offering memorandum. OM: Filing Requirements Copies of OM to be filed with OSC (OSC Rule 45-501 s.5.4) within 10 days of the distribution No review of OMs by regulators so more flexibility as to their content and level of detail o But bc of liability implications, preparing an OM in ON is STILL a significant legal undertaking OMs not made public so someone cannot go to commission to get it

42 Discretionary Exemptions OSA s.74 (1) Upon the application of an interested person or company, the Commission may make the following rulings if the Commission is satisfied that to do so would not be prejudicial to the public interest: o 1. A ruling that any person or company is not subject to section 25. o 2. A ruling that any trade, intended trade, security, person or company is not subject to section 53 (1.1) In a ruling under s (1), the Commission may impose such terms and conditions as are considered necessary. (2) Where doubt exists whether a distribution of any security has been concluded or is currently in progress, the Commission may determine the question and rule accordingly. (3) A decision of the Commission under this section is final and there is no appeal therefrom. (ruling final)

PRIVATE PLACEMENTS: TSX & TSX-V REQUIREMENTS

TSX Company Manual sets out all rules that a company listed on the TSX has to follow, S. 607 TSX: General Requirements Notice to TSX (Form 11) May request price protection (Form 11-A) while negotiating principal terms of placement o I am negotiating with an investor and want to protect the price for 30 days o Call exchange to protect price so that when you tell the public of the investor you have price protection (otherwise shares may go up a significant amount or something once you inform the public of this new investor, and then the investor would be paying more) but NOT with price protection For all private placements: o Transaction must close no later than 45 days (135 days if shh approval required) from the date on which the market price of the securities being issued is established, unless TSX approves written request for extension o Issuer must give TSX immediate notice in writing of closing of the transaction There are other rules that you must comply with if you are on the exchange o I.e. need shareholder approval if issuing more than 25% of shares to someone TSX: Regular Private Placement TSX is the only regulatory authority in private placement Form 11 Private Placement Regular Filing TSX will generally approve issuers transaction within seven business days of receipt of notice Price per listed security must not be lower than the market price less the applicable discount, as follows: Market Price $0.50 or less $0.51 to $2.00 Above $2.00 Maximum Discount 25% 20% 15%

There is a maximum discount to protect other shareholders In order to compensate investors for risk, give them a discount There is more risk because if you issue privately, there is a 4-month hold period where they cannot sell

TSX: Definitions market price means the VWAP on TSX, or another stock exchange where the majority of the trading volume and value of the listed securities occurs, for the five trading days immediately preceding the relevant date. Market price is as at the date: (a) provided for in the binding agreement obligating the issuer to issue the securities (either the date of the binding agreement or some future date); or (b) the date the Section 607(e) Form 11A notice is received by TSX, requesting price protection VWAP means the volume weighted average trading price of the listed securities, calculated by dividing the total value by the total volume of securities traded for the relevant period. Where appropriate, TSX may exclude internal crosses and certain other special terms trades from the calculation. TSX: Expedited Private Placement Form 11 Private Placement Expedited Filing

43 TSX will generally approve issuers transaction within three business days of receipt of notice Requirements: o Private placement offered at a price at or above market price, regardless of the number of listed securities issuable; or o Where the price per security is less than the market price but within the applicable discounts, the offer is for an aggregate number of securities equal to or less than 25% of the issuers outstanding listed securities

TSX Venture Exchange- Corporate Finance Manual, Policy 4.1 TSX-V: Regular Private Placement Set price per security by: o Issuing comprehensive news release; or o Filing a Price Reservation Form (Form 4A) o Price must not be less than the Discounted Market Price File Private Placement Notice Form (Form 4B) within 30 days after the earlier of filing Form 4A or issuance of news release TSX-V gives conditional or final acceptance o If only conditional acceptance rec eived, can still close transaction but must submit final documentation within greater of 15 days from issuance of conditional acceptance or 45 days from price reservation date (if brokered, 30 and 60 days, respectively): Updated Form 4B; and Balance of any applicable fees (see Policy 1.3) TSX-V issues Exchange Bulletin If final documentation not received in time, then notice deemed withdrawn TSX-V: Definitions Discounted Market Price means the Market Price less the following maximum discounts based on closing price (and subject, not withstanding the application of any such maximum discount, to a minimum price per share of $0.05 and a minimum exercise price per Warrant or incentive stock option, as the case may be, of $0.10): Closing Price Up to $0.50 $0.51 to $2.00 Above $2.00 Discount 25% 20% 15%

Market Price means the last closing price of the Issuers Listed Shares before either the issuance of the news release or the filing of the Price Reservation Form (Form 4A) required to fix the price at which the securities are to be issued or deemed to be issued

TSX-V: Expedited Private Placement Purpose: permits issuers to obtain acceptance of smaller transactions without staff review Issuer issues comprehensive news release or files Form 4A and a news release to set the Discounted Market Price Must file Form 4B within 45 days after earlier of issuance of news release or filing of Form 4A TSX-V issues Exchange Bulletin generally the business day after notice is filed Eligibility requirements: o At least 50% to be purchased by arms length parties; o Issuer is not a CPC or an issuer put on notice of pending transfer to NEX; o Proceeds will be spent on a biz or asset in which issuer has interest and which has been accepted by the TSX-V; o Does not involve convertible securities (other than warrants); o No more than 50% of outstanding Listed Securities issued pursuant to expedited process in 6 mo period; and o Must not create a new Control Person

44

RESALE RULES AND CONTROL DISTRIBUTIONS

Bc we have a closed system, if you buy shares through private exemption, cannot just sell it; must follow resell rules OSC wants to ensure if co. doesnt file a prospectus, there are restrictions so it doesnt end up in public market right away because then the public wont have sufficient info to make informed investment decisions

Policy Objectives of Resale Rules (1) Disclosure (to protect the public so public has proper info) (2) Preventing backdoor underwriting o Dont want backdoor listing easy way for company to distribute shares to a whole bunch of people without prospectus (sell shares through private placement and then they sell to anyone) (2) Pricing o Hold periods create an incentive for issuers to complete a public offering by reducing the price the private place will pay for securities given they are NOT freely tradeable o It is hoped this consideration might encourage issuers to file a prospectus (4) Control distributions o Control person is anyone that owns more than 20%; OSC wants to ensure they control how they sell because control persons may have insider info NI 45-102 Resale Rules 2 separate rules for non-control block resales: o NI 45-102 s.2.5 [use appendix D] More stringent because in order to resell, must be RI for 4 months and hold shares for 4 months o NI 45-102 s.2.6 [use appendix E] Less stringent; just seasoning period Rationale for more stringent rule o More stringent rule is applicable when there is more chance of a backdoor underwriting taking place SO in 2.5, the more onerous resale rule, governs those exempt transactions that are considered more susceptible to being abused by issuers or initial purchasers o Many of them are more capital-raising exemptions Which exemptions attract which resale rules? Application of rule depends on what exemption was relied upon when securities originally issued. See italicized instructions above relevant section of NI 45-106 establishing an exemption (tells you which appendix) NI 45-102 s. 2.3 says if a security was distributed under any of the Appendix D provisions, first trade is subject to 2.5 NI 45-102 s.2.4 says if a security was distributed under any of the Appendix E provisions, first trade is subject to 2.6 Chart at CB p.339 sets out main exemptions and which resale rules apply Both the accredited and minimum amount exemption attract 2.5 whereas most of the exemptions based on a preexisting relationship with the issuer attract the less restrictive rule

45

Person who acquires securities pursuant to prospectus exemption can sell by: (1) filing prospectus for secondary offering (2) relying on another exemption (3) get an exemption order from OSC [rarely granted] (4) satisfy resale rules under NI45-102 Substance of Resale Rules Restricted Period NI 45-102, s.2.5 *This resale rule is the more stringent of the two, in that imposes conditions on both issuer and reseller (1) Seasoning requirement o What is rationale for requirement to be reporting issuer for 4 months? (4 months and 1 day) Relates to the policy objective of ensuring that subsequent purchasers of securities initially distributed without a prospectus have access to adequate info about the issuer Protecting investors; give the public market time to absorb the info This is a lot less burdensome than in previous rules o Note effect of NI 45-102 s.2.7 on seasoning period requirement. Why? Appendix B jurisdictions Time period is further reduced if the issuer only becomes a reporting issuer by filing a prospectus after the distribution date (then only the restricted/ hold period applies) NI 45-102 CP s.1.11 explains 2.7 re trade-off between restricted period and seasoning period o If the issuer never becomes a reporting issuer, the seasoning period requirement remains unfulfilled thus preventing the securities from being resold unless a further exemption is available (2) Restricted/hold period requirement o 4 month restricted/ hold period (4 months and 1 day) o Definition of distribution date: the date the security that is the subject of the trade was distributed in reliance in an exemption from the prospectus requirement by the issuer o Rationale for restricted/hold period? All info is filtered and public is aware of it Calculation of restricted periods where more than one exempt purchaser: NI 45-102 CP s.1.8 o Provides guidance as to the calculation of the appropriate restricted period where there have been a series of transactions involving more than one exempt purchaser (distribution date is when securities were distributed in reliance on the first exemption) p.342 (3) Legending o Requirement that securities certificates or ownership statements carry a legend indicating the date when the securities may be validly resold to provide more transparency to downstream purchasers of securities issued under prospectus exemptions o (i) if the issuer was a reporting issuer on the distribution date, the certificate representing the security, if any, carries a legend stating:

46 OR o Unless permitted under securities legislation, the holder of this security must not trade the security before [insert the date that is 4 months and a day after the distribution date];

(ii) if the issuer was not a reporting issuer on the distribution date, the certificate representing the security, if any, carries a legend stating: Unless permitted under securities legislation, the holder of this security must not trade the security before the date that is 4 months and a day after the later of (i) [insert the distribution date], and (ii) the date the issuer became a reporting issuer in any province or territory. o NI 45-102 CP s.1.10 (if control period expired, no need to put a legend) (4) Not a control distribution (5) no unusual effort to prepare market p.343 o Includes activities such as dissemination of soliciting material, formation of selling groups, sales to non-arms length purchasers I.e. advertising in newspaper (6) no extraordinary commissions o Compensation greater than is customary for transactions of similar size o I.e. Cannot hire someone to sell shares and give them commission that is really high (7): no reasonable grounds to believe issuer in default of securities legislation o Policy rationale? Recognition of the assumed info asymmetries that exist as between these classes of investor and outside investors so good faith requirement on insiders o If you are an O or D and you want to sell before freely tradable, can not sell if you know company isnt up-todate with disclosure

Seasoning Period NI 45-102, s.2.6 This rule is known as the seasoning period rule because a seasoning requirement for the issuer is the main regulatory obligation imposed on the resale process There is NO hold period so freely tradeable immediately upon issuer being a RI for 4 months No restricted period because there is little danger of backdoor underwriting prob in connection with the types of exemptions that attract 2.6 such as stock dividend Note similar reduction in seasoning period where issuer becomes reporting issuer by way of prospectus (RTO not included) filed after distribution date: see s.2.7 [Exemption for a Trade if the Issuer Becomes a Reporting Issuer After the Distribution Date] o Then all requirements in 2.5/2.6 dont apply anymore o Shares become freely tradable right away because public has full info after prospectus is filed o If distribution date is AFTER the prospectus then 2.7 doesnt apply o I.e. Nov 1: final prospectus receipt; Nov 15: private placement So distribution date is Nov 15, so you have to wait 4 months (because the public needs time to absorb info/ changes thru MCRs and press releases, etc) BUT if you flip the dates, then you dont have to wait 4 months Other conditions similar to s.2.5 Steps to take: 1) Find out original exemption 2) Does it fall under appendix D or E? 3) Go to resale rules of 2.5 or 2.6 and see if they have been complied with Resale Rules for convertible or exchangeable securities NI 45-106 s.2.42 and NI 45-102 Appendices D&E For application of restricted/seasoning period rules to underlying securities: see also NI 45-102 s.2.5 (3) (legend requirements) and NI 45-102 CP s.1.10 (no need for legend if period has expired) o Share + warrant and you exercise warrant 6 months later, hold period starts when you acquired original securities (ALWAYS original distribution date) These securities may create the possibility of backdoor underwritings Resale rules work such that is the original security was acquired under an exemption to which the resale rule in 2.5 would apply, then the resale rule in 2.5 applies to the converted or underlying security and same goes for 2.6 But if original security was acquired under prospectus then 2.10 applies not 2.6 o 2.10: Exemption for a Trade in an Underlying Security if the Convertible Security, Exchangeable Security or Multiple Convertible Security is Qualified by a Prospectus - Section 2.6 does not apply to a trade in an underlying security issued or transferred under the terms of a convertible security, exchangeable security or multiple convertible security if

47 (a) a receipt was obtained for a prospectus qualifying the distribution of the convertible security, exchangeable security or multiple convertible security; (b) the trade is not a control distribution; and (c) the issuer of the underlying security is a reporting issuer at the time of the trade.

Resale rules for control persons NI 45-102, s.2.8 traditionally onerous Definition of control person: OSA s.1(1) (a) a person or company who holds a sufficient number of voting rights attached to all outstanding voting securities of an issuer to affect materially the control of the issuer, and, if a person or company holds more than 20 per cent of the voting rights, the person or company is deemed, in the absence of evidence to the contrary, to hold a sufficient number of the voting rights to affect materially the control of the issuer, (affect materially means less than actual control) (b) OR same thing BUT there is a combination of persons or companies, acting in concert by virtue of an agreement, arrangement, commitment or understanding o Typically in public company, if hold more than 20% because company is usually widely held o If another person owns 40% and you own 21% you could go to OSC and say you are NOT a control person o OR you can only own 15% and still control company if you have shareholder agreement for instance that says you can vote other shareholders shares o It is a factual test but typically assumed if you own more than 20% unless evidence to the contrary o It will be a question of fact whether the control person holds a sufficient number of securities to materially affect control the issuer though they will be deemed to do so if they hold more than 20% of the voting rights attached to all outside voting securities of an issuer o The analysis will depend on the characteristics of the shares held, the number and the type of shareholders, and the relationships among the shareholders Rationale for specific resale rule for control transactions Doesnt matter how control person acquired securities. o The logic is the general regulatory concern with info symmetry and the possibility that control persons may be selling into the marketplace on the basis of info not available to investors generally 1) Those in control have better knowledge 2) Control persons have a superior ability to alter the value of the issuer 3) Similarly, the control person herself may be an important factor in the success of the enterprise S. 2.8 more restrictive than s.2.5 and 2.6 bc control persons have special relationship to company so public needs to know in order to be protected Definition of Control Distribution: o OSA (c) a trade in previously issued securities of an issuer from the holdings of any control person o Sales by control person are considered to be a distribution even if the control person acquired the securities initially by means of prospectus 2.8 looks like 2.5 + more (file with OSC) BUT if company files prospectus after, 2.8 no longer applies, but still have to follow subsection 3 (filing requirements) Alternatives available to control person distributing securities 1) Control person/issuer issues a prospectus [Secondary offering] 2) Discretionary exemption from OSC under s.74 o Unlikely to be granted given the policy objectives of regulating these transactions in the first place 3) Use another prospectus exemption o Resale rules applicable to purchasers o But still have to follow subsection 3 4) Resale rule in 45-102, s.2.8 2 advantages o (1) It is NOT necessary to find selected purchasers who meet prospectus exemption requirements so that for example that securities could be sold on the TSX o (2) Buyer is not subject to further resale rules Conditions: 45-102, s.2.8(2) (1) seasoning period (2) restricted period o Note reduction in seasoning period where issuer becomes RI after distribution date via NI 45-102 s.2.7 o Determination of time periods in context of convertible or exchangeable securities, s. 2.9(3) (3) no unusual effort to prepare market (4) no extraordinary commission paid (5) condition to be fulfilled by selling security holder re no reasonable grounds to believe issuer in default

48 Filing Requirements 45-102, S.2.8(3): (a) Complete and sign Form Form 45-102FI no earlier than one business day before filing o This form represents advance notice of the control persons intention to resell o Re terms of Form, note especially certification by control person Requirement that control person has no knowledge of a material fact or material change w respect to the issuer of the securities that has not been generally disclosed and that the info given in the form is true and complete (b) Form 45-102FI to be filed on SEDAR at least 7 days before first trade (so public has warning; can digest info and decide what to do) (c) Insider reporting requirements to be fulfilled within 3 days after completion of any trade o Must also file insider report to say you sold these shares and this is the price you sold them for NI 45-102 s.2.8(4): Form expires no later than 30 days from date filed: o Must sell shares within 30 days or start the process over Separate specific rule for eligible institutional investors (such as banks, pension or mutual funds, and portfolio managers) under NO 45-106, Part 4 and NI 62-103 OSCB Summary 2.5- seasoning and restricted period 2.6- seasoning 2.8- seasoning + restricted period + notice and filing requirements Cleansing effect of s. 2.7 o Restricted Period still remains o Cleanses the Seasoning Period ONLY of 2.5, 2.6 and 2.8 Consequences of incorrectly relying on exemption Jones v. Deacon Hodgson Ratio: Failure to file prospectus renders contract void, on basis that provision of prospectus so fundamental to statutory scheme that action should not be statute-barred [The significance of this case lies in what it says about the potential consequence for issuers of wrongly relying on an exemption in a statute] Facts: Use of a former private company exemption to distribute securities. The plaintiff successfully claims that as a member of the public, he should have been provided with a prospectus pursuant to the distribution. Reasons Court held that the failure to file a prospectus with the regulator rendered the contracts of purchase and sale void so there was no question of a limitation period for a remedy to be available This was a contract prohibited by the statute The result of this decision seems to be that if an issuer relies on an exemption inappropriately so that it should have provided a prospectus, those who purchased the securities are not time-limited in seeking a remedy Distinction between failure to file prospectus [whether or not by virtue of incorrectly interpreting an exemption] and failure to deliver one [which had been filed, to the specific purchaser, for which there is an explicit statutory remedy that must be exercised within 3 years]

CAPITAL POOL COMPANIES

Purpose of CPC The TSXV runs a capital pool program that is unique to Canada Designed to help smaller companies go public CPC is a company without a business (it has shareholders and is listed on the exchange though) It is a way for people to invest in start-up companies that go public by setting up a shell first CPC will go and find private co to put biz in (called an RTO) TSXV Manual: The Exchanges program was designed as a corporate finance vehicle to provide businesses with an opportunity to obtain financing earlier in their development than might be possible with an IPO. The CPC program permits an IPO to be conducted and an Exchange listing to be achieved by a newly created company that has no assets, other than cash, and has not commenced commercial operations. The CPC then uses this pool of funds to identify and evaluate assets or businesses which, when acquired, qualify the CPC for listing as a regular Tier 1 or Tier 2 Issuer on the Exchange. Two-stage process: Stage 1: o Organization and seed financing of the CPC

49 o Filing of a prospectus in respect of the CPCs IPO o Completion of the IPO and the listing of the CPCs common shares on the Exchange. Stage 2: o Entering into of an Agreement in Principle in respect of a proposed Qualifying Transaction o Preparation and filing with the Exchange of a comprehensive CPC Information Circular or CPC Filing Statement (each of which provides prospectus level disclosure concerning the CPC, the target company and the Resulting Issuer). Ultimate Goal: Acquire a business (shares or assets) through a Qualifying Transaction and Resulting Issuer begins trading as a normal TSXV listed company

CPCs: Overview

24 Months Maximum

Seed

Public Financing and CPC Trades

CPC Acquires Business (QT)

Aftermarket and Growth

Seed Financing Founders contribution: o Minimum of 3 founders (directors and officers). o Each director must invest a minimum of $5000 o Together they must invest the greater of $100,000 (between them) or 5% of the aggregate from the sale of all 17" securities by the CPC at the date of filing the prospectus in relation to the IPO o Want to ensure that Ds of CPC have vested interest in the CPC o The founders must each submit to the exchange (and to the OSC) a personal information form. Price of Seed Shares: o Minimum: greater of $0.05 and 50% of the price at which the common shares of the CPC are sold pursuant to its IPO o Value of seed shares sold at a price less than the IPO price cannot exceed $500,000 After the minimum $100,000 is invested by founders, other investors (private placement) may also invest IPO Following the completion of the seed financing, the CPC prepares a prospectus for its IPO to raise between $200,000 and $4,750,000 by the sale of common shares of the CPC. o Prospectus is very bare and standard since there is no real business activity to discuss. o Prospectus is reviewed by the TSXV, not the securities commissions Only a single class of common shares may be issued as seed shares and IPO Shares. The minimum price at which the IPO Shares may be issued is $0.10 (if seed shares are issued at $.05) Typically, the IPO Shares are priced at twice the issue price of the seed shares (double what they did at private placement) The maximum aggregate gross proceeds to the CPC from the issuance of all seed shares and IPO Shares (and any shares issued pursuant to subsequent private placements) must not exceed $5,000,000. Minimum amount raised is $300,000. When you set up a CPC, you can say you have a possible deal BUT CANNOT say you have a firm, binding deal Following the IPO, the CPC must: o have at least 1,000,000 issued and outstanding common shares in the public float upon completion of the IPO o have a minimum of 200 shareholders with each shareholder beneficially owning at least one board lot of listed common shares free of resale restrictions (exclusive of any common shares held by non-arms length parties to the CPC). o no person can subscribe for more than 2% of the IPO shares

50 must have an IIROC dealer as an agent. Typically pay Agent 10% commission and options to purchase 10% of IPO shares If final listing documentation is satisfactory, the Exchange issues a bulletin Two days after bulletin, the shares begin trading on the TSXV The shares will have the designation .P beside the stock symbol to indicate that the issuer is a CPC Options issued to directors. Up to 10% of outstanding shares. o

Restrictions on Use of Proceeds Generally, proceeds only to be used to identify and evaluate businesses or assets and obtain shareholder approval for a proposed Qualifying Transaction. [when finds business to take over, it is called a qualifying transaction] Specifically, expenses incurred for the preparation of: o Valuations or appraisals; o Business plans; o Feasibility studies and technical assessments; o Sponsorship reports; o Engineering or geological reports; o Financial statements, including audited and pro forma financial statements; o Fees for legal and accounting services; and o Agents fees, costs and commissions, relating to the identification and evaluation of assets or businesses and the obtaining of shareholder approval for the CPCs proposed Qualifying Transaction. o I.e. 100k raised from directors; 700k raised from private placement seed financing; 400k raised thru IPO = 700k is total amount of capital CPC has raised TSXV wants to ensure you spend it on finding a private co (cannot be spending it on just anything) CPC cannot pay officers and directors. Exceptions: o Up to $225,000 may be advanced as a refundable deposit or secured loan to a target company or vendor for a proposed arms length Qualifying Transaction, if it has been publicly announced at least 15 days prior to the date of such advance, due diligence with respect to the Qualifying Transaction is well underway and either a sponsor has been engaged or sponsorship has been waived. o Up to $25,000 may be advanced as a non-refundable deposit, unsecured deposit or advance to a target company or vendor to preserve assets without the prior acceptance of the Exchange (basically a deposit) o Up to the lesser of 30% of the gross proceeds from the sale of all securities by the CPC or $210,000 can be used for purposes other than the permitted expenditures described above, which expenses include: listing and filing fees; legal, accounting and audit expenses relating to issuance of securities and preparation and filing of the CPC prospectus; administrative and general expenses of the Corporation Qualifying Transaction Within 24 months of the issuance of the IPO Bulletin, the CPC must complete the acquisition of a company or business as its Qualifying Transaction. [Once the CPC is set up, have 2 years to find a company] o Until then, ppl can buy and sell shares once it goes public even if there is no business yet) o CPC acquires shares of private company by issuing shares from CPC o I.e. CPC has 1M shares worth 10M plus has 700k Cash Private company owns 90% of CPCs shares Upon entering an Agreement in Principal, the company issues a news release and trading of shares is halted until all of the following occur: (there must be FTP disclosure of private co to public) o Where the transaction is subject to sponsorship (if no significant concurrent financing, need a sponsor), the Exchange has received a Sponsorship Acknowledgement Form o Exchange receives a Personal Information Form for each person who will be a director, senior officer, promoter and other insider of the Resulting Issuer together with resumes for each director and senior officer of the Resulting Issuer o The Exchange has completed preliminary background searches and other due diligence o Comprehensive news release in respect of the Qualifying Transaction has been issued Agreement in Principal must not exist before the IPO CPC then prepares either a draft CPC Information Circular or CPC Filing Statement o prospectus level disclosure on the CPC and the business that is to be acquired, as well as the Resulting Issuer (pro forma) o Include 3 years of audited financial statements o reviewed by the TSXV

51 Resulting Issuer must meet the TSXV minimum listing requirements (Tier 1 or Tier 2) CPC has 75 days after Agreement in Principle announced to file draft information circular or filing statement with TSXV

Shareholder approval of Qualifying Transaction A CPC must hold a shareholders meeting for approval of proposed Qualifying Transaction if non -arms length: o Majority of the Minority Approval required approval by a majority of the votes cast by shareholders other than non-arms length parties to the CPC, the target company and the vendors of the assets being acquired, as the case may be) I.e. If a co sets up its own CPC and thus 60% of the CPC shareholders are also shareholders of the private company, a majority of the 40% CPC minority will decide o CPC must file a CPC Information Circular with the Exchange and send that document to its shareholders prior to holding its shareholders meeting If arms length: [private company has no connection with CPC] o the CPC will not be required to obtain shh approval provided it files a CPC Filing Statement with the Exchange. o CPC Filing Statement becomes the disclosure document [it has prospectus-like disclosure] o CPC can close Qualifying Transaction 7 business days after filing its CPC Filing Statement on SEDAR However, in either case, shareholder approval may also be required under applicable corporate or securities law (e.g. where there will be a change of auditor, election of new directors, name change, amalgamation, etc.) One of the main reasons people do it this way is because of certainty o You already know you will meet the requirements of money and number of shareholders o So basically it gives smaller companies that may not have otherwise passed the prospectus process, certainty After Shh Approval and Documentation After shareholder approval (if required) and filing of required final/post-meeting documentation, the Exchange issues a bulletin that evidences final Exchange acceptance of the Qualifying Transaction. The QT Bulletin also indicates that the Resulting Issuer will not be considered a CPC, will not trade with the designation .P and will commence trading in two trading days under a new name and a new stock symbol, if applicable.

Escrow Purpose: [escrowed in accordance with policy]: To ensure founders and purchasers of shares at a discount are committed to and stay with the company and cannot cash-out (and run). If you bought shares thru seed financing and private placement, escrowed up to 3 years (3 years until they can sell ALL Group 1: their shares so they dont leave public shareholders holding! the bag) CPC shares that must go in escrow: Different conditions depending on: " All shares issued prior to the CPCs IPO at a discount to the price of the o whether resulting issuer is Tier 1 (bigger co) or Tier 2 (smaller Sharesco) Issuer of TSXV and o when shares were purchased and for what price " all shares acquired by non-arms length parties to the CPC prior to comp E.g. Resulting Issuer is Tier 2 more stringent escrow conditions of the Qualifying Transaction.
Tier 1

Group 1: CPC shares that must go in escrow: All shares issued prior to the CPCs IPO at a discount to the price of the IPO Shares All shares acquired by non-arms length parties to the CPC prior to completion of the Qualifying Transaction. I.e. Tier 1 (big cos), you are allowed to sell 25% of shares but after 18 mos, can sell all of them, whereas for tier 2, you are not allowed to sell as much (i.e.15% for 3 years)

Tier 2 10% 15% 15% 15% 15% 15% 15%

Issuance of QT Bulletin 6 months 12 months 18 months 24 months 30 months 36 months

25% 25% 25% 25%

Group 2: CPC shares that must go in escrow: o securities held by directors, officers and 10% shareholders of the Resulting Issuer (Principals) following the completion of the Qualifying Transaction will also be subject to escrow restrictions Further distinction: Value Securities v. Surplus Securities o Basically, Value Securities value is backed by assets in the company while Surplus Securities value is not. If at least 75% of securities issued pursuant to the QT are Value Securities Value Security Escrow Agreement If not Surplus Security Escrow Agreement

Group 2 (contd): Group 2 (contd): !Release pursuant to Value Security Escrow Agreement: !Release pursuant to Surplus Security Escrow Agreement:

Issuance of QT Bulletin 6 months 12 months 18 months 24 months 30 months 36 months Tier 1 25% 25% 25% 25% Tier 2 10% 15% 15% 15% 15% 15% 15%

52

Tier 1 Issuance of QT Bulletin 6 months 12 months 18 months 24 months 30 months 36 months 10% 20% 30% 40%

Tier 2 5% 5% 10% 10% 15% 15% 40%

Release pursuant to Value Security Escrow Agreement

Release pursuant to Surplus Security Escrow Agreement

30"

Business Advantages {basically helps smaller companies go public} Obtaining money earlier Venture Capitalists Certainty Going public advantages (liquidity, profile, shares as currency, raise additional capital, etc.) Easier for smaller companies to go public (eg, junior exploration companies) Side Note: How an RTO works: Priv company says you, public company buy our shares by issuing us your shares. Public company issues shareholders of private company $10M worth of shares in return for private company giving their shares to public company SO public company owns 100% of private companys shares (10M + $1M = 11M) Private company takes control of public company even though public owns the private RTO is a way to go public that gives them certainty

31

Introduction Relationship between securities law and corporate law in the proxy solicitation process Related to the disclosure system and the statutory objectives of investor protection and the efficiency of capital markets The info circular and proxy process allows securityholders to make informed decisions as to whether to purchase, sell or continue to hold their securities It can also allow investors to exercise their rights to participate through voting and shareholder proposal mechanisms granted to them by corporate and security law statutes Regulatory Environment for Proxy Solicitation (1) Corporate Statutes [this is where it begins] At least one class of shares of corporation must have the right to vote; most common shares have the right to vote Cdn corp law requires that an annual general meeting of shareholders be convened at which time shareholders elect directors, receive annual financial statements and appoint the cos auditor (max 15 mo) While corporate law is aimed at enabling the corp to operate, setting out the respective rights and obligations of Ds, Os, shareholders, securities law is implicated bc of the need to protect the integrity of capital markets by ensuring that investors rights to info and exercise of voting are not compromised The Kimber report back in 1965 sought greater accountability and participation rights for securitiesholders (so they could vote against management) The Kimber report formed the underpinning for the expansion of proxy rights and obligations under securities law Specifically, shh not able to attend general meetings are granted a voice in decisions thru the proxy process Those that attend the meeting count as 100% of the vote (those that come or send in a proxy) Now shh are becoming activists and trying to influence in a way they didnt before (i.e. executive compensation) Most reporting issuers are corporations. [not a requirement] so CBCA is important Part XIII of the CBCA Proxy: means a completed an executed form of proxy by means of which a shareholder appoints a proxyholder to attend and act on his behalf at a meeting of shareholders

PROXY SOLICITATION

53 Form of proxy: written or printed form that, on completion and execution by or on behalf of a shh, becomes a proxy Defines solicit: o (a) includes (which means could be more) (i) a request for a proxy whether or not accompanied by or included in a form of proxy, (ii) a request to execute or not to execute (iii) the sending of a form of proxy or other communication to a shareholder under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy, and (iv) the sending of a form of proxy to a shareholder under section 149; o (b) does not include (i) the sending of a form of proxy in response to an unsolicited request made by or on behalf of a shh, (ii) performance of administrative acts or professional services on behalf of a person soliciting a proxy, (iii) the sending by an intermediary of the documents referred to in section 153, (iv) a solicitation by a person in respect of shares of which the person is the beneficial owner, (v) public announcement, by a shh of how the shh intends to vote and the reasons for that decision, (vi) a communication for the purposes of obtaining the number of shares required for a shareholder proposal under subsection 137(1.1), or (vii) a communication, other than a solicitation by or on behalf of the management of the corporation, that is made to shareholders, in any circumstances that may be prescribed o *What is solicitation and what isnt is litigated much more S.149 management of a CBCA corporation must send a form of proxy to all shareholders unless the corporation is not a distributing corporation and has less than 50 shareholders. S.150 a person shall not solicit proxies unless, in the case of management, the notice of meeting is accompanied by a management proxy circular in prescribed form and, in the case of any other solicitation, a dissident proxy circular in the prescribed form is sent to each shareholder. o Re Pacifica Papers Inc. 2001:The court found that the proxies were solicited in a manner that contravened the CBCA s.150(1) but concluded that this was a technical non-compliance and insufficient for the judge to refuse his discretion to approve the arrangement S.150(1.1), 1.2- Further exception for solicitation by public broadcast where a person may solicit without proxy circular if the solicitation is conveyed by public broadcast, speech or publication o A public announcement by a shareholder of how the shareholder intends to vote and the reasons for a decision, or a communication for the purposes of obtaining the number of shares required for a shareholder proposal is all allowed without triggering dissident proxy requirements o New communication provisions allow shh to communicate & build support for particular governance strategies S.151 of the CBCA allows a corporation to apply for an exemption from mandatory proxy solicitation rules o I.e. if you are a private co and over 50 shareholders who are your family members Dissidents: Exemption to the proxy solicitation requirements for dissidents who solicit proxies from fifteen or fewer shareholders o The defn of what constitutes a proxy solicitation has been contested over the years because some shareholder communication was found to be a proxy solicitation with the meaning of corporate or securities legislation, triggering costly dissident proxy solicitation requirements such as providing info circular o Recent legislative amendments (2001) have opened up the process by allowing increased communication among security holders without activating the proxy solicitation requirements which promotes shareholder activism and accountability I.e. 15 or fewer, not triggered, nor public announcement o Those seeking to put their own nominees up on the Board are called dissident o If they fall under solicitation, must follow rules in corporate statute o Will try to convince other shh to vote with them by having those shh that cannot make it to meeting named dissident as proxy o If you are manager/ reporting issuer, you have access to treasury so those companies have money to battle (management has resources of the co to fight the battle) o Dissidents are paying out of their own pocket; if they win they want to be reimbursed but may not be reimbursed if they lose so it is a big risk for them o Dissidents are NOT required to send info circular to ALL shareholders whereas management is They are only required to send it to ppl they are soliciting Proxyholder has the same rights as a shareholder at the meeting, subject to the terms of the proxy Part VIII of the OBCA has similar proxy rules as the CBCA o BUT diff from OBCA in that management must do proxy

(2) Continuous Disclosure Obligations - NI 51-102 Part 9 of NI 51-102 [deals with registered holders] requires management of a reporting issuer to solicit proxies and send, or make available under notice-and-access, a management information circular to registered holders

54 Forms 51-1-2F5 and F6 set out the form requirements for content of proxy and management information circular See example of form of proxy and voting instruction form

Registered versus Beneficial By definition, corporate statutes refer to registered security holders. o Shareholders of a corporation are called registered shareholders (name and address is on registry) o Now we have electronic trading and ppl always trade so registration and reregistration isnt working anymore Difference between registered and beneficial holders: Holding shares directly vs. through a nominee. Policy considerations behind the proxy rules o Companies must reach out to their beneficial holders who are now the vast majority of shareholders (3) Communication with Beneficial Owners of Securities of a Reporting Issuer - NI 54-101 By definition, corp statutes are geared towards registered shhs (companies must send notices of meetings, information circulars etc. to registered shareholders). However, most shareholders now hold their shares through intermediaries. Market efficiencies require shares to be registered in the name of nominees such as depositories or intermediaries. Issuers are only bound to recognize as its shhs those recorded on its share register or who either derive their rights from the registered shhs or who can demonstrate and entitlement to have their names entered on the share registry NI 54-101 not only facilitates the delivery of proxy-related materials to beneficial shhs, but it also allows for issuers to send material directly to NOBOs, thereby according beneficial shhs similar recognition as their registered counterparts Objectives of NI 54-101 o An objective of NI 54-101 is to give all securityholders of a RI the opportunity to be treated alike, as far as practicable with the obligations to both registered and beneficial securityholders clearly defined o The obligation of the intermediaries under NI 54-101 to provide RIs with NOBO lists upon requests creates transparency in the beneficial ownership of the issuer by advising them how they can exercise voting rights attached to their securities o And also permits RIs to communicate directly with its NOBO shareholders Common misconception is that beneficial shh who appointed himself as the proxyholder by filling in his own name in lieu of managements nominee on the form of proxy will be put in the same p osition as the registered shh at the meeting This may be the case provided the form of proxy contains a grant of discretionary authority to deal with other biz at the meeting and has not been completed such that the proxyholder will be bound on how to vote at the meeting Whereas a registered holder can change their mind last second, proxyholder has no choice but to execute the instructions completed on the proxy SO the scope of this instrument does NOT address the preservation of a beneficial shareholders rights at a meeting but it dramatically improves the procedures for delivery of proxy-related info to NOBOs and OBOs 54-101 says RI has to set record date for meeting, notice of meeting to CDS, stock exchange and securities commissions at least 25 date before record date Whoever is a shareholder at the record date gets to vote at meeting 54-101 also says at least 21 days before meeting, proxy materials must be sent and another 3-4 biz days are added on bc need intermediary to sort it and send it (thats where Broadridge comes in) RI drafts info circular in accordance with form requirement, prints as many copies TA tells them to mail it TA mails it to registered owners- CDS and Al (and prints enough copies for NOBOs and sometimes OBOs) If you are OBO, co doesnt have to send you stuff but can (usually chooses not to because it costs money) TA sends to Broadbridge; Broadbridge within 3 biz days mails it Now you can say you want to be own proxyholder (changed it recently because of shareholder activism) Fundamental principles of NI 54-101 aims to level the playing field all security holders of a reporting issuer, whether registered or beneficial, should be treated as identically as possible; market efficiency should be encouraged. following developments in the USA, notice-and-access now permitted in Canada o Essentially permits reporting issuers to send a notice and either proxy or VIF in lieu of sending an information circular; the notice sets out the website on which the information circular and other documents can be found. Use Of Proxies and Voting Instruction Forms (VIF) Facilitate voting at annual and special meetings of registered and beneficial shareholders of a reporting issuer [prescribed and regulated by law] o What is the difference between the two? Registered shareholders can use proxies to appoint someone to vote for them if they do not plan to attend the meeting.

55 Beneficial owners can use VIFs to instruct the registered holder (or its proxyholder) how to vote the securities beneficially held by the beneficial owner. For or withhold for votes regarding Board, auditors, etc BUT for or against for other topics such as exec compensation SO we send omnibus proxy to CDS (CDS required to appoint someone else as proxyholder such as BMO, so now BMO can vote, but cannot vote unless they get voting instructions from beneficial shareholder) Proxy voter can appoint someone else whose appoints someone else and so on So filled out forms and sent to Broadridge

Overview of Beneficial Shareholding System Players: (1) Reporting Issuer: must engage services of Transfer Agent (2) Transfer Agent: maintains books and records (minute books) of shareholders; facilitates transfer of securities (3) Registered Shareholders: holds shares pursuant to corporate statute; usually CDS so not much for TA to do there (4) Beneficial Shareholders o (a) NOBOs (Non-objecting beneficial owners): doesnt object to reporting issuer/ corp knowing name and address of beneficial owner so can send shareholder material to them o (b) OBOs (objecting beneficial owners): blind system but still have to communicate with them sometimes; when lots of OBOs it is difficult (5) Intermediaries and proximate intermediaries : financial institutions, brokers, nominees who investors/ shareholders deal with to get shares (6) Broadridge: agent retained by intermediaries and proximate intermediaries; was a private enterprise formed, carrying out legal obligations for intermediaries and proximate intermediaries made things easier for issuers too bc instead of dealing with banks, etc they go to Broadridge; Broadridge also has names and addresses of NOBOs (7) CDS Canadian Depository for Securities: Used by intermediaries and proximate intermediaries as their nominee (8) DTC Depository Trust Company (USA): US version of CDS

Broadridge RI (RIM)

BMO (intermediary)

K ME

CDS
Transfer Agent

CIBC (intermediary)

GMP (independent investment bank) (intermediary) Independent investment bank (intermediary)

Proximate intermediary

I open an account with BMO that is used to buy securities from RI so my relationship with BMO is contractual in nature BMO is a proximate intermediary so either BMO has securities registered in its own name or is a participant in CDS, in which case my shares are registered to CDS (thus RI has no idea about me- my only connection is the k I have w BMO) The independent investment bank may not participate in CDS, but the bank must make an agreement with someone else (proximate intermediary) BMO creates an electronic record so retains an agent, Broadridge, whose role is to provide record keeping services for financial institutions like communications with shareholders especially in shareholder meetings Broadridge is hired by banks but billed to issuers to assist in the identification of beneficial owners, distribution of materials and collection of proxies- Broadridge keeps OBOs and NOBO lists so if RI wants to know who beneficially owns, TA contacts Broadridge (only can send NOBO list) TA notes that CDS is the holder of the securities but will get NOBO list from Broadridge, so knows number of OBOs too BMO also is a member of the stock exchange

56 This system produces 3 types of pathologies according to Marcel Kahan and Edward Rock: (1) Pathologies of Complexity o (a) Materials dont arrive Following steps must occur before the materials are made out: issuer sends inquiry to DTC; DTC must respond; issuer must send out search cards to custodians (banks); custodians must respond; then issuer mails materials to Broadridge who distributes them to shareholders Given this complexity, there will be numerous cases in which the proxy materials and the request for voting instructions simply do not make it to the beneficial owner in time for them to vote o (b) Votes that are not counted Sometimes votes not counted by mistake or tabulator stops counting early bc enough votes to achieve outcome so dont now the margin of victory which might be an imp indicator of the support that management enjoys o (c) Nightmare of verification Systems inability to provide vote verification and an end -to-end audit trail (2) Pathologies of Ownership: Confusion as to who Really Owns the Shares (3) Pathologies of Misalignment between Voting Rights and Economic Interest o Voting rights rest with the record holder on the record date but that record holder may not have beneficial economic ownership in the company for one of 3 reasons: The record holder is a street name holder (a bank or broker) who never had a beneficial eco interest The shares have been sold after the record date and before the vote The holder has hedged her economic exposure to the co o By the same token, a holder may have a beneficial economic interest but no voting rights (bought shares AFTER record date but BEFORE vote) o THEREFORE in the present regime, there will be some persons with voting rights and no beneficial interest and others with a beneficial interest but no voting rights o Discrepancies between voting rights and beneficial interests can arise in 2 contexts: Unintended consequence of a transaction For the purpose of obtaining votes without an equivalent economic exposure (buy before and sell after record date) (4) Stock Exchange Policies Essentially require that a listed company comply with the requirements of its corporate statute and NI54-101. Listed companies must hold an annual meeting within six months of the financial year end. Following the rise of corporate governance concerns, stock exchanges now have rules regarding conduct of the meeting and what shareholders are entitled to vote on.

MUTUAL FUNDS AND CLOSED END FUNDS [Investment Products]

Regulation of investment products has grown Securities regulators saying they dont trust that investing public knows the documents

Investment Products: A Working Definition Definition o A financial instrument that provides an investor with the right to receive returns generated by a professional investment adviser from investing in a particular asset class utilizing particular strategies or techniques. o Interface between creativity, greed, complexity o In the last 30 years, there has been a dramatic increase of regulation Importance of Regulation (1) markets need savers of capital to make such capital available returns uncorrelated with other assets (2) meet a need for retail investors stock/ bonds dont meet the needs of investors especially where time is important i.e. retirement (3) assets under management growing rapidly expansion of financial assets (amount of savings) (4) have inherent risks not present in deposit products getting incremental return has financial risks that need to be managed

57 (5) there have been high profile failures - market timing, backward pricing, Portus, Norshield and more recently Bernie Madoff frauds so trust model hasnt worked (regulate instead of being reactive) (6) new asset classes are more susceptible to fraud alternate asset classes I.e. hedge funds uniquely different from securities that we historically saw

The Canadian Household Wallet [impressive] Mutual funds grew exponentially from 1985-2005 (increase of 25%) Also an increase in closed end funds (just not as much as mutual funds) Refer to diagram below

The(Canadian(Household(Wallet(
Where Canadian financial assets are held Pension Plan Assets (defined benefit and defined contribution plans) Deferred Income Plans (RRSPs) Investment Products Deposits with Financial Institutions Mutual Funds Closed End Funds ETFS

approximately $1.2 trillion

approximately $1.7 trillion

$2.2 trillion $840 billion $50 billion $50 billion

Savings accounts, GICs, other deposit accounts

The(Asset(Management(Business(in( Canada(
Type(of(Client( Segregated(Asset( Management?(
! Complete visibility of every asset held ![Portfolio manager]

2(

Types(of(Investment(Products( Invested(in(
[Costly, less efficient from tax standpoint]

1) 2) 3)
! Regulators want to make sure there are good guys so small guys dont get shafted

58
I can come to you and say I want my money back (cannot do this in any other securities law) Take it back today at value of closing market price today within 3 business days So regulator has to provide lots of rues on the liquidity of asset types
NON-REDEEMABLE Non-redeemable Investment Funds (closed-end funds, flow-through limited partnerships)

Regulatory(Matrix(
REDEEMABLE ON DEMAND

RETAIL PRODUCTS/ Applicable Rules: Applicable Rules: REPORTING ISSUERS Conflict of interest rules Part XXI of the Securities Act (Ontario) TSX Rules National Instrument 81-101, Mutual Fund National Instrument 41-101 F2, General Prospectus Disclosure ! Mutual fund distribution rules Prospectus Requirements !Substantial National Instrument 81-102, Mutual Funds National Instrument 81-106, Investment Fund Investment products (80s) regulation of Continuous Disclosure National Instrument 81-105, Mutual Fund mutual funds National Instrument 81-107, Independent Review Sales Practices Committee for Investment Funds National Instrument 81-106, Investment Fund Part XXIII.1 of the Securities Act (Ontario), civil Continuous Disclosure National Instrument 81-107, Independent ! Create liability regime Review Committee for Investment Funds discipline Not redeemable at demand so fewer rules of Part XXIII.1 of the Securities Act (Ontario), managers civil liability regime Exempt Mutual Funds EXEMPT PRODUCTS/ NONREPORTING ISSUERS
We dont care about ppl that have money to lose

Mutual Funds (conventional mutual funds, labour-sponsored funds, split share offerings, exchange traded funds)

Exempt Offerings (Pooled Funds, Linked Notes) Applicable Rules: CSA Notice 46-303, 46-304, 46-305 and 46-306 Principal Protected Notes Principal Protected Notes Regulations (SOR/ 2008-180) National Instrument 31-103 - Registration Requirements Everything goes

Applicable Rules: Part XXI of the Securities Act (Ontario) Certain parts of National Instrument 81-106, Investment Fund Continuous Disclosure National Instrument 31-103 - Registration Requirements

4(

Anatomy(of(a(Structured(Product(
Investment Note Convertible Debenture Preferred Security Capital Security Unit Warrant Subscription/Instalment Receipt Contract of Insurance Entity Corporation Trust Partnership (Limited or General) Investment Returns/Strategies Marketable Securities single stock equity index high yield debt flow-through shares debt obligations Alternative Assets hedge funds commodities private equity Techniques carbon credits real estate electricity weather inf rastructure mortgages

Easily traded and valued

Get the choice of many instruments and entities

credit derivatives vo latility

All these change character sometimes and there is the potential to increase the return associated with it

active vs. passive covered option writing short selling !short selling can manifestly change exposure taken forward agreement leverage 5(

Choose depending on the legal relationship that you are attempting to provide to the investor, and you are also trying to make it as tax efficient as possible A lot of products are designed to not create incremental tax on holders Huge displacement of mutual funds with EFTs

59

Overview(of(Financial(Investments(
Note( Conver3ble(Debenture( Preferred(Security( Capital(Security( Unit( Warrant( Instalment(Receipt( Trust(Indenture/Note(Cer3ficate( Trust(Indenture/Note(Cer3ficate/Share(Cer3ficate( Ar3cles(of(Incorpora3on( Ar3cles(of(Incorpora3on( Declara3on(of(Trust/Partnership(Agreement( Warrant(Indenture( Subscrip3on(Agreement(

Annuity(Contract( Insurance/Annuity(Contract( Segregated(Fund( ( We document according to relationship and all of these are different legal relationships
6( Retail Products (1) Mutual Funds In the world of investment funds there is a division between mutual funds and other investment funds or products, including non-redeemable investment funds. When we refer to mutual funds, we are most often referring to mutual funds that are subject to NI81-102-Mutual Funds. However, the definition of mutual fund in the Securities Act (Ontario) catches all sorts of other issuers who are not what we would normally think of as mutual funds.

Similarities between Mutual Funds and Other Investment Products Pooling of assets for investment Investors share proportionately in the gains and losses of the portfolio Professional management Diversification of investments Why Mutual Funds are Popular (1) For a small amount of money you get a professional to manage money for you and you can get broad diversification of investment types (2) Because it is done daily, you get a create deal of transparency (3) Because of all the abuses in the 1920s, they did not gain popularity until the last 30 years Differences with Other Retail Products Generally, mutual funds are in continuous distribution and other retail products have a limited offering period o Sold and redeemed daily, so constant amount of each coming in and leaving, which puts a lot of pressure to ensure there is not a large imbalance Mutual funds are subject to rigorous regulations and, most notably, a strict set of investment restrictions, including with respect to the use of leverage, concentration restrictions and investments in illiquid securities o Because of unique characteristics, they are drivers of liquidity in crisis so thats why there are restrictions Redemption/liquidity features (i.e. frequency of redemptions, exchange listing) Certain retail products are typically sold through a syndicate of agents/underwriters o 8-9000 investment dealers only o 40, 000 ppl in comparison can sell mutual funds Generally A mutual fund is an entity that is used to pool together investors money and invest it in accordance with the investment objectives of the fund Funds are distinguished from one another and categorized based on their investment objectives and the strategies used to achieve these objectives The mutual fund manager is paid a management fee to manage the funds assets Investors have an interest in the fund that is evidenced by securities of the fund o intermediary o interest in whole of portfolio o your relationship is defined by the term used For liquidity, rather than trading the fund securities on an exchange, investors are entitled to redeem their securities

60 and receive a price equivalent to the net asset value per unit Mutual funds are reporting issuers and subject to various securities laws and regulations

Definitions Securities Act (Ontario) o mutual fund includes an issuer of securities that entitle the holder to receive on demand, or within a specified period after demand, an amount computed by reference to the value of a proportionate interest in the whole or in a part of the net assets, including a separate fund or trust account, of the issuer of securities Key points [MFs are unique bc]: (1) redeemable on demand [few days typically or most 1 week] and (2) redeemable with reference to the net asset value (NAV) of the fund o no fixed value; dynamic amount measures daily or weekly etc. Mutual fund in Ontario means a mutual fund that is a reporting issuer or that is organized under the laws of Ontario, but does not include a private mutual fund; o key points: (1) a mutual fund as defined above; and (2) organized under the laws of Ontario or a reporti ng issuer under the laws of Ontario NI 81-102 applies to a mutual fund that offers or has offered securities under a simplified prospectus for so long as the mutual fund remains a reporting issuer. o key points: (1) a mutual fund as defined above; and (2) offers or has offered its securities by way of prospectus o relevance: if caught by this definition, the fund is subject to the restrictions and requirements of NI 81-101 and NI 81-102 Structure of a Mutual Fund if corp, trust co or manager has to be trustee Mutual funds are typically structured either as a trust or a corporation and are managed by a registered investment fund manager and advised by a registered portfolio manager o trust structure: manager is often also the trustee (81-901 exemption from Loan and Trust Corporations Act); created by declaration of trust; an interest in the fund is evidenced by units of the trust; each fund is a separate trust, possibly with multiple classes or series of units for different types of investors; unitholders rights are determined by the declaration of trust and NI 81-102 o corporate structure: created by articles of incorporation; single class or multi-class structure (each class of the mutual fund corporation is a separate fund with its own investment objective), possibly with multiple series of shares of each class for different types of investors; shareholders rights are determined by OBCA/CBCA and NI 81-102 o multi-class mutual fund corporation allows investors to switch between funds (classes of shares) on a tax-deferred basis can be more expensive because of capital tax typically intended for investments outside of an RRSP Key Players and their Regulatory Requirements Since mutual funds typically do not themselves have internal management, they must contract with third parties for all services. Certain of these services must be performed by regulated entities. The services provided by other parties are governed by the terms of the contract under which the service provider is engaged (1) investment fund manager the company that directs the business, operations and affairs of the mutual fund o under NI 31-103 must be registered to act as a manager of a retail mutual fund and is regulated o distribution: must be sold through a mutual fund dealer or investment dealer (2) portfolio adviser/sub-adviser the person/company that provides investment advice or portfolio management services under a contract with the mutual fund or with the manager of the mutual fund o portfolio adviser: must be registered as a portfolio manager (PM) under the OSA (3) trustee/board of directors ultimately responsible for the affairs of the fund, typically delegates management functions to a manager [prove they are good people] o trustee: must be the manager of the mutual fund or a registered trust company under the Loan and Trust Corporations Act (4) independent review committee (IRC) under NI 81-107 requirement for each investment fund to have an IRC to review conflict of interest matters who act like independent directors on board (5) custodian the company appointed by the mutual fund to hold the funds assets on behalf of the fund o single largest structural reason why theres not more fraud in the investment world o safe keep property of fund o major discipline on managers

61 (6) registrar and transfer agent for investment funds, this is typically the manager who keeps a record of all securityholders, purchases, switches and redemptions challenging job because it changes daily

* k describes responsibility manager owes MF bc MF is like a baby, a manager controls that taking care of it Only way assets are sold: (1) if a k requires expenses to be paid (2) only sell assets if get appropriate money value or of equivalent value (financial institutions usually) Offering Documents simplified prospectus (SP), Part A and Part B (81-101 F1), annual information form (AIF) (81-101 F2) and Fund Facts (FF) (81-101F3) o SP, AIF and FF are valid for 12 months (s. 62(1) of OSA) concept of continuous distribution section 62 of OSA: lapse date means, with respect to a security that is being distributed under subsection 53(1) or this section, the date that is 12 months after the date of the most recent prospectus relating to the security o process by which client can ask you to renew prospectus and MUST meet dates documents are amended throughout the year for any material changes that occur o i.e. sustain loss in investment, structural changes (press release and MCR as well) annual renewal process (s. 62(2) of OSA) file pro forma SP and AIF 30 days prior to lapse date resolve all comments file final SP and AIF within 10 days following lapse date obtain final receipt within 20 days following lapse date any misstatement or misrepresentation in prospectus, statutorily liable people found these prospectuses were not very helpful in the beginning of the 80s so more focus on point of sale Regulatory Framework NI 81-101 sets out SP, AIF and FF requirements o Sets out form requirements; it is a boring process; it says check this, state this here, etc (use simple words) NI 81-102 comprehensive set of rules governing all facets of mutual funds, including investment restrictions, conflicts of interest, new funds, fundamental changes requiring securityholder and/or regulatory approval, custodianship, sales and redemptions, sales communications o Substantive regulation of MFs o Need to be liquid, not to be concentrated in 2-3 stock, etc and rules around service providers, etc. o Will give you greater sense of probs in past + steps taken to address them NI 81-105 mutual fund sales practices o Another example of regulation by reaction to market circumstance o Attempted compromise where certain practices are acceptable in certain circumstances i.e. it is disclosed NI 81-106 continuous disclosure obligations [parallel to 51-102] NI 81-107 Independent Review Committee (NI 81-106 and 81-107 apply to all prospectus qualified investment funds, not just mutual funds) S.80s act has thickened because of all the probs encountered by regulators and the amount of resources that had to go after the fact dealing with it Our Role as Lawyers Structuring o Have a list of legal relationships the client wants i.e. tax-efficient o If not way they wanted, then litigation results establishing the mutual fund and drafting key documents related to the fund [aligns itself w structure] o simplified prospectus o annual information form o declaration of trust/articles of incorporation o management agreement o advisory agreements o custodian agreement upkeep of documents [update to mirror reality] o amendments to SP and AIF throughout the year and annual renewal of SP and AIF o termination of key agreements and replacing same

62 o amendments to declaration of trust, management agreement, etc. fund mergers [lots of M and A activities] o regulatory relief o information circular and related meeting materials o purchase agreements and amendments to material agreements ongoing regulatory advice and assistance o relief from regulatory requirements (i.e. delivery of financial statements, investments in related companies, short-selling relief) o what constitutes a material change o tax changes o registration is a PRIVILEGE not a right so theyll put terms and conditions if you are not performing as they want, so this part of advice is continuous, NOT sexy but important registration matters

(2) Closed End Funds Generally, most of the other types of investment funds that we work on can be categorized as non-redeemable investment funds. These other products are growing rapidly but not nearly the same amount of penetration as MF non-redeemable investment fund means, in Ontario, an issuer [no obligation to redeem ppl out; i f it exists it for 1 yr18 mos away which is the most imp difference] o (a) whose primary purpose is to invest money provided by its securityholders, o (b) that does not invest for the purpose of exercising effective control, seeking to exercise effective control or being actively involved in the management of the issuers in which it invests, other than mutual funds or other non-redeemable investment funds, and o (c) that is not a mutual fund. Allows us to create whole new audience of strategy Recall that the two primary features of a mutual fund are that the securities are (1) redeemable on demand; and (2) redeemable at a price with reference to the NAV of the fund. As a result, in order to be considered a non-redeemable investment fund and stay out of the regulatory environment of mutual funds, a non-redeemable investment fund must generally be either: o redeemable no more frequently than annually (i.e. not on demand); OR o redeemable at a price that does not have reference to the NAV of the fund (i.e. redeemable with reference to the market price, if the securities are traded on an exchange). Closed end funds are listed on TSX so can get liquidity immediately which causes problems o If no liquidity, illiquidity discount created in market (I will buy it from you but because I cannot get out for a whole year so Im going to pay you less than its value) o How can you get it to trade closer to the value? Working on it with some success (3) Flow-Through Limited Partnerships Example of product trying to reach objective of preserving tax credit characteristic to investor money raised is invested in flow-through shares of Canadian oil & gas, mining and renewable energy issuers these resource issuers spend money on exploration and development that qualifies as Canadian exploration expense (CEE) under the Income Tax Act and get a tax credit for the CEE expenditures Resource issuers issue flow-through shares which entitle the shareholder to the CEE tax credits the Partnership, itself being a flow-through entity, flows CEE tax credits to its limited partners limited partners/investors receive tax credits and any capital gain on the portfolio of securities resource issuers the limited partnership is used because it is a flow-through entity so the tax credits can end up in the hands of investors, while still providing investors limited liability material documents include: prospectus, limited partnership agreement, management agreement, loan facility o key agreement o ltd partnership agreement defines the relationship of investor to LP o loan facility is the whole amount flowed thru (not going to manager, etc) Companies in Canada can issue these Encourage work and enterprise in North by giving tax credits on exploration to ppl willing to invest in them Flow-thru takes some risk away diversified portfolio (invest in 2-3) so more chances of success rather than investing in 1 Can flow tax credit right thru to purchaser of LP (4) ETFs Exchange Traded Funds I.e. TIP was passive holding

63 pools of capital which are passively managed hold a stable portfolio of equity or fixed income investments while technically mutual funds, liquidity is principally offered through listing of units or shares on an exchange relief from several mutual fund requirements is conventionally obtained have undergone enormous growth in US and Canada as they represent a very low cost alternative to actively managed mutual funds O to 60B because heavily concentrated, exempt from certain rules (so certain risk due to diversification) ETFs really popular by retail investors Listed securities on TSX but diversification of listed stocks Can get representative exposure to the entire index for a low price so you get the diversification just like MF Great battle is active management versus passive Having someone professionally manage it isnt worth the money bc majority of active managers underperform ETFs are still passive but much more traded now Classic ETF: static portfolio based on benchmark ETFs complex though- 3 diff ways to represent index o (1) buy individually each stock in proportion they represent in index daily o (2) do it thru sampling o (3) futures allows you to purchase those stocks in future much more fluid less tracking error against index you are trying to replicate

(5) Linked Notes - Principal Protected Notes & At Risk Notes a linked note is a debt security typically issued by a bank that generally matures in seven to ten years notes are most often linked to the return of a basket of securities, from conservative mutual funds to riskier hedge funds principal protected notes (PPNs) offer the potential for appreciation (the opportunity to participate in market growth) as well as the protection of your principal if you hold the notes until maturity o I.e. if you give bank $100, they put $80 in Money Mart so guaranteed $100 in the bank and then the other 20 goes into investing so you get that market exposure (guaranteed money is at least returned) in some cases, market linked notes may also offer a fixed dividend or a minimum return investment in addition to principal protection at risk notes put market risk on the investor and provide no protection of investor principal (6) Split Share Offerings first offered in Canada in late 1980s corporations hold one or more shares of public company and issue two classes of shares o preferred shares having entitlement to dividends of the underlying investment and o capital shares which enjoy any increase in either share price or dividends declared by the underlying investment o If you buys shares in Bell Canada, you get dividend and you own value of the biz if it goes up or down so essentially you have 2 instruments so it would be $25 to buy 2, $15 instruments similar to ETFs liquidity is principally available through the listing of both the preferred and capital shares they too enjoy relief from several mutual fund requirements (7) Pooled Funds if the offering is being made to exempt investors (i.e. accredited investors) or is made with respect to exempt securities (certain PPNs) such offerings are either an offering memorandum (OM) or an information statement (8) Deposit/Insurance Based Investment Products [exempted from securities defn] Segregated Funds or Annuities certain products are structured so that they are not securities (variable insurance contracts) or otherwise exempt from the prospectus requirements pursuant to sections 35 and 73 of the Act (principal protected notes) such offerings are made pursuant to an information statement or information folder

64

CONTINUOUS DISCLOSURE
Once an issuer becomes a RI, it has ongoing disclosure obligations that must be met if the issuers securities are to continue to trade in securities markets 2 types of disclosure reporting issuer is subject to: (1) Continuous {periodic} disclosure [known in advance] i.e. financial statements o Periodic disclosure of interim and annual financial statements and accompanying reports o Includes: quarterly and annual financial statements, MD&A of financial condition and results documents, Annual Info Form (AIF) and info circulars in connection with proxy solicitation (2) Timely disclosure [not generally known in advance] o If event occurs in your co, may be required to submit timely disclosure o Facilitated by the move to electronic reporting and trading o Usually refers to timely disclosure of material changes Underlying Rationale for Continuous Disclosure [both types] Aimed a providing transparent and efficient access to info about issuers Integral part of the ability of the issuer to effectively and cost efficiently raise capital bc without continuous disclosure system, there would be a disincentive to for investors to provide capital 94% of all capital market activity in Canada is in secondary markets o bc prospectus is involved the continuous disclosure regime becomes key in ensuring that issuers provide investors with the most accurate and current info possible on which to base their risk and investment choices o Shareholders ability to choose, on the basis of adequate, accurate info, whether to hold or to sell their shares is the operative mechanism by which the capital and takeover markets promote managerial accountability and thus influence corporate governance for the better o Things could change immediately after final receipt and you need to protect investors to ensure that all the info that those in the primary market had, is available to those in the secondary market. Continuous disclosure is a way to do that because it keeps info current. It allows existing and potential investors to assess the performance and integrity of the issuer and its officers Can also facilitate issuance of new securities bc can do short-form or private exemption, etc. Can also increase financial analyst coverage Failure to disclose leads to impaired confidence in the Ds and Os of the issuer and civil liability Has a role in corp governance as well, as the Board can use it as a monitoring tool in its oversight of corporate managers Without accurate info, shareholders cannot seize the opp to exert informal pressure on existing management as a means of addressing their firms problems Obligation re continuous disclosure Generally speaking, arises when an issuer becomes a reporting issuer under applicable s ecurities laws. Further the objectives of providing information in prescribed form to the investing public. Since securities laws are provincial, reporting issuer disclosure obligations can vary between jurisdictions (e.g., filing of Form 45-106F1 in BC and other provinces). Originally part 18 governed continuous disclosure and some of it still does Subsequent to that, 51-108 (OSC) dominated However, most disclosure obligations have been harmonized under NI 51-102 National Instrument 51-102 [aimed at harmonization of continuous disclosure obligations/ material change reporting in jurisdictions across Canada] Predominant continuous disclosure instrument Includes ongoing disclosure obligations as well as rules and the form for timely disclosure reporting. Important definition: venture issuer means a reporting issuer that, as at the applicable time, did not have any of its securities listed or quoted on any of the Toronto Stock Exchange, a U.S. marketplace, or a marketplace outside of Canada and the United States of America other than the Alternative Investment Market of the London Stock Exchange or the PLUS markets operated by PLUS Markets Group plc; where the applicable time in respect of (a) Parts 4 and 5 of this Instrument and Form 51-102F1, is the end of the applicable financial period; (b) Parts 6 and 9 of this Instrument and Form 51-102F6, is the end of the most recently completed financial year; (c) Part 8 of this Instrument and Form 51-102F4, is the acquisition date; and (d) section 11.3 of this Instrument, is the date of the meeting of the securityholders. More onerous requirement for non venture issuers AIM and PLUS market are junior exchanges similar to TSXV

65 Part 2- Application (2.1) o This instrument doesnt apply to investment fund (then look to defn of investment fund to see if it is one) o Even if it is an investment fund, probably still disclosure requirements but look to that area to be sure

NI 51-102 (Part 4) Financial Statements Each RI must prepare and file quarterly and annual financial statements When combined with prior financial projects or analysts predictions of the following quarters financial earnings, financial statements can dramatically affect the price of securities in the secondary market Statements required: o Set out in Part 4, ss 4.1 and 4.3. [only apply to RIs] 4.1(1)(a) requires a RI to file annual financial statements that include a statement of comprehensive income, statement of changes in equity and a statement of cash flows for (i) the most recently completed financial year AND (ii) financial year preceding the most recent financial year if any (for comparative purposes) o Shift to IFRS as of January 2011 (see National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards). After Jan 1/11 report shave to be in accordance with International Financial Reporting Standards (IFRS); before it was Generally Accepted Accounting Principles (GAAP) US still hasnt changed it yet but much of world is using IFRS standard o Financial statements are the record of past transactions and their impact on the issuers financial position Approval by board (NI 51-102 s.4.5). o Board of directors of RI MUST approve the (1) annual financial statements AND (2) interim financial report before the statements/report are filed Auditors report required only for annual (NI 51-102 s.4.1(2)). o On the assumption that issuer are using the same accounting principles, it is possible to take different issuers and compare the results (as potential inventor) there is a basis for comparison even if industry is diff Filing deadlines (ss 4.2 and 4.4) o Venture [4.2(b)] vs. non-venture issuers. [4.2(a)] o 4.2(b)(i) On or before the earlier of the 120th day after the end of its most recently completed financial year Venture issuers get additional 30 days so less current info than non-venture issuers o 4.2 (a) For non-venture issuers: (i) audited annual financial statements must be filed 90 days after the end of its most recently completed financial year no particular date; RI sets its own fiscal period so common to have Dec 31 st year end Delivery requirements (51-102 s.4.6) sending financial statements to shh has been supplanted by requirement to send a request form to registered and beneficial owners of its securities who are identified under NI 51-201 as having chosen to receive all securityholder materials sent to beneficial owners of securities (s.4.6(1)), unless issuer mails financial statements and MD&A to all shh within prescribed time limit of within 140 days of the year end (s.4.6(5)). o There is a positive obligation on shareholders to let co know they want paper copies Note that recent amendments permit the sending of these documents via notice-and-access procedures. o Because ppl get materials and throw them out and all available online anyways o Under the notice-and-access process, a reporting issuer may materials by posting the info on SEDAR. The issuer must also send a notice informing registered holders and beneficial owners that such materials have been posted electronically and how to access them. Securities regulators are currently looking at different regimes with respect to what venture issuers should be required to disclose (i.e. some people are asking why there should be different standards) Interim financial statements 1st quarter, 2nd quarter, 3rd quarter but not 4th bc thats annual financial statement Content of statements largely the same as for annual period. A RI must file an interim financial report for each interim period ended after it became a RI ( 4.3(1)) Approval by board can be delegated to audit committee ( s. 4.5 (3)). Auditors report NOT required (s.4.3(3)) note review requirement in NI41-101 and NI44-101. o Annual statement MUST be audited but interim statements dont require it o Interim can engage review and engagement which is less than an audit but still a formal procedure o Even review and engagement is not required BUT if it is not undertaken, the RI MUST indicate this! If filing prospectus, then interim financial statements must be reviewed so for those issuers trying to raise money, get financial statements reviewed at minimum or even better if they are audited

66 The interim reports must include a comparative statement to the end of the same quarter in the last financial year bc consistency is imp 4.4 - Deadlines for interim financial statements is (a)(i) 45 days for non-venture issuer and (b)(i) 60 for venture after the end of interim period

*Note that venture issuers have a longer deadline for filing both annual and interim financial statements the aim is to give jr issuers more flexibility about fulfilling periodic disclosure requirements Other requirements re financial statements Filing statements after becoming a reporting issuer s.4.7. o Aimed at ensuring transparency of financial reporting documents before immediately prior to and after becoming a RI o Might be given more time if you become RI and your year end is immediately coming (may not have time) I.e. (2)(a) file annual financial statements for financial year before the issuer became a RI, within 20 days of becoming RI and (3)(a) 10 for interim o (4) Issuer is not required to provide comparative interim financial info for periods ended before the issuer became a RI if (a) to a reasonable person it is impractical to present prior period info on a basis that it could be compared (b) prior info available is presented (c) note disclosing the fact that prior-period info hasnt been prepared consistently with most recent interim financial info Change in year end s.4.8. o Might have chosen a wonky year end like Feb 28 leap year but can change year end so may be less than 10 mos, and you have to change interim period too (might be after 1 mo for i.e.) Change in corporate structure s.4.9. o No automatic way of ceasing to be RI; issuer can change structure in corporate law o Sets out how to report financial statements Reverse takeovers - s.4.10. o Private co can get public status thru revise takeover (priv co owns most shares of public co) o Financial statements will look completely different after that Change of Auditor s.4.11. o (5) Must file change of auditor notice (Notice and disclosure as to why auditor is changing) o Refer 4.11(5) for requirements and (7) for change of auditor notice content o I.e. Disclose whether or not there was a dispute or disagreement o Seeing more and more auditors liable o Must disclose any matter in the former auditors opinion that has or could have materially impacted financial statements or reports provided by the auditor relating to the financial statements Janis Sarra, Proportionate Securities Regulation [NI 51-102] Proportionate regulation by type of listing, recognizes diff resources available to venture and non-venture RIs Examples include: o Diff filing deadlines for interim and annual financial statements (90 v 120 and 45 v 60) o Venture issuers exempted from filing an AIF o Also exempted from specified disclosure requirements under NI 51-201 such as filing a report on matters such as voting at a shareholder meeting o Under liquidity disclosures, issuers are required to discuss balance sheet conditions or income or cash flow items in a summary and tab form but venture issuers do not have to provide summary or table o Venture also do not have to provide an analysis of their critical accounting estimates as non-ventures do o Venture issuers do not have to make a number of specific disclosures that non-venture issuers have to in respect of stock appreciation rights Forward Looking Information; Future Oriented Financial Information Forward-looking information is "disclosure regarding possible events, conditions or results of operations that is based on assumptions about future economic conditions and courses of action and includes future oriented financial information with respect to prospective results of operations, financial position or cash flows that is presented either as a forecast or a projection." (underlined = includes FOFI) NI 51-102 Parts 4A and 4B.: Issuers encouraged to provide future-oriented info Disclose of FLI and FOFI subject to additional requirements in ss 4A.3, 4B.2 and 4B3. FLI o 4A.2 A reporting issuer must not disclose forward-looking information unless the issuer has a reasonable basis for the forward-looking information. (THUS not too far ahead of time)

67 4A.3 A reporting issuer that discloses material forward-looking information must include disclosure that (a) identifies forward-looking information as such; (b) cautions users of forward-looking information that actual results may vary from the forwardlooking information and identifies material risk factors that could cause actual results to differ materially from the forward-looking information; (c) states the material factors or assumptions used to develop forward- looking information; and (d) describes the reporting issuers policy for updating forward-looking information if it includes procedures in addition to those described in subsection 5.8(2). FOFI what financial results likely to be in future period before it has happened (less common to disclose) o 4B.2 Assumptions (1) A reporting issuer must not disclose FOFI or a financial outlook unless the FOFI or financial outlook is based on assumptions that are reasonable in the circumstances. (2) FOFI or a financial outlook that is based on assumptions that are reasonable in the circumstances must, without limitation, (a) be limited to a period for which the information in the FOFI or financial outlook can be reasonably estimated; and (b) use the accounting policies the reporting issuer expects to use to prepare its historical financial statements for the period covered by the FOFI or the financial outlook. o 4B.3 Disclosure In addition to the disclosure required by section 4A.3, if a reporting issuer discloses FOFI or a financial outlook, the issuer must include disclosure that (a) states the date management approved the FOFI or financial outlook, if the document containing the FOFI or financial outlook is undated; and o Board must approve financial statements (b) explains the purpose of the FOFI or financial outlook and cautions readers that the information may not be appropriate for other purposes. A reporting issuer might disclose FLI or FOFI in its MD&A (or news release, AIF, etc) o

NI 51-102 Part 5 - Management Discussion and Analysis (MD&A) Objectives o Md & A encourages future-oriented info so reader gets better idea as to financial results of co o All RIs are required to provide an MD&A of financial results that accompanies the financial statements (now an integral part of it) o While the financial statement records what occurred during the reporting period, the MD&A discusses WHY it happened and provides managements insight into how the issuer is likely to perform on a going forward basis o BOTH reflective and prospective analysis is imp o MD&A is particularly imp for jr cos that dont have a history of profitable operations that might otherwise give investors assurance about the cos long-term prospects o It allows investors to assess underlying value in making their decisions about continuing or ne investments in securities of the issuer o MD&A is imp for retain investors esp who may not be able to understand the financial statements alone o Most discuss positive and negative developments and any material changes from the last reporting period o Should discuss whether or not the issuer achieved significant milestones and its projections for achieving them in the future etc etc o The objective of the MD&A is to provide a descriptive analysis of the info contained purely in accounting form in the financial statements Definition of MD&A (51-102FI, Part 1) o Form requirement; defn of MD& A refers to form o Narrative interpretation of issuers current financial position and future prospects. Supposed to be comparable to other issuers but sometimes not so have a narrative Content of MD&A o NI 51-102 s.5.1 and NI 51-102FI, Part 2. o Definition of materiality (NI 51-102F1 Part 1). Part 1 (f) What is material? Would a reasonable investors decision whether or not to buy, sell or hold securities in your company likely be influenced or changed if the information in question was omitted or misstated? If so, the information is likely to be material o Update of previous FOFI s. 5.8. [must update previous MD&A if changes] Approval requirements (s.5.5). o Full board has to approve annual MD&A

68 o Just like with financial statements, can only delegate interim to boards audit committee (frequently delegated) Filing requirements for MD&A (s. 5.1(2)). Delivery requirements for MD&A (s.5.6) - tied to s.4.6. [piggybacks]

NI 51-102 Part 6 - Annual Information Form (AIF) Definition of AIF (51-102F2, Part 1). o (a) An AIF (annual information form) is required to be filed annually by certain companies under Part 6 of National Instrument 51-102. An AIF is a disclosure document intended to provide material information about your company and its business at a point in time in the context of its historical and possible future development. Your AIF describes your company, its operations and prospects, risks and other external factors that impact your company specifically. o This disclosure is supplemented throughout the year by subsequent continuous disclosure filings including news releases, material change reports, business acquisition reports, financial statements and management discussion and analysis. Similar to prospectus in that it requires very detailed info about the history, operations and financial affairs of the RI including discussion of the issuers prospects AIF was originally conceived for larger issuers as a means to communicate extensive info in order to qualify for the short form prospectus (still used for this purpose) 6.1 Requirement to prepare applicable to non-venture issuers only Note voluntary filing if venture issuer wishes to file a short form prospectus under NI 44-101 Content of AIF prescribed by NI 51-102F2, Part 2. Filing deadline s.6.2. o Must be filed within (on or before) 90 days after the end of the issuers most recently completed financial year NI 51-102 Part 7 - Material Change Reports NI 51-102 (1.1) defines material change as a change in the biz, operations or capital of the RI that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the RI While Material fact, when used in relation to securities issued or proposed to be issued, means a fact that would reasonably be expected to have a significant effect on the market price or value of the securities Requirement to file MCR s.7.1 (1) o (a) immediately issue and file a news release authorized by an executive officer disclosing the nature and substance of the change; and o (b) as soon as practicable, and in any event within 10 days of the date on which the change occurs, file a Form 51-102F3 Material Change Report with respect to the material change. May be confidential o 7.1 (2) above doesnt apply if: o (a) in the opinion of the reporting issuer, and if that opinion is arrived at in a reasonable manner, the disclosure required by subsection (1) would be unduly detrimental to the interests of the reporting issuer; or Mere fact of disclosure could further harm co or issuer may have obligation of between 3 rd parties etc o (b) the material change consists of a decision to implement a change made by senior management of the reporting issuer who believe that confirmation of the decision by the board of directors is probable, and senior management of the reporting issuer has no reason to believe that persons with knowledge of the material change have made use of that knowledge in purchasing or selling securities of the reporting issuer, and the reporting issuer immediately files the report required under paragraph (1)(b) marked so as to indicate that it is confidential, together with written reasons for non-disclosure. o So still file MCR with regulator but ask them to keep it confidential and dont file press release (completely contrary to regime which is to ensure investors have the proper info to make informed investment decisions o 7.1(5) Must be updated every 10 days (must say why it still needs to be confidential) Regulators will watch stock to see if there has been a leak of the material change and only so long before they make you disclose it No requirement to disclose material fact but cannot selectively disclosure (unless in necessary course of biz) Issuers listed on the TSX or TSXV must comply with a disclosure standard of MATERIAL INFORMATION which eliminates the distinction between material fact and change (so broader than what OSC requires) o NP51-201 4.5: If listed on TSX or TSXV, must timely disclose both material changes AND material fact o According to the TSX Company Manual, it is the responsibility of each listed company to determine which info is material according to the above defn bc they are in the best position to apply the defn to its unique circumstances Materiality of info varies from one co to another according to size if profits, nature, assets and capitalization, etc what is material to a small co may not be material to a big co

69 Issues in Timely Disclosure regulation Material Change Reporting (summary of statute above) o In addition to periodic reporting requirements, issuers have ongoing obligations to make timely disclosure of material changes that affect an issuer as these changes occur o A RI in Canada must comply with continuous disclosure requirements thru electronic filings on SEDAR and its public website o In terms of specific disclosure requirements, there is some latitude in defining what is a material event o An underlying premise of MCRing is that continuous disclosure is essential to promotion of active capital markets and enhanced investor protection o Once an issuer determines that a material change occurred within the meaning of securities legislation, the statutes impose a reporting obligation Form of disclosure required [News release and MCR Form 51-102F3] Confidential disclosure (s.75(3) and NP 51-201 s.2.2) Timing o Press release is immediate o MCR is usually immediately after but not later than 10 days Rumours/selective disclosure o Material change must be publicly disclosed but material facts dont need to be o BUT if you disclose material facts, cannot selectively disclose o Also cannot trade before material fact or change has been disclosed o Regulators have tried to find the appropriate balance between confidentiality and requiring issuers to disclose as a result of rumours circulating in the market Re AiT Advanced Info Technologies Corp Determination of whether a material change has occurred is NOT a bright-line test Instead the assessment of whether a material change has occurred will depend on the circumstances and series of events that took place This is because the determination of a material change is a question of mixed fact and law (YBM) YBM Magnex OSC; 2003 Facts: In August of 1996, US regulators suspected company was laundering money. By April 1997 a special committee determines no wrongdoing. YBM files (final) prospectus later in 1997 (about 5 months after filing prelim) but does not disclose information about regulatory investigations, rumours or special committee mandate. Prosp. contained misreps - didnt directly refer to investigators & used muddled language when said special committee Issue: Was the audit suspension a change in the business, operations or capital of YBM that would reasonably be expected to have a significant effect on the market price or value of its securities? YES D&T tells YBM it cannot issue audit report on 1997 financial statements, so the question was: when did this refusal to issue an audit report become a material change? Decision: OSC agreed that each fact in isolation was not material BUT looking at the context, they were material Reasons YBMs prospectus did NOT contain FTP disclosure of all material facts by failing to disclosure that YBM was subject to unique risks. When each alleged omission is analyzed in isolation, a technical argument can be made that some of them may not be material. We do not believe that is the approach to this case. The factual context cannot be ignored. At a minimum, some disclosure regarding what YBM knew about the US investigation and less muddled disclosure regarding the purposed of the Special Committee would have better informed investors about the risks facing YBM. YMB hadnt disclosed the specific risks only applicable to YMB and US investigation and specific committee (they just had general disclosure which wasnt enough) In our review, if the facts regarding the investigation were not material in and of themselves, they were unquestionably material as part of the broader factual context. Probability/Magnitude test re material changes probability of risk occurring and magnitude of impact if it occurs o This is an American test but can be used in Canada for analyzing when contingent events like M&As become sufficiently crystalized that they are required to be disclosed as material changes o It is useful for materiality but not useful to determine whether a material change occurred o It requires an assessment of the probability that an event will occur, having regard to all the known or ascertainable facts

70 It also requires some assessment of the magnitude or significance of the change, in terms of whether the info would be viewed by reasonable investors as imp info for making an investment decision o This case outlines the test: held that the test encompasses an assessment of the current value of the info as it affects the price of securities, discounted by the chances of it occurring o The test is a useful tool in this context, as the issue is the materiality of a discrete event, namely YBM missing its filing deadline and having its securities cease-traded o MAGNITUDE: Potential magnitude of court missing the filing deadline in this case is evident o PROBABILITY: Court found it was probable that YBM would be unabbe to obtain an audit opinion and make the deadline because (1) the extraordinary nature of the concerns expressed (2) D&Ts re quest for a forensic investigation (3) the fact the D&T advised that it would need to consider whether it was willing to continue being associated with YBM No supercritical interpretations (para 518) o Court said you cannot have supercritical interpretations o Look at the change in context; use an objective standard o Has to be evaluated in light of all available info/not in pieces o If the decision is borderline, then the info should be considered material and disclosed o Supercritical interpretations of the meaning of material change does not support the goal of promoting disclosure or protecting the investing public Decision Given the events of April 19 and 20, as informed by earlier events, the emergence by April 20 of the risk regarding the filing deadline and likely cease trade order constituted a material change and since the press release was filed 18 days later instead of 10 days, YBM breached 75(2) by failing to disclosure the audit suspension forthwith o Kerr v Danier SCC; 2007 *first securities class action ever to go to trial Ratio: A factor external to the issuer is not a material change is long as the issuer did not make a change in its biz, operations or capital during the period of distribution. Facts: Danier obtains receipt for (final) prospectus on March 6, 1997. Determines that revenue forecast in (final) prospectus in jeopardy March 16, 1997. Danier closes IPO offering on March 20, 1997. Danier files material change report on June 10, 1997 disclosing that forecasts had been revised downwards. Purchasers under a prospectus are given a stat right of action if the prospectus or any amendment contains a misrep against the issuer and officers of the issuer who signed the prospectus Appellants initiated a class action for failure to disclosure material information i.e. disappointing intraquarterly results Remaining weeks of the 4th quarter: sales improved significantly- weather cooled and co held a 50% discount promo Issue: Was revision to forecast revenue due to softer sales as a result of warmer than expected weather a material change that should have resulted in the filing of an amended prospectus pursuant to section 57(1) of the OSA? NO. Reasons The SCC clarified in this case, the difference between material facts and material changes, holding that when a prospectus or amendment to a prospectus contains no misreps on the date the document is filed, info amounting to material facts but not material changes that arises subsequently cannot support an action under s.130(1) Of course, if a material CHANGE arises during the period of distribution, failure to disclose this change could support an action under s.130(1) The distinction is deliberate and policy based as explained by a former chairman of the OSC [Peter Dey]: o The term material fact is necessary when an issuer is publishing a disclosure document, such as a prospectus or take-over bid circular, where all material information concerning the issuer at a point in time is published in one document which is convenient to the investor. The term material change is limited to a change in the business, operations or capital of the issuer. This is an attempt to relieve RIs of the obligation to continually interpret external political, economic and social developments as they affect the affairs of the issuer, unless the external change will result in a change in the business, operations or capital of the issuer, in which case, timely disclosure of the change must be made. Poor intra-quarterly results MAY reflect a material change in biz operations i.e. co that has restructured its operations and thus that would trigger the disclosure obligation In the present case though, there is no evidence Danier made a change in its biz, operations or capital during the period of distribution (court ignored the fact that Danier had 50% off sales) It is not disputed that the revenue shortfall was caused by the unusually hot weather, a factor external to the issuer Ultimately they substantially met forecast (regardless of lagging numbers) but that was irrelevant bc whether there was an actual effect in the end is NOT part of the test If reporting issuer and private co, would still be required to file amended under s.57 but wouldnt have to notify public like thru press release

71 Side note: External Developments: NP51-2014.4: Companies are not generally required to interpret the impact of external political, economic and social developments on their affairs. However, if an external development will have or has had a direct effect on the business and affairs of a company that is both material and uncharacteristic of the effect generally experienced by other companies engaged in the same business or industry, the company is urged to explain, where practical, the particular impact on them. Sharbern SCC 2011 Test for materiality of omitted information: para 61 (i) Materiality is a question of mixed law and fact, determined objectively, from the perspective of a reasonable investor. o Whatever the COURT thinks is objective; NOT from perspective of company (ii) Substantial likelihood that it would have been considered important by a reasonable investor in making his or her decision, rather than if the fact merely might have been considered important. Omitted fact is material if there is a substantial likelihood that its disclosure would have been viewed by the reasonable investor as having significantly altered the total mix of information made available. o NOT might, WOULD have o Tightening up rules to make them more issuer friendly (iii) The proof required is not that the material fact would have changed the decision, but that there was a substantial likelihood it would have assumed actual significance in a reasonable investors deliberations; (iv) Materiality involves application of a legal standard to particular facts to be determined on a case-by-case basis in light of all of the relevant considerations and from surrounding circumstances forming total mix of information made available to investors. [NOT one-size-fits-all] (iv) The materiality of a fact, statement or omission must be proven through evidence by the party alleging materiality, except in those cases where common sense inferences are sufficient. A court must first look at the disclosed information and the omitted information. A court may also consider contextual evidence which helps to explain, interpret, or place the omitted information in a broader factual setting, provided it is viewed in the context of the disclosed information. As well, evidence of concurrent or subsequent conduct or events that would shed light on potential or actual behaviour of persons in the same or similar situations is relevant to the materiality assessment. However, the predominant focus must be on a contextual consideration of what information was disclosed, and what facts or information were omitted from the disclosure documents provided by the issuer o Onus is on the party alleging it was material to provide it was material Somewhat narrowed what OSC said Pezim v BC Supt of Brokers SCC; 1994 Facts: BCSCs Superintendent of Brokers instituted proceedings against the respondents in connection with various transactions, alleging that the respondents had violated timely disclosure provisions and insider-trading prohibitions in 3 categories- 3 circumstances of potential material changes: o (1) Disclosure of drilling results (see para 95); o (2) Private placement; and o (3) ALC withdrawal. [significant contract that other side was in breach of so certain transaction didnt close and thus didnt receive certain amount of cash] Issue: Are the 3 circumstances above material changes and thus subject to timely disclosure? SCC agrees with Commission (NOT the CA) by saying YES Reasons In terms of the third category, even though the CA viewed the ALC withdrawal in contractual terms and stated it did not have to be disclosed until there was a repudiation of the contract, SCC believes this is inconsistent with the purpose of the Act which is to protect the investing public o ALCs withdrawal represented a 4.25M contractual dispute so this is a ma terial change Ratio: Note duty to inquire on directors in para 94 This case stands for the fact that the I dont know defence doesnt work Also issuer has an obligation to disclose material changes as soon as practicable and as soon as practicable takes on a diff meaning when an issuer is about to engage in a securities transaction If an issuer wishes to engage in a securities transactions, the Ds have a positive obligation on them to inquire about all material changes in the issuers affairs prior to the transaction Consequently, the Ds will have at one pt in time, knowledge of undisclosed material facts and changes which constitute inside info Even if the Ds dont have inside info, there is still a duty imposed on them to inquire about material changes Notes

72 Definition of material change in BCSA para 82 (contrast with Ontario Securities Act) is different than ON because they have change of assets a part of their defn; it ON, it might not have been a change Note that the case was substantially about deference owed to the securities regulators o It was not always the case that judges in CA or SCC had a background in corporate/ securities law o So more than willing to defer (privative clauses which were not actually included in this act BUT the SCC said BC commission has a great deal of expertise and the CA should have gave them more deference as a result)

Market Impact v Reasonable Investor Test Ministry of Finance, Five Year Review Committee Final Paper [13.2 Appropriate Standard for Materiality] Pros of Market Impact [Canadian approach] Works well and is more objective o US courts consider market impact when applying reasonable investor so a change in the test would not produce a significant differences o Market participants would have to adopt a different disclosure standard Pros of Reasonable Investor [US approach] o FTP disclosure uses reasonable investor standard o Harmonizing Cdn sec law with US will eliminate complexity issuers face in fulfilling disclosure obligations o Market impact takes too formulaic an approach in determining what is material o No difference in tests bc a reasonable investor would be concerned with whether a fact or change would affect the price or value of security [kind of supports both sides bc end up with same result] ULTIMATELY the Committee emphasized the need for increased regulatory harmonization expect where specific policy objectives preclude it THUS they recommend our defn be changed to be consistent with US reasonable investor test Five-Year Review Committee considered whether ON should move to a standard of material info: Pros o More info available in market to make informed decision o More clarity in disclosure area o Reduce reliance on exchange requirements that are difficult to enforce Cons o When civil liability amendments are in force, issuers will have a strong incentive to take a more principled and less technical review of developments that ought to be disclosed as material changes which should contribute to a more robust timely disclosure regime o Issue of when to disclose becomes more difficult when material info must be disclosed esp when it will be reviewed in hindsight o Significant burden on issuers to continually monitor o If there are perceived gaps in info on a continuous disclosure basis, the Commission has the necessary rulemaking authority to promulgate specific disclosure requirements similar to SEC [US has substantially more codification of disclosure requirements] NI 51-102 Part 8 Business Acquisition Reports Objective of the BAR requirements is to allow transparency and comparability in the financial data underpinning the significant acquisition Required when a reporting issuer completes an acquisition of a business that is a significant acquisition. [undefined] o Can include a lot of diff things but no guidance o Can have biz but no revenue or biz losing money, or money but no actual biz, etc SO need to determine whether it is a significant acquisition o Usually done in conjunction with auditor bc they have handbooks as to what constitutes a biz Filing deadlines NI 51-102, 8.2 o (1) All RIs are required to file a biz acquisition report within 75 days after the date of acquisition o (a) Different filing deadlines if the most recently completed financial year of the acquired biz ended 45 days or less before the date of acquisition ((a) 90 for non-venture and (b)120 for venture after date of acquisition) 8.3(2) In order to determine whether it is significant there are three tests and if any one of these 3 tests is met then dont need to do the rest of them; just file biz acquisition report o Required Significance Tests [For venture issuer, 40% not 20% in all test including optional significance so it is a higher level before triggered] o (a) The Asset Test. The reporting issuers proportionate share of the consolidated assets of the business or related businesses exceeds 20 percent of the consolidated assets of the reporting issuer calculated using the audited annual financial statements of each of the reporting issuer and the business or the related businesses for the most recently completed financial year of each that ended before the acquisition date. Proportion of biz exceeds 20%

73 I.e. if issuer had 100M of assets and the proportion that is attributed to biz of it is 30M then that triggers the asset test and dont have to go onto next test o (b) The Investment Test. The reporting issuers consolidated investments in and advances to the business or related businesses as at the acquisition date exceeds 20 percent of the consolidated assets of the reporting issuer as at the last day of the most recently completed financial year of the reporting issuer ended before the acquisition date, excluding any investments in or advances to the business or related businesses as at that date. Investment/ advances exceed 20% o (c) The Profit or Loss Test. The reporting issuers proportionate share of the consolidated specified profit or loss of the business or related businesses exceeds 20 percent of the consolidated specified profit or loss of the reporting issuer calculated using the audited annual financial statements of each of the reporting issuer and the business or related businesses for the most recently completed financial year of each ended before the acquisition date. if its loss, take absolute value of loss more money you lose, still likely it will trigger test o There is also the: Optional Significance Test (3) Can use a later date if that means you dont have to file Form of report is NI 51-102F4. o Biz acquisition report has to be filed if acquisition meets certain thresholds o Form needs to include: income statement, statement of retained earnings, cash flow statement, a balance sheet, notes to the financial statements and the annual audited financial statements [ 8.4] Although the prescribed form is not onerous, the reason ppl dont want to fall under this defn is because they have to include audited financial statements of the biz acquired which is onerous because usually not the case that the financial statement has been prepared and audited already

NI 51-102 Part 9 Information Circulars Part 9 duplicates the corporate statutes in many respects note OBCA and CBCA references. (See s.9.5.) National Instrument 54-101 is related to this Part since most security holders do not hold securities in registered form. Form of information circular is NI 51-102F5 (part 9); may also need to include disclosure in NI51-102F6. 9.1.1- notice and access [notice that it is available online and instructions on how to get paper copy] So if registered shareholder, you will get info circular and proxy form NI 51-102 Part 11 Additional Disclosure Requirements Additional material s.11.1 o (1)(a) In the event you send disclosure material to securityholders, file on SEDAR so that if you dont send it to all shareholders or the addresses you have isnt accurate, this is the way to ensure everyone has access Change of status report s.11.2 o If your status changes i.e. you go from venture to non-venture issuer, must file a notice promptly Voting results s.11.3 o If non-venture issuer you must publish voting results of any vote that takes place o Including a description of the matter voted on, the outcome and if the vote was conducted by ballot, the number of votes cast for, against, withheld o Not required for venture issuer News release containing financial information s.11.4 o Must file a copy of the news release for anything that contains financial info o As a matter of practice though all press releases are filed anyway Re-filing documents s.11.5 o If a RI decides it will re-file a document or re-state financial info for comparative periods in financial statements for reasons other than retroactive application of a change in accounting standard or policy or a new accounting standard and the refilled info differs materially from the info originally filed, the issuer must immediately issue and file a news release authorized by an exec director disclosing the nature and substance of changes Executive compensation s.11.6 o File compensation of directors so investors know what they are being paid o Securities regulators have taken steps to ensure that the disclosure of executive compensation complies with regulatory requirements o Shareholders increasingly want a voice as to executive compensation (say on pay issue) o TSX has certain requirements put to shareholders whether exec package is fair (it is not binding though) NI 51-102 Part 12 Filing Material Documents Material documents s.12.1

74 These documents include articles, bylaws if it is a corp, trust declaration if its a trust, partnership agreement if it is a partnership, amendments, etc Material contracts s.12.2 o (1) File a copy of any material contract within the last financial yr or before the last financial yr if the material contract is still in effect o (2) Any contract in ordinary course of business doesnt have to be filed unless it is any of the following (a) a contract to which Ds, officers, or promoters are parties other than a contract of employment; (b) a continuing contract to sell the majority of the reporting issuers products or services or to purchase the majority of the reporting issuers requirements of goods, services, or raw materials; i.e. co has 1 major client (c) franchise, licence or other agreement to use a patent, formula, trade secret, process or trade name; (d) a financing or credit agreement with terms that have a direct correlation with anticipated cash distributions; (e) an external management or external administration agreement; or (f) a contract on which the reporting issuers business is substantially dependent. o If reasonable to believe certain provisions would be seriously prejudicial to the interests of the RI or would violate confidentiality provisions, can omit them but must have a description of them Timing s.12.3: The documents required to be filed under sections 12.1 and 12.2 must be filed no later than the time the reporting issuer files a material change report in Form 51-102F3, if the making of the document constitutes a material change for the issuer, and o (a) no later than the time the reporting issuers AIF is filed under section 6.1, if the document was made or adopted before the date of the issuers AIF; or o (b) if the reporting issuer is not required to file an AIF under section 6.1, within 120 days after the end of the issuers most recently completed financial year, if the document was made or adopted before the end of the issuers most recently completed financial year. o

The Canadian Securities Administrators (CSA) published the results of its continuous disclosure review program at the end of 2008 and was quite satisfied with the compliance: 39% of RIs reviewed were not required to amend disclosure docs 36% were requested to make enhancements in future filings 19% had significant deficiencies 5% were referred to enforcement 1% was subject to cease-trade orders Other continuous disclosure requirements 43-101: specific to exploration cos such as mineral cos 51-101: oil and gas issuers 52-107: accounting principles and standards, so it is consistent and can make relative comparisons NI 52-108: auditor oversight NI 52-109: certification of annual and interim filings *refer to lecture on corporate governance NI 52-110: audit committees *refer to lecture on corporate governance NI 58-101/NP 58-201: disclosure of corporate governance practices *refer to lecture on corporate governance o NI 58-101FI/F2 o NP 58-201 corporate governance guidelines o Corporate governance practices are not mandatory but if you do not adhere to them that must be disclosed Policy Developments in Respect of Continuous Disclosure Janis Sarra Modernizing Disclosure in Canadian Securities Law: An Assessment of Recent Developments in Canada and Selected Jurisdiction While primary market disclosure is contained in several documents notably the prospectus and AIF, for specialized offerings, the info is disclosed in the prospectus, AIF, financial statements and MCRs This leads to fragmentation of info In secondary market disclosure, info is disclosed in financial statements, AIFs, MD&As, proxy circulars and MCRs, often located in diff places There is overlap, duplication and fragmentation Current system means investors dont necessarily get all the info that is referenced in required disclosure and they must spend additional time and resources to receive rhose disclosures Another possibility is to have a one click full access electronic disclosure FTP disclosure should mean being in a form that is capable of being read and understood by investors who are

75 reasonable ppl acting reasonably SEC promoting XBRL which attaches electronic tags to elements of info, the tagged data can can then be pulled out of comprehensive electronic disclosures which allows investors to draw out the info they are interested in examining on a selective basis o if this is successful, it can revolutionize electronic disclosure

Canada Steps Up The Task Force on the Modernization of Securities Laws makes a bunch of recommendations on p.422 Some examples include: search features on SEDAR be expanded to allow for more detailed searches of disclosure docs financial literacy should be a matter of national priority instead of delivering docs, just file them on SEDAR etc etc

INSIDER REPORTING AND TRADING

Introduction: Boundaries Legal and illegal insider trading o Despite the tension it is NOT illegal to own or trade if you are insider (just illegal in certain circumstances) Reporting requirement for legal insider trading: Within set period of time, disclose they traded so market knows Definition of insider: OSA s.1 o (a) a director or officer of a reporting issuer, o (b) a director or officer of a person or company that is itself an insider or subsidiary of a reporting issuer, o (c) a person or company that has, (i) beneficial ownership of, or control or direction over, directly or indirectly, securities of a reporting issuer carrying more than 10 per cent of the voting rights attached to all the reporting issuers outstanding voting securities, excluding, for the purpose of the calculation of the percentage held, any securities held by the person or company as underwriter in the course of a distribution, or (ii) a combination of beneficial ownership of, and control or direction over, directly or indirectly, securities of a reporting issuer carrying more than 10 per cent of the voting rights attached to all the reporting issuers outstanding voting securities, excluding, for the purpose of the calculation of the percentage held, any securities held by the person or company as underwriter in the course of a distribution, o (d) a reporting issuer that has purchased, redeemed or otherwise acquired a security of its own issue, for so long as it continues to hold that security, o (e) a person or company designated as an insider in an order made under subsection (11), o (f) a person or company that is in a class of persons or companies designated under subparagraph 40 v of subsection 143 (1) o Basically includes directors, officers, 10%+ shareholders Reporting insider refer to 55-104 below o Not all insiders have to report, only certain ones because in practice, sometimes VPs have the title but not a lot of say or info (In old regime these VPs had to report even though they didnt have material info ) o The rule has changed; only those likely to be in possession of material info will be considered reporting insider Policy issues re Insider Reporting/Trading We dont prohibit insider trading as long as they disclose their trades; just prohibit illegal insider trading Some say we should prohibit insider trading bc of the competing tension that if you make a decision thats in best interest for corp, it will likely be best interest for shareholders as well Why do we regulate insider reporting? o The regulation is built on concerns relating to fairness and in particular the idea that the law and its enforcers must seek to build confidence in the capital markets o Investors should feel confident that there is a level playing field and that individuals with access to confidential info will not benefit from their special connection with an issuer ON THE OTHER HAND, some argue we shouldnt regulate insider reporting bc: o Insiders will have acess to this info regarding the issuer earlier than the general public and if they are able to trade on the basis of that info, they are rewarded for the work they do as issuer insides o Ds and Os benefit from their position by receiving salaries and stock options so why not benefit from the info they receive as a result of being in their positions?

76 Insider trading regulation is expensive to enforce and detection is rare so is it actually a deterrent?

Legislative Scheme -2 pronged 1) Legislation stipulates that under prescribed circumstances, trading by insiders is legal o Specifically, if insiders report trades within a certain time period, such trades are permissible providing they are not based on undisclosed material info 2) Legislation identifies certain illegal insider trading o No insider or any other person in a special relationship with the issuer can trade on material undisclosed info SO the prohibition on insider trading actually covers a much broader class Insider Reporting Insiders are required to file insider trading reports with the Commission under certain circumstances The filing requirement discourages insiders from using inside info for personal gain & it increases investor confidence in the integrity of the markets Insider trading reports are also a valuable research and evidentiary tool for Commissions when they investigate insider tipping allegations OSA s.107 o (1) Initial report (Sets out initial holdings) within 10 days of becoming an insider o (2) Changes in ownership (Within 10 days but now 55-104(2.2) has shortened it to 5 days NI 55-104 o Reporting insider means an insider of a reporting issuer if the insider is (a) the CEO, CFO or COO of the reporting issuer, of a significant shareholder of the reporting issuer or of a major subsidiary of the reporting issuer; (b) a director of the reporting issuer, of a significant shareholder of the reporting issuer or of a major subsidiary of the reporting issuer; (c) a person or company responsible for a principal business unit, division or function of the reporting issuer; (d) a significant shareholder of the reporting issuer; (e) a significant shareholder based on post-conversion beneficial ownership of the reporting issuers securities and the CEO, CFO, COO and every director of the significant shareholder based on postconversion beneficial ownership; (f) a management company that provides significant management or administrative services to the reporting issuer or a major subsidiary of the reporting issuer, every director of the management company, every CEO, CFO and COO of the management company, and every significant shareholder of the management company; (g) an individual performing functions similar to the functions performed by any of the insiders described in paragraphs (a) to (f); (h) the reporting issuer itself, if it has purchased, redeemed or otherwise acquired a security of its own issue, for so long as it continues to hold that security; or (i) any other insider that (i) in the ordinary course receives or has access to information as to material facts or material changes concerning the reporting issuer before the material facts or material changes are generally disclosed; and (ii) directly or indirectly exercises, or has the ability to exercise, significant power or influence over the business, operations, capital or development of the reporting issuer; o NB: concept of reporting deadline (s.2.2) - file by particular date NI 55-102 - SEDI Fill out 2 forms: Insider profile (55-102F1) and reports (55-102F2) Insider profile form sets out the info required wen you create your profile Reports sets out info required if you are reporting insider and you trade Anyone can go on it and search an insider Applies to beneficial holdings too NOT just registered So CEO might have husband who buys securities or short sells and does things they would profit on based on undisclosed info, so she has to report it Some take view they dont own the securities, not beneficially held by spouse, but thats risky 2 separate offences created by s.76: Trading and Tipping

77 Illegal Insider Trading 76(1) No person or company in a special relationship with a reporting issuer shall purchase or sell securities of the reporting issuer [NOT private co] with the knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed. Elements of Proof Required for Illegal Trading (1) the accused was in a special relationship with the reporting issuer (2) the accused purchased or sold securities of reporting issuer (3) the accused made the purchase or sale with knowledge of a material fact or material change concerning the affairs of the reporting issuer (4) the material facts or changes had not been generally disclosed What is the Nature of a Special Relationship? S. 76(5) Broader than definition of insider Potentially extensive chain of accused All these prohibitions resulted because clever ppl found a way around them person or company in a special relationship with a reporting issuer means, (a) a person or company that is an insider, affiliate or associate of, [special captures insider + more] o (i) the reporting issuer, o (ii) a person or company that is proposing to make a take-over bid, as defined in Part XX, for the securities of the reporting issuer, or o (iii) a person or company that is proposing to become a party to a reorganization, amalgamation, merger or arrangement or similar business combination with the reporting issuer or to acquire a substantial portion of its property, (b) a person or company that is engaging in or proposes to engage in any business or professional activity with or on behalf of the reporting issuer or with or on behalf of a person or company described in subclause (a) (ii) or (iii), o [i.e. a consultant or someone that provides services] (c) a person who is a director, officer or employee of the reporting issuer or of a person or company described in subclause (a) (ii) or (iii) or clause (b), o so cannot say my co is proposing reorg NOT me as employee (d) a person or company that learned of the material fact or material change with respect to the reporting issuer while the person or company was a person or company described in clause (a), (b) or (c), o cant say I found this out and quit and now I am trading (e) a person or company that learns of a material fact or material change with respect to the issuer from any other person or company described in this subsection, including a person or company described in this clause, and knows or ought reasonably to have known that the other person or company is a person or company in such a relationship o This is the broadest part of the defn o Captures infinite chain of tipees o D/O tells friend who tells someone else- that friend is in a special relationship o Captures infinite chain of tipees but that chain is broken when it is no longer reasonable i.e. overhearing on ttc What Does General Disclosure Require? Dissemination plus analysis time to digest? o In Re: Harold P. Connor, the OSC stipulated that the info must be disseminated to the trading public and the public must be given a sufficient amount of time to digest such info given is nature and complexity No rigid rules for determining if dissemination has been adequate- tribunals and courts regard a variety of factors including the info, the type of security, the issuer, the medium adopted for communicating this info and any alternative disclosure methods o In this case the OSC suggests that one full trading day following the release of info should pass before insiders trade o In short, the term generally disclosed requires (1) one to assess whether info has been released to the public and (2) whether enough time has passed so that investors can analyze it This 2 pronged approach was adopted in Pezim See NP51-201 o Doesnt really say the time o Some might have a black out period where they prohibit Ds and Os and employees from trading i.e. 2 days after financial results disclosed (bc they think 2 days I enough time to disclose info) o Some caselaw says and least be out for a day

78 There is a duty to inquire whether there are material facts or material changes in relation to the reporting issuer [even though it is not expressly stated] bc such an interpretation contextualized the general obligation to disclose material changes and guarantees the fairness of the market which is the underlying goal of the Act (Pezim) o Particularly when other issuance of securities

Donnini (OSC) Facts P had spoken to KCA about how it would be 6.75 and told D Stock limit was 6.90 and D now had evidence that it was going to be 6.75 so D began to short sell stock of KCA So he sold no less than 6.90 then he could buy it at 6.75 Issue: Was this an illegal trade? YES Reasons Application of elements of illegal trading to facts o (1) Was he in a special relationship with KCA? Yes CEO is in special relationship, tips P and P knows he is CEO Then P tips D and D knows the info came thru P o (2) Did he purchase/sell securities of KCA? Yes o (3) Did he make purchase/sale with knowledge of material information? Yes This was a lot of what case revolved on Argument was D was only hedging own position OSC said even if that mattered, sold way more than hedging position required o (4) Was the material information generally disclosed? No Was it a material fact that KCA was going to do another offering? Yes In this case, the Court use the US probability/ magnitude test bc before a fact can become material, it has to be established (side note: OSC loves probability/ magnitude test doesnt apply to whether there is change in ON. ONLY to determine the MATERIALITY of the change but the test for materiality is already set out in act) Decision Therefore taking into consideration all the facts, Court determined Donnini had knowledge of material facts with respect to KCA that had not been generally disclosed; in view of the high volume short sale orders placed, Court concluded that Donninis actions were deliberate and intentional and his trades could not be excused on the basis of reasonable mistake Thus he breached s.76(1) of the Act TIPPING s.76: (2) No reporting issuer and no person or company in a special relationship with a reporting issuer shall inform, other than in the necessary course of business, another person or company of a material fact or material change with respect to the reporting issuer before the material fact or material change has been generally disclosed. o This is where selective disclose comes from o It is an offence (criminal and quasi-criminal) for the insider to tip someone o Also criminal and quasi-criminal offence for the bf to go out and buy or sell based upon the tip Difference between trading and tipping is WHO does the trade Tipping Issues Does there have to be trading by tippee in order for there to be tipping? NO tipping is in and of itself illegal because you are selectively disclosing Does tippee have to know that tipper is in special relationship in order for there to be tipping? o Known OR reasonably ought to that the tipper is in a special relationship (so cannot use willful blindness if court thinks you ought to have known) 3 basic elements of the offence of tipping: o (1) the tipper must be in a special relationship with the RI o (2) the tipper informs the tippee of a material fact or material change other than in the necessary course of business, and o (3) the info has not been generally disclosed A tippee can also be a tipper if he or she like the original tipper, is also in a special relationship with the issuer and passes material undisclosed info along to another person If this other person also classifies as a tipper and passes info on to another person it is easy to see how a chain of tippees can be informed As the chain becomes longer it becomes more difficult to insolate and detect insider trading

79 Rankin is one of the most high-profile cases in the recent past relating to tipping Rankin charged with 10 counts of insider trading and 10 counts of illegally tipping to Daniel Duic, a high school and long time friend; (Rankin argued he didnt tip him; Duic went into his suitcase but OSC didnt believe him) The case was initially significant bc it was the first Cdn case to yield a conviction of tipping; however, when it was overturned and leave to appeal was denied, it came to stand as another example of how difficult enforcing insider trading and tipping is Ultimately the OSC settled with Rankin (he was prohibited from serving as D or O, had to cease trading securities for 10 years and pay 250k in costs for the investigation Duic settled with the OSC and agreed to disgorge $1.9 million of the $4.5 million he earned from the scheme; Duic also agreed to a trading ban and to testify against Rankin at his trial. Recent Cases on: WHAT is the TIP? Essentially, there seems to be a spectrum of tipping and the courts are divided If you say I cant say another word other than go and buy as much stock as you can buy and you wont regret it o Inquiry shifts to asking whether on circumstantial evidence basis that you knew or should have known I was providing you inside info based on that advice? o Cases are all over the map and very divided o The better view in Joes opinion, is that is not inside tipping but that is conduct contrary to public interest o No doubt the person who did trading will have to pay money back Lets say you are insider in discussion of takeover bid, you go to fam event where your bro in law is in attendance; your bro in law has traded your stock but you deny giving him inside info in past o At that dinner you dont make any recommendation at all, you dont discuss your co o BUT bc of way you act, you say things like I am really busy at work, Ive been travelling a lot, I am looking forward to retirement (essentially you seem to be in good mood) o Your bro-in-law comes to conclusion that something good must be happening and he buys your stock; 4 days later there is a takeover bid and he makes lots of money o More troubling is he settles with regulators but he denies you tipped him o Clients name is Jaffer (reported decision in Alberta) ; he was acquitted bc the regulators believed him when he said he didnt top Case going to trail this fall @ OSC- What if you dont know the person giving the info is an insider? o You get a phone call from your good friend Eda, you know she works at brokerage house o Eda says you should buy a lot of XYZ stock o Unknown to you, she is insider of that stock because she is in special relationship bc her brokerage house is working for XYZ o She doesnt tell you why, just tells you to buy it, doesnt tell you she is doing work for XYZ R v Landen (CB at p.671) trading and tipping case Charges of trading and tipping against Landen and trading against Diamond Factual issues as to (i) had certain material info been generally disclosed and (ii) materiality of certain information about reconciliation problems *There are about 10 particulars that keep getting referred to SOO FOR EXAM call them particulars o Discussion of probability/magnitude test [paras 87, 103-4] Para 87: magnitude matters in the determination of materiality of a contingent or speculative factor; the test used by OSC, adopted from American jurisprudence defines materiality of such facts as a balancing of these two actors in light of the totality of the co activity There is significance in the magnitude of the impact when measured against the probability that the long term production forecase would be reduced Para 87- Cites Donnini: "Materiality is reached when some unspecified minimum threshold of both probability and magnitude is reached. Only where there is some probability of the event's occurrence [e.g. the reduction in the long term production forecast] and some magnitude to the event can it be expected that a reasonable investor would consider the disclosure a factor in making an investment decision. Materiality is indicated when there are high probabilities the event will occur and the high magnitudes of the event's impact on the registrant ... Instead of balancing the two against each other, the materiality analyst will weigh both of them separately and then discount the potential magnitude by the probability of non-occurrence ..." Para 104 - It does not appear that the reduction of 2004 production guideline was at that point more than a possibility. However, the significance of it was considerable. The magnitude was so great that it outweighed the lesser degree of probability. In measuring magnitude and probability separately then

80 "discounting the potential magnitude by the probability of non-occurrence", the "unspecified minimum threshold of materiality" is met. I must conclude that Mr. Boyd's reference to "lowering the bar" at the October 1, 2006 meeting amounted to a material fact. THIS IS JUST SO I KNOW HOW TO APPLY THE DONNINI TEST WHEN A MATERIALITY IS CONTINGENT Application to Facts in Landen o Did Landen insider trade? [paras 113-115] YES He was in a special relationship with Agnico-Eagle, being an officer He sold securities of Angico-Eagle He had knowledge of material info about the public co And that material info had not been generally disclosed o Did Landen tip Diamond? [paras 97, 148] YES

Defences to Trading/Tipping s.76(4) Reasonable belief that material information generally disclosed prior to the trade Trading AND Tipping OSA Onus is on the Accused to prove that he or she had a reasonable belief that the info had been generally disclosed Connor [The defendant believed certain info had been disclosed prior to his trade bc a press release had been issued but he was found guilty of insider trading bc not enough time had passed after the issuance of the press release] RATIO: Wait at least one day before release of the info Remember the 2 pronged test? The appropriate standard is a two part one: the information must be disseminated to the trading public and the trading public must have it in its possession for a period of time that will allow it to digest the info given its nature and complexity. There can be no firm rule as to what depends upon the nature and complexity of the infoWe do feel confident in saying, however, that an insider may not trade with the release of the news as was literally the case here. A safe working rule would be that an insider should wait a minimum of one full trading day after the release of the info before trading This defence is available in the case of tipping if the tipper disclosed info in the necessary course of business In this event there is no liability If you are going to enter into contract, then may want to update info in necessary course of business and that would be a defence NP 51-201 (3.3) sets forth when this defence is available Royal Trustco Ltd v OSC In this case, it was found that disclosing info to a shareholder as part of an attempt to defend against a takeover bid was NOT in the necessary course of business Court gives deference to OSC OSA Regulations (1) provides that a person or co can avoid liability under the OSA if the firm or employee can provide that no individual with actual knowledge of an undisclosed material fact or material change made, or participated in the making of, the decision to buy or sell a security to which the material fact or change relates (3) In determining whether a person or company has sustained the burden of proof under subsection (1), it shall be relevant whether and to what extent the person or company has implemented and maintained reasonable policies and procedures to prevent contraventions of subsection 76 (1) of the Act by persons making or influencing investment decisions on its behalf and to prevent transmission of information concerning a material fact or material change contrary to subsection 76 (2) See OSC Policy 33-601 for registrants these guidelines cover such areas: o education of employees o containment of inside information o restriction of transactions o compliance

s.76(2)

Necessary course of business

Tipping

s.175(1) and (3))

Firewall defence

Trading

81 The guidelines recommend that when a registrant is or maybe he in receipt of insider info about an issuer, the registrant consider whether to monitor, restrict or discontinue certain activities of the registrant and its employees with regard to the securities of that issuer Application: Donnini case Burden of proof in ALL s.175 situations is on those trying to establish the defence ditto Common Law If you reasonably believe certain facts were true; This defence is RARELY successfulVERY difficult argument to meet Fingold [Genesis of reasonable mistake of fact defence] Facts: The accused, a director of a move co became aware of certain info at a board meeting, then he sold his shares before disclosure to the public Issues The issue was whether the accused believed that the info would have a substantial effect on the cos share price The issue was whether a defence of reasonable mistake of fact was available to permit Fingold who had knowledge of the unexpected and disappointing 4th quarter results to assert that he had a genuine reasonable belief that those results were not a material fact within the meaning of the defn [This defence arises bc the offence of insider trading under s.76 is an offence of strict liability] Decision: Court determined that the unexpected and disappointing 4th quarter results were a material fact and if those results were known, they would reasonably be expected to have a significant effect on the market price of the shares BUT court accepted Fingolds testimony which said that at the time Fingold sold his shares, he reasonably believed that the results would NOT have a significant price on the market price of the shares Harper (One of the leading cases on insider trading in Canada) Test: In addressing the question, the evidentiary test becomes has Harper demonstrated on a BoP an honest and reasonable mistaken belief to refute his knowledge of facts which the Court finds to be material and which Harper admits to being in possession? NO Facts 2 counts of insider trading in shares of a jr mineral exploration co Harper was in a special relationship to the co Prosecution alleges that Harper had knowledge of undisclosed material facts in the form of assay results and sold his shares during two time periods OSC proved that good news and bad news press releases affect the price of Golden Rule shares Issue: Did Harper have a genuine and reasonable belief at the relevant time that the results of 800 soil samples and the results of the Teck trench samples did not constitute material facts? Reasons 800 Soil Sample Results Harper admits reporting favourable results to public bc he knew it was material At no time did he release the negative results though It is NOT reasonable that good news results are material and bad news arent Harper claims the project geologist advised that the info was not significant and didnt undermine it BUT given Harpers expertise with Golden Rules, its related mining cos, prior employment and his industrial/ financial involvement in general, reliance such reliance would be unreasonable Tech Trench Sample Results: Harpers concerns leading him to a belief in the unreliability of the assay results on these samples is a retrospective rationalization, as such it is either genuine nor reasonable

s.175(2) s.175(5) N/A

Unsolicited Orders Other party had knwledge Reasonable mistake of fact

Trading Trading Trading

82 OSA Sanctions for Insider Trading/Tipping Civil; s.134 (1), (4) (buyer or seller) and s.135 (Commission on behalf of issuer if issuer has action under 134(4)) Administrative; ss.127/128 [Donnini decision] Criminal Code Offence of Illegal Insider Trading CC s.382.1 (reproduced at CB p.664) Requirement for knowing use -Criminal sanctions have the element of knowledge: MUST KNOW (so it is different) Applicable to issuers securities Categories of potential accuseds Assessment of Illegal Insider Trading Whether the legislative regime and the enforcement of the illegal insider trading regime is effective CSA established an independent task force to examine illegal insider trading in Canadian capital markets o Any insider trading in Canada has a direct adverse impact on the fairness and efficiency of those markets and consequently on market liquidity and cost of capital o With increased ease of access to offshore trading and the continued development of the options and single stock future markets, illegal insider trading threatens to become more prevalent and profitable over time without strategies on how to mitigate risk Study on insider trading by McNally and Smith o Authors show that insiders do not avoid trading prior to announcement of material info o Costs and benefits of insider trading restrictions Unrestricted insider trading makes prices more informative bc trading by insiders moves stock prices toward their fundamental value BUT this is only a benefit to the extent that firms are slow in releasing info to the investing public Expensive to enforce bc difficult to prove Convictions are rare bc prosecutions often relies on circumstantial evidence Burden of proof is high in prov court (beyond reasonable doubt is certainly higher than it would be if it was in admin tribunal) so that is a reason convictions under s.122 are difficult to secure The Felderhof case is a prime example of this point On average there has been less than one insider trading conviction a year since 1980 Insider trading violations are infrequently enforced and lack of convictions may send a signal to market participants that insider trading is not a serious crime Recent international study showed that there is a net benefit only when restrictions are enforced and they result in convictions o Policy prescriptions that follow from the research Relative paucity of prosecutions in Canada relative to the US suggest OSC should consider approaches used by the American regulators Compliance with insider trading reporting rules should be imposed Reporting of other insider traces should be checked for consistency with changes in ownership figures To reduce compliance costs, TSX and OSC should explore a common repurchase reporting system Announcements of insider trading should be made faster Insiders should be restricted from trading in a period just prior to pre-planned announcements such as earning releases CASE STUDIES posted on moodle (print these for exam) BRE-X MINERALS LTD. [Joe Groias case] The OSC charges Felderhof with insider trading and authorizing false press releases on the basis of the alleged existence of a number of obvious red flags, eventually recognized in full by Strathcona Minerals. Felderhof faced penalties ranging from fines of up to $8 million, plus additional financial penalties of up to three times any profit made from insider trading, and possible jail time of up to 16 years. No other member of Bre-Xs board, nor any other person associated with the Busang site, is ever charged. (IN 2007) By a 594-page judgment, John Felderhof is pronounced not guilty of all charges related to illegal insider trading and issuing false press releases. Although the court found that the press releases approved by Felderhof were materially misleading, Justice Hryn considered that Felderhof had exercised appropriate due diligence in allowing Bre-X to release them. All parties, even the OSC, had by that point conceded that Felderhof was unaware that the core samples had been tainted. The OSC decided not to appeal the decision, making it a landmark victory for Felderhof and his lawyer, Joe Groia. Joe Groia, Felderhofs lawyer, is found guilty of professional misconduct by the Law Society of Upper Canada for being

83 overly aggressive in his defence of Felderhof. Felderhof has spoken out in defence of Groia, who has represented him pro bono since 2005. INSIDER TRADING CORNBLUM & GRMOVSEK 2 former Osgoode law students who engaged in millions of dollars of insider trading; the got the material info thru the firms they worked for one committed suicide after convicted while the other was sentenced to 39 months in prison in 2010 SINO-FOREST CORPORATION Really profitable co at first- lots of shareholders putting in money Muddy Water Report claims the co is a ponzy scheme Share price decreases heavily Co does internal investigation and OSC starts to investigates Many of the Os and Ds resign Co has to file for bankruptcy in March 2012

SHAREHOLDER DEMOCRACY AND CORPORATE GOVERNANCE

Introduction Corps were creatures of the 15-17th century Corps are platforms to collect capital and vehicle whereby ppl providing the capital arent liable Back when corps started, shh were personally liable but then corp was created to be a separate legal entity o Needs agents to govern it though, as it cannot act on its own thus who is to be held liable? o That is the tension in corporate governance Corp governance used to be seen as solely a corporate law matter, not securities, but this changed within the last decade (1) Legislation (a) Statutes [corporate governance recognized in corporate law AND securities statutes] Corporate Law Statutes: Standard of corporate governance: Section 134 of the OBCA: Every director and officer of a corporation in exercising his or her powers and discharging his or her duties to the corporation shall o (a) act honestly and in good faith with a view to the best interests of the corporation; and (fiduciary duty) o (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. (duty of care) Section 122 of the CBCA requires a similar standard of care. S.102 (CBCA): Ds responsible to manage and supervise bc the legal entity cannot manage itself S. 106(3): shh at ordinary resolution elect Ds S.108(1): D ceases to hold office when he or she: (a) dies or resigns, (b) is removed in accordance w s.109 (c) disqualified S.109: D can be removed by special meeting thru ordinary resolution S.121: Ds can appoint or delegate some of their tasks to the Os The above sections set out the fact that the D controls the entity, is elected/ removed by shh and D appoints Os AGENCY PROBLEM: (+) collected pools of capital to build things and there is no liability BUT (-) separation between my investment and my ability to control the investment SO corporate governance tries to remedy the agency problem Shareholder Remedies to Remedy the Agency Problem The following are equitable remedies that became embedded in statute (1) USA if every shh signs it, can take power away from Ds; usually in small private co situation (2) Dont elect or re-elect the D o (a) Every corp has annual meeting whereby Ds are elected or re-elected o (b) Shareholders can call a special meeting to remove Ds before their term is up (3) Oppression remedy (basis of BCE) shh feel oppressed by Ds (4) Derivative actions shh can sue on behalf of corp and step ino the shoes of the board Proxy battle is a self-help remedy

84 Securities Law Statutes OSA s. 121.3: A reporting issuer shall comply with such requirements as may be prescribed with respect to the governance of reporting issuers, including requirements relating to [bifurcation] (a) board composition [fiduciary duty]; (b) board committees [duty of care]; and (c) codes of business conduct and ethics. (b) National Instruments and Policy CSA have created a series of instruments to back up corporate governance; most of the, being creatures of the Enron fallout in the early 2000s and other corrupt cos It was a complete and utter failure of corporate governance so billions of dollars were wiped out Shh didnt know what was going on, Ds were hiding it form them, auditors not knowing how it should look, etc. These policies developed alongside US (NY stock exchange) This has been a step-by-step process (filling holes) As problems came up, they added instruments/ rules to fix them While instruments are mandatory rules, policies are best practices that provide guidelines (cannot make you do them) Policies are not one-size-fits-all; they couldnt lay it out for all issuers bc every issuer applies them differently (some are small cos and thus dont have to worry about them as much) NI 52-109 Certification of Disclosure in Issuers Annual and Interim Filings o When financial statement and MD & A filed on Sedar, certificate in prescribed form must accompany it o Aimed at holding corporate officers accountable for the quality and accuracy of the issuers disclosures o The objective is to improve the quality, reliability and transparency of annual filings, interim filings and other materials that issuers file or submit under securities legislation o Requires an issuers CEO and CFO or persons performing similar functions to them, to personally certify that the issuers annual and interim filings do not contain misreps o The certifying officers are now required to certify that the financial statements fairly present the financial condition of the issuer and there are internal controls to ensure that the material info is conveyed to decision makers, and they have disclosed to the auditor any deficiencies in internal control and any fraud o What are CEO and CFO required to certify? Form 52-109F1 [non venture] and Form 52-109FV1 [venture] Disclosure controls [meaning stuff like media contact] and procedures/internal control over financial reporting - but note requirements for venture issuers not as onerous This is not mandatory for venture For non-venture issuer, that certification has more items in it Disclose you have financial reporting in place (put in place procedures so financial reporting is accurate), where as venture do NOT have this in place bc it is lower level of reporting o Officers must disclose material weaknesses o Liability issues: NI 52-109CP, Part 18 Certifying officers can be held jointly and personally liable if there is a misrep No longer can CEO claim to not know anything about it o In favour of distinction between venture and non venture: In the US there is less distinction and this is killing small businesses bc having an auditor and procedural safeguards are expensive cannot issue dividends and stuff bc spending all their excess money on stuff like auditors so there is a desire to lessen requirements for venture NI 52-110 Audit Committees o 3.1 Composition o (1) An audit committee must be composed of a minimum of three members. o (2) Every audit committee member must be a director of the issuer. o (3) Subject to sections 3.2, 3.3, 3.4, 3.5 and 3.6, every audit committee member must be independent. Meaning of independence in 1.4 Those exceptions above MAY allow for majority to be independent and not all but there are requirements such as the board determines in its reasonable judgement that the member is able to exercise the impartial judgement necessary & appointment of member is in best interest of issuer and shhs etc. + more requirements All members not required to be independent for venture o (4) Subject to sections 3.5 and 3.8, every audit committee member must be financially literate. Literacy: NI 52-110CP, Part 4 Must be literate and prove it in AIF by listing the education and experience of the committee You are financially literate if you have the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to

85 the breadth and complexity of the issues that can reasonably be expected to be raised by the issuers financial statements Issuer required to disclose in its AIF an edu and experience of audit committee members A D that is not financially literate can be appointed still providing they become financially literate within a reasonable period of time following the appointment and the Board has determined that the appointment will not materially adversely affect the ability of the audit committee to act independently o Responsibilities of audit committee [NI 52-110 Part 2] o AIF disclosure re audit committee (NI52-110F1) Only required if non-venture Include things like identity, what makes them financially literate, etc] o Audit committee must be directly responsibly for overseeing the work of the external auditor o Response to blow in US bc found audit committees had little knowledge of the financial statements so there was a drive to strengthen them and hold them accountable o Any financial statement must be approved by the audit committee and the board o An audit committee is a committee of the board that has responsibility for oversight of the financial reporting process, including helping Ds meet responsibilities, providing better communication between the Ds and the external auditors, enhancing the independence of the external auditor, increasing the credibility and objectivity of financial reports and facilitating in-depth discussions among Ds, management and external auditor o Set up to encourage RIs to establish and maintain strong, effective, and independent audit committees that will enhance the qualify of financial disclosure made by RIs NI 58-101 Disclosure of Corporate Governance Practices o Shame and blame Take policies in 58-201 and tell world whether you are applying the policies or not o If not, explain why i.e. explain why majority of Board is not independent o Requirements for non-venture issuers are incredibly more detailed o Non venture must disclose board attendance records, the identity, role and responsibilities of an independent chair or lead director, what the board does o facilitate its exercise of independent judgement, etc while venture issuers do not face such requirements o Venture issuers are not required to disclosure the boards written mandate or delineation of board roles and responsibilities, nor required to disclose written descriptions o While venture issuers must disclose what steps the board takes to encourage and promote a culture of ethical business conduct, non-venture must disclose detailed codes, describe how the board monitors compliance with the code, etc o Thus there are modified requirements in scope, breadth and detail of required corporate governance disclosure o Another principal difference is where non-venture issuer doesnt have formal policies and practices in place, it must disclose initiatives that it has undertaken to ensure independence and objectivity in the process o The TSX has modified its company manual to align with the requirements in this instrument o It is a vehicle used to push the behaviour they want NP 58 201 Corporate Governance Guidelines o CSA published national policy on corporate governance guidelines in conjunction with 58-101 o It sought to be sensitive to the realities of large numbers of small cos and controlled cos in Canada o Also sought to take into account the impact of corp gov in the US and globally o In the US, non-compliance means failure to adhere to the guidelines o In Canada, it means the issuers failure to disclose its non-adherence to the guidelines o Lays out the best practices of corporate governance o I.e. board should have majority independent Ds, Chair should be an independent D o Boards job description should be included in proxy materials now so they are held accountable o Implementing codes of ethics must be disclosed tells you corporate culture NP 62-202 Defensive Tactics o Highlights the irreconcilable tension between corporate law and securities o Hostile bids are discipline on management o In 1997, promulgated 62-202 to deal with responsibilities of Ds in these situations o Can persuade shh to reject bid and can take action to maximum return to shh to include soliciting higher bids o Under 62-202, OSC saying duties of Board in hostile situation is to shh so securities regulators saying there should be open and free auctions to maximize value to shh BUT corp law says BIOC so what is the right rule? o BCE and after this changes the rule to act in best interest of shh!

(c) TSX Company Manual TSX as a regulatory body is taking action i.e. New rules with respect to the election of directors (individually by slate, elected annually, post results of fors and withholds and TSX recommends voluntary resignation)

86 (2) (Corporate Law) Cases Peoples Department Stores v. Wise SCC Facts: The trustee, representing the interests of the creditors, sued the Ds for an alleged breach of the duties imposed by s. 122(1) of the CBCA. Essentially, creditors sued Ds for negligence and self-dealing as Peoples went bankrupt Decision: In this case, in adopting the joint inventory procurement policy, the directors did not breach their duty of care in respect of Peoples creditors bc the implementation of the new policy was a reasonable business decision made with a view to rectifying a serious and urgent business problem in circumstances in which no solution may have been possible. Ratio: Fiduciary duty o In resolving these competing interests, it is incumbent upon the directors to act honestly and in good faith with a view to the best interests of the corporation. 122(1)(a) fiduciary duty (CBCA) o This means they must respect the trust and confidence that have been reposed in them to manage the assets of the corporation in pursuit of the realization of the objects of the corporation, avoid conflicts of interest, avoid abusing their position to gain personal benefit, maintain the confidentiality of information they acquire by virtue of their position. o Basically Directors and officers must serve the corporation selflessly, honestly and loyally o To whom do they owe this fiduciary duty?: BIOC does NOT mean best interest of the shh; it means means taking into account various stakeholders- shareholders, employees, suppliers, creditors, consumers, governments and the environment Duty of care o CBCA 122(1)(b) : Every director and officer of a corporation shall: exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances o D and Os will not be held in breach of the duty of care if they act prudently and on a reasonably informed basis. (business judgement rule) o The standard of care is an objective one, and the factual aspects of the circumstances surrounding the actions of directors and officers are important. The establishment of good corporate governance practices should be a shield that protects directors and officers BCE Inc. v. 1976 Debentureholders Facts BCE was becoming private and it was a friendly transaction Going to borrow money to take BCE over and then add that to the debt to BCE BCE has tenuous cash flow so had a lot of debenture holders (bonds) The debenture holders that financed BCE for decades said this transaction will change BCE in a fundamental way because they will be in HUGE debt Ratio Officers and directors owe the fiduciary duty of care to the corporation. The fiduciary duty to the corporation is a broad, contextual concept that originated in the common law. It is not confined to short-term profit or share value. Where the corporation is an ongoing concern, it looks to the long-term interests of the corporation. Directors may look to the interests of shareholders, employees, creditors, consumers, governments and the environment to inform their decisions Courts should give deference to business judgement of Ds who take into account these ancillary interests so long as it lies within a range of reasonable alternatives (Maple Leaf Foods) Often the interests of shareholders and stakeholders are co-extensive with the interests of the corporation. But if they conflict, the directors' duty is clear it is to the corporation: Peoples Department Stores Decision At the end of the day, debenture holders lost, but in reality they won bc they delayed the time long enough by the time the decision came out so BCE was worth a lot less than they were prepared to pay (bc of market crash) Teachers and KKR walked away from it because of the crash Maple Leaf Foods v. Schneider Facts Hostile takeover- Schneider rejected Maple Leafs bid and accepted a lower one instead that offered their employees a

87 better deal; Maple Leaf tried to argue that Schneider is to maximize shh value but court said that is not true Ratio Case articulates the business judgment rule. The court looks to see that the directors made a reasonable decision, not a perfect decision. Provided that the decision taken is within a range of reasonableness, the court ought not to substitute its opinion for that of the board even though subsequent events may cast doubts on the boards determination. Diligent process means showing up at meetings, being prepared and then doing something that is rationale not perfect

UPM- Kymmene (Repap) Facts: lucrative compensation package Ratio The business judgment rule protects directors from those that might second-guess their decisions. This approach recognizes the autonomy and integrity of a corporation and the expertise of its directors. They are in the advantageous position of investigating and considering first hand the circumstances that come before it and are in a far better position than a court to understand the affairs of the corporation and to guide its operation. However, directors are only protected to the extent that their actions actually evidence their business judgment. The principle of deference presupposes that directors are scrupulous in their deliberations and demonstrate diligence in arriving at decisions. Courts are entitled to consider the content of their decision and the extent of the information on which it was based and to measure this against the facts as they existed at the time the impugned decision was made. Although Board decisions are not subject to microscopic examination with the perfect vision of hindsight, they are subject to examination. Re Magna International Inc. Facts Decision of the Ontario Securities Commission examining board process in the context of a regulated transaction under Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions Magna was controlled by Frank Stronach who owned multiple voting shares There was a transaction agreed to by management and Frank that he wouldn t have multiple shares but minority shhs complained that the transaction was too expensive It was a related party transaction Reasons They looked at corporate practice and found it lacking (1) the execs negotiated but were not independent (2) OSC thought the job description of the special committee was not comprehensive enough Ultimately the transaction went forward for a diff reason SO securities has public interest jurisdiction even though it is primarily a corporate law matter Re Walt Disney Company Derivative Litigation Contrast to outcome in Repap. [where intention doesnt matter] Delaware court finds that directors did not intentionally shirk or ignore their duty, but acted in good faith, believing they were acting in the best interests of the Company. (3) Canadian Coalition for Good Governance Policy and lobbying organization for Canadian institutional investors. Members include pension funds, mutual funds and other money managers. Mission: Representing the interests of institutional investors, the CCGG promotes good governance practices in Canadian public companies and the improvement of the regulatory environment to best align the interests of boards and management with those of their shareholders. Prepares best practices documents for reporting issuers to provide them with guidance on effective communication. Issues guidelines and position papers regarding, among other items: o Governance differences of controlled corporations o Majority voting o Director compensation o Board and shareholder engagement

88

OVERVIEW OF SECURITIES LITIGATION AND ENFORCEMENT

Introduction Rigorous enforcement has been construed as an essential element of restoring investor confidence in securities markets damaged by the bursting of the dot.com bubble and financial crisis Judges tell us over an over again trading securities is a privilege not a right Consider how the ongoing balance among various available enforcement options will be achieved in the future There is a spectrum of how many rights you are guaranteed: o Category 1 No protections for ppl registered, cos trading, matters at core of securities trading If you want to be stock broker, you have to be a registrant Becoming a broker means you park any notion of due process and fairness at the door and you give up those rights in many instances I.e. you go into your office and securities regulators are there to look at your files and they dont need a search warrant you HAVE To give them access to all your books and records Your clients have no right of confidentiality; You have no right of process or fairness Doesnt need to be probable cause or reasonable grounds They can have unlimited examinations of your books and record as it relates to securities It is like public health dept going to restaurant Protection of trading is so imp that we are going to impose highlest level of surveillance and review and lowest level of protection for rights and individuals o Middle category: ppl not brokers, not registered, not public co; broad category called market participants Every market participant has minimal protections Ie. anyone that has ever bought or sold mutual fund, stock, bond if someone wants to review your trading, then can do that by getting inspection or investigation order from commission Then that requires broker to provide all that info that relates to you and your trading activities They can also call you in for deposition, examination and make you provide financial info relating to your trading activities with minima amount of charter scrutiny and review S.7 applies very minimally o Category 3: target of criminal investigations Full range of protections available If as a result of your trading activity, commission considering crim prosecution/ investigation then you are provided all protections available under s.7 and 11 in Charter Liability, Enforcement and Remedies OSA, s. 1.1 Regulators have a high degree of control over the enforcement process in the sense that regulatory enforcement staff is responsible for most investigation of potential infractions Deferential approach bc OSC is a specialized tribunals, populated by ppl better able to understand needs of market SOR is reasonableness as it applies to securities commission Ppl who get put on securities commission in ON have limited experience in capital market matters says Joe We have an open court principle but it doesnt seem to apply when it relates to securities commission or courts being asked to review decision of regulators Primary Market Liability Primary regulates how securities get in Can seek remedies in an admin civil, crim/quasi crim There is common law BUT unlike in the secondary market, the common law in the primary market is willfully deficient when it comes to prospectuses and thus the statute is stronger Secondary Market Liability [Previously issued securities] Secondary regulates how people trade after the previously issued securities are in public market place (stock exchange) I.e. misleading financial statements, market manipulation, misleading continuous prospectus obligations Same remedies as explained above under primary: admin, civil, crim/quasi crim BUT unlike in primary, the common law remedy remains VERY imp for certain transactions

89

OVERVIEW OF SECURITIES LITIGATION AND ENFORCEMENT

Purposes of the Ontario Securities Act (OSA) (s. 1.1)

Primary Market Liability

Secondary Market Liability

Criminal, Quasi-Criminal, Civil and Other Liabilities

Administrati ve Proceeding s

Civil Liability

(s.127, OSA)

(Part XXIII, OSA)

Criminal/ QuasiCriminal Proceeding s

Administrati ve Proceeding s

Civil Liability

Commo n Law

(ss. 380(2) and 400 of the Criminal Code; s. 122, OSA)

(s. 127, OSA)

(Part XXIII.1, OSA)

Criminal/ QuasiCriminal Proceedings (s. 380(2) of the Criminal Code; s. 122, OSA)

Administrati ve Proceeding s

Civil Proceedin gs

(s. 127, OSA)

(contract, negligence and deceit)

Criminal/ QuasiCriminal Proceeding s

(ss. 382, 382.1, 383 and 384 of the Criminal Code; s. 122, OSA)

Regulatory Investigations Anyone that buys shares of a co a week before a takeover gets investigated Very likely that if you trades securities actively you will be involved in an investigation at some point You have very few rights in regulatory investigation Request to produce documents so they can get brokerage statements, trade slips from broker, anything that is in brokers file without search warrant, your bank account record from your back everything with lil authorization Part VI, OSA Investigations and Examinations; o E.g., ABCP-related investigations - $138.8 million in administrative penalties and investigation costs in 2009; o Section 11 investigations require issuance of investigation order by staff of OSC (almost never rejected) o OSC may order such investigations as it considers expedient for the admin of ON securities law or to assist in the due administration of the securities law or the regulation of the capital markets in another jurisdiction o The scope of an investigation order is quite broad, but other sections of the OSA attempt to provide some boundaries to the use of the powers o Commission in independent agency that has 2 components (1) 10 or 11 commissioners mostly part-time; independent of staff; are to act as equivalent of admin judge; hearing before 3 commissioners (2) Staff of commission; Independent govt civil servants (When talk about bureaucracy call them staff) Engaged in all kinds of activities like investigations, reviews o Number of reports on why the structure needs to change BUT SCC has said there is nothing wrong w structure o Joe has no problem in relation to property/ transaction issues but do have a problem with ordering someone to pay costs when that money goes in to fund own operations, and being able to fine ppl when that fine goes towards advancing investor protection o Once the order is signed, powers kick in- have power to force you to come to exam. & be examined under oath o Prob: Old practice was if you were examined by commission and you took protections of evidence act and charter, they would not use that transcript against you in admin case Joe argued hearing at the commission is a subsequent proceeding from the investigation They said NO it is not, it is continuation of same proceeding so we can use those transcripts against you, and they did o They have the power to require you to produce docs o They can interview other ppl NOT just target of investigation so they regularly call 10-15 ppl to give testimony Constitutionality of the OSC investigative regime; o Have been argued (Branch v Levitt is leading case) o Our court has taken hands off approach to investigatory powers by regulators [they never step in basically] o SO commission has all the powers o Rights against self-criminalization doesnt exist; Constitutional rights dont exist in this context basically Cross-border cooperation.

o o o

90 All kinds of trading of securities back and forth between Canada and US If you trade on US exchange, you are subject to exchange commission in Washington and SEC is even worse The case about 2 students at Osgoode was prosecuted under US and Canadian regime But his lawyer, Joe struck a deal with US So he got 38mos in Canada (but ended up serving only 8 mos), opposed to 17 years in US Once you plead guilty, no longer allowed to go to US even though he was heading to NY to be sentenced

ADMINISTRATIVE HEARINGS
Bulk of prosecution work and securities regulation takes place in admin setting Regulators can deny co access to market of if already in the market, can remove cos from trading activities Can regulate types of transactions in market by co (regulate takeover bids, issuance of secondary market securities etc) Limited rights available to respondents (without discovery or due process) Legislation will put into place anything securities commission recommends In 1990s Commission said we dont like going to court because we lose so we are going to increase the range of admin sanctions available so we dont need to go into court often Securities commission has the most costs available o At hearing if you are acquitted, you are NOT entitled to be paid your costs but if you lose, you pay costs o Joe challenged that in div court and lost and someone even went to CA and they lost

The Public Interest A major component in the enforcement arsenal of provincial securities regulators is the power to make orders of various kinds that impose sanctions on market participants Regulators may make orders identified in their governing statutes if it is in the public interest to make them It is in the discretion of the regulator to interpret the public interest in accordance with its statutory mandate Making public interest orders does NOT require a breach of securities law, which creates uncertainty for market participants as to how they should conduct themselves in the securities market It is also possible to make a public interest order in circumstances where there has been a quasi-criminal action in respect of the same matter without infringing on protections against double jeopardy Hearings take place where Security Commission staff have home court advtg He wants to distinguish between property cases and individuals SPPA and OSC Rules of Practice; o No right to remain silent o Can be subpoenaed as target and forced to give testimony at hearing (no right to refuse to testify at admin hearing even though there can be draconian remedies against you) o No right to discovery o Dont get to attend on interviews on witnesses o Essentially when you go to hearing, you have investigation done by Commission and no real ability to get prehearing info that goes beyond what they give you o All you can do is get summons if issues to call witnesses at hearing itself but you never call a witness as your own bc you dont know what they are going to say o Disclosure is very one sided o Rules of evidence are relaxed- no rules against hearsay o Rules of examination relaxed o Try to negotiate resolution that minimize amount of punishment and increase prophylactic o OSC is really just trying to scare ppl, trying to make it seem like a commission hearing is scary as a deterrent o To settle commission hearing, you pay more than less (whereas in civil case it is somewhere in the middle) Commission staff will say if you go to hearing your guy will get 6mos but if you want to avoid hearing you will get 9 mos bc stigma, bad reputation, etc. Most clients want to avoid hearing bc once hearing is called, it is in newspaper, commission plays publicity game So dealing with admin laws is imp, difficult and trying to deal with proceedings supposedly in public interest is not simple o Practically thinking, manage media by putting out press release in defence, consider settling and appealing (but you are buying div court, CA and SCC pretty much so very costly) o Prof thinks Commission is ruining lives- reality is on Bay steet, you are guilty until proven innocent, ppl arent being given procedural fairness, courts are just giving deference to commission and commission is ruining lives; need judges to have meaningful review process when it involves PEOPLE (SO imp distinction between

91 people versus transactions). Why should Donald be stigmatized when he did not break the law? Civil burden of proof. o BoP- not going to prosecute in crim court unless they want jail bc burden of proof is beyond reasonable doubt

Administrative Powers of the Commission (1) PUBLIC INTEREST Section 127 of the OSA: o Wide variety of orders made in the public interest; o E.g., cancellation, restriction or suspension of registration, injunction or compliance order, cease trade order, and removal of exemptions. Many of those exist to protect transactions Reasons why regulators take zealous approach bc they perceive they are there to protect capital markets and perception develops that our capital markets are corrupt this is bad So when it comes to that yes give securities commission enormous power and ability to regulate transactions, but Joe argues there is a prob of the rights of individuals being abused (below) Committee for the Equal Treatment of Asbestos Minority Shareholders v OSC Discussed the scope and limits of securities regulators authorities Specifically the SCC examined the power to intervene in the market in the public interest This discretion is granted to regulators where there is concern regarding protection of investors or public policy concern about the integrity or efficiency of the capital market High degree of curial deference Standard of review is one of reasonableness Re YBM Magnex International Inc. (2003), 26 OSCB 5285; Outside D acquitted but inside Ds convicted by failing to detect fraud [Can be prosecuted if you should have known] Dealing with inadequacies in prospectuses and continuous disclosure are regulatory decisions made under s.127 Also in YBM, OSC sought to reprimand a lawyer who represented YBM bc of misleading statement he made to the regulators about YBM obtaining a series of favourable due diligence results Wilder brought an application for JR on grounds that the order was beyond the OSCs jurisdiction but the decision was upheld, so s.127 also applies to lawyers Canadian Tire Corp. v. C.T.C. Dealer Holdings Ltd. (1987), 10 OSCB 857 RATIO: No breach of the OSA is required! (This case is the high water mark of the understanding of the public interest enforcement powers) Facts Cdn Tire co-attail was badly drafted They devised a transaction perfectly legal which resulted in the voting shares being offered 400 dollars a share and non voting being offered 20 dollars Commission said when it comes to transactions, we act in public interest Even though perfectly legal to do what you are doing, you are going to damage integrity of market, so the commission cease traded the bid Counsel argued that the power to issue a cease trade order under s.123 ought not to be made unless a breach of the Act, the regulations or a policy statement has been demonstrated but the OSC DISAGREES Reasons Can use the public interest power to deal with situations that are inconsistent with the interest of the investors or where a transaction constitutes a flagrant abuse of the marketplace The Legislature deliberately gave the Commission a broad and unfettered power to move quickly to intervene in the capital markets to stop a trade or a transaction where it seems to be contrary to the public interest Such intervention is necessary to fulfill the OSCs mandate to regulate the capital markets in the public interest The transaction was structured to accommodate the desire of the Billeses to sell their entire control position without triggering the coattail, so it is artificial If abusive markets such as the one at issue here is allowed to proceed, confidence in capital markets will inevitably suffer and individuals will be less willing to place funds in the equity markets That can only have a deleterious effect on our capital markets end, in that sense, it is in the public interest that this offer be cease traded To invoke the public interest remedy particularly in an absence of a breach of the Act, the conduct or transaction must clearly be demonstrated to be abusive to shh in particular and of the capital markets in general A showing of abuse is different from and goes beyond a complaint of unfairness

92 The abuse must be such that it can be shown to the Commissions satisfaction that a question of the public interest is involved That almost invariably will mean some showing of a broader impact on the capital markets and their operation The evidence is clear that the dealers and their advisors were well aware of the controversial nature of the transaction in that it was structured to avoid the triggering mechanism **remedies under public interest not consistent in all of Canada

Re Paul Donald, (2012) 32 OSCB 7383. Facts He was a former senior exec of RIM charged with insider trading During golf, head of M&A told Donald about a co they looked at but put everything on hold bc they are not interested. Mr. Donald the next day decides to buy shares of that other co. 6mos later after co went up and down substantially, RIM makes offer to buy Mr. Donald has to disclose fact that he is a shh of it. RIM fires him and goes to the OSC He is not insider of target co, he is insider of RIM. Decision Commission says no there is no insider trading but we still dont like what he did but we are going to discipline him in public interest He cannot be D or O of any co for 5 years and has to pay costs for the hearing Significance SO big prob for securities lawyers bc dont know when Commission will intervene in public interest (even if the conduct was lawful!) so be careful every time you trade (2) Punitive vs. Prophylactic [another key distinction when talking about admin powers] Cartaway Resources Corp., Re, (2004), 2004 SCC 26. Facts 3 guys who worked for brokerage house who got involved with little co at early stage and proceeded to make millions of dollars in profit from trading of those securities Commission held hearing saying their conduct was unacceptable Commission upheld by courts decided what they had done was lawful BUT it is contrary to public interest to make money in stock market (pretty much what they said) so we are going to fine these ppl Issue: is it acceptable to fine ppl for conduct contrary to public interest? YES If the SCC had said fining someone was a punitive measure, they would have to strike down fine bc s.11 requirements hadnt been met Decision: So SCC said when it comes to securities matters, fining someone is prophylactic (not doing it to PUNISH ppl, doing it to send msg to market as a whole by way of general deterrence that you shouldnt engage in this conduct) In my view, nothing inherent in the Commissions public interest jurisdiction prevents that Commission from consideration general deterrence in making an order. To the contrary, it is reasonable to view general deterrence as an appropriate and perhaps necessary, consideration in making orders that are both protective and preventative Reasons: It is reasonable to assume that general deterrence has a proper role to play in determining whether to make orders in the public interest It may well be that the regulation of market behaviour only works effectively when securities commissions impose ex post sanctions that deter forward-looking market participants from engaging in similar wrongdoing. That is a matter that falls squarely within the expertise of securities commissions, which have a special responsibility in protecting the public from being defrauded and preserving confidence in our capital markets. It was reasonable in the circumstances of this case to conclude that general deterrence applies The weight given to general deterrence will vary from case to case and is a matter within the discretion of the Commission

CIVIL PROCEEDINGS [Statutory and Civil Liability in the Primary and Secondary Markets]
Introduction You would sue in civil proceeding when it is a class action (i.e. Danier) or a more serious offence I.e. OSC went after Joe Groia in court because they wanted a bigger penalty; commission can order restitution Means go to court, sue in civil court for remedy Rarely exercised by provincial commissions bc they prefer home court advantage

93 Cannot get civil or crim liability for violating public interest S.128 allows the OSC to apply to the Ont Sup Ct of Justice for a declaration that a person or co has not complied with or is not comply with ON secs law, if the Court agrees, Court can make a wide variety of orders including orders to comply with secs law, rescinding transactions, requiring compensation or restitution, payment of damages, disgorgement and the rectification of past non-compliance S. 128, Parts XXIII and XXIII.1 of the OSA: o Freeze orders; Commissioner can sign paper that freezes your bank account without notice to you and without permission from judge; you get notice after it is done Within 10 days they have to go to court to get order extending freeze order Done bc instantaneous transfer of money is reality o Appointment of receivers; o Disgorgement. (forced giving up of money illegally or unethically obtained) Redress at common law

Introduction Contd Consequences of filing to meet the obligation of providing FTP disclosure Until recently civil liability only extended to misrep in prospectus, OM and takeover-bid circulars but now legislation has been enacted invoking liability for misrep in continuous disclosure The remedies available under securities legislation for misreps are in addition to remedies available to them at CL In common law misrep requires an investor to prove the existence of a misstatement, reliance on that misstatement and causation between the reliance and damages suffered But civil liability provisions in securities legislation differs o Misrep means omission as well as misstatement o No need for investor to prove each of the elements of a negligence claim such as reliance o Securities legislation contains a number of defences which weakens the ability of investors to succeed via stat remedy (as highlighted in YBM) Stat remedies are EXTREMELY impt for development of financial market bc their existence contributes to investor confidence and the integrity of the market La Porta et al have found that countries with better legal protections for investors have more developed financial markets Usually in civil cases, person assert the violation has the onus of proof Same in sec reg- plaintiff must prove breach of provision BUT onus of proof when a defence is invoked is unclear and much depends on working of statute 3 underlying principles to think about (1) The Securities Act creates 2 entirely different liability- primary or secondary/derivative I.e. if financial statement is misleading, company is liable for that conduct and there is a range of things that can happen to co bc they have that primary responsibility But there is also derivative liability- even though financial statement is responsibility of corp, securities act provides OTHERS can be liable for those statements as well i.e. if you are D of public co, you can also be liable if you authorized, permitted to acquiest in that decision Joe thinks this is wrong- he thinks a standard should be gross negligence (Deliberately putting yourself in situation where you dont things) BUT legal standard is if you fail to steps a reasonable D would take So it is simple negligence and D can be held liable for a corp (He thinks bar is too low) (2) When you look at security regulation as it relates to litigation and enforcement, we see a complicated diff series of procedures rule and substantive law concerns- what Joe believes is necessary is balancing of crim, civil and admin and other forms of liability. In what circumstance do we use one kind of regulatory procedure and in what circumstance do we use difference procedures For every act you take as a regulator is a significant decision I.e. criminal sanction invokes s. 7 and 11 rights, time-consuming, expensive, difficult In Canada there is a failure of class actions to make significant inroads in securities market In the Us, in comparison some lawyers take on class actions and are successful in requiring co pay large amounts of money to shh but w dont have that bar here In Canada we put too much emphasis on government activity not individual plaintiffs suing on behalf of shh o How much emphasis should be placed on government activity and activity of individual (3) Compensation- very controversial area- how and when do investors get compensated for losses in the marketplace and to what extent should those losses be addressed by regulators opposed to court Tension between compensation and punishment: Is the focus on compensating individual investors who suffered a lost

94 or focus on punishing ppl who engaged in misconduct o Cannot have both generally; There is limited amount of money I.e. if you sue for 1 M, they will spend all their money fighting in to avoid paying that Primary Market Cause of action is against the issuer or selling securityholder (sales from a controlblock), underwriter required to sign the certificate in the prospectus, Ds of the issuer, any person who prepared and filed reports, opinions or statements (usually lawyers or accountants) and anyone else who signed the prospectus or amending doc When an investor purchases a security under prospectus during period of distribution, liability can arise if prospectus contained misrep Misrepresentation in prospectus is the failure to meet the FTP requirement Prospectus should contain FTP disclosure, all steps necessary for investor to make informed decision Under sec law, highest level of disclosure is in prospectus, co has to be most honest and candid with potential investors Procedure Liability for a Misrepresentation in a Prospectus OSA, Part XXIII, s. 130: where a prospectus together with any amendments to the prospectus, contains a misrepresentation, a purchaser who purchases a security offered by the prospectus during the period of distribution or during distribution to the public has, without regard to whether the purchaser relied on the misrepresentation, a right of action for damages misrepresentation includes misstatement and omission; o OSA, s. 1(1). o Misstatement: statement of fact is not true o Omission: failure to state an act necessary to be stated in order to make the things you say, accurate Future-oriented financial information (FOFI); can be a misrep if at the time you prepare it, you fail to take steps to ensure its accuracy of a forecast o Kerr v. Danier Leather Inc. o Material fact a fact that would reasonably be expected to have a significant effect on the market price or value of the securities (s. 1(1), OSA). When co announces, market reacts to that by dropping the price Now we know bc of market impact, that info had a significant affect on market price or value of stock so we can call an expert to determine it to look at the effect on the market and extrapolate form that market, the materiality of that info Not inward looking SCC said change in weather was material fact and not change in Danier (but then said neither one of them was really material) o Material change a change in the business, operations or capita of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer (s. 1 (1), OSA). [Inwardly looking, inside issuer; change in biz, operations, etc] Case Law Kerr v. Danier Leather Inc., [2007] 3 SCR 331 o The prospectus contained a sales forecast for Q4 1998 financial results; o Forecast: Educated guess as to future financial results o Two weeks after the closing, Danier issued a press release which included a revised forecast downgrading the predictions (due to the unusually warm weather) and Share price dropped significantly; o At the end of the Q4, the original forecast was substantially achieved. YBM Remedies Deemed Reliance; o S. 130 provides that everyone who purchases securities in primary market is deemed to have relied on everything said in prospectus, so even if ppl in the class didnt read prospectus, they can join class action Remedies: somewhat limited though bc you have to prove you bought shares in financing itself o Market that has existing shares reacts to announcement that you are going to issue more shares o So all those individuals trading in secondary market, have no claim under s.130 if it turns out there is misrep in prospectus but ppl who buy the new 10M, those ppl do have claim for secondary market liability under s.130 o Both remedies available against issuer or underwriter in the case of firm commitment underwriting o Liability of persons under the stat civil action is joint and severable o (1) Damages; [more common]

95 OSA s.130(7) states that the D will not be liable for damages that do not represent the depreciation in value of the securities as a result of the misrep relied upon Your liability is to the extent to the market reacted to info Bre-X- when it was found to be a fraud, stock went from $20 to $5 but at the same time that was happening, price of gold was dropped so market was reacting to other market conditions too that had nothing to do with fraud You have to disentangle Called an event study Limited by statute to the price at which they were offered to public (OSA s.130(9)) In particular, damages are calculated based on the difference between the price paid for the shares and their value once the misrep is disclosed o (2) Rescission. Voids the contract and attempts to place the parties in the position they were in before the contract had been reformed [Right to give shares back and money back] powerful remedy Claims bought within 180 days of finding out there was misstatement Limitation Period OSA, s. 138. o 3 year from financing o Or 180 days from day you find out about misrep

Defences One of the primary distinctions between common law right of action for misrep and stat civil liability provisions is the existence in the statute of a host of defences against claims of misrep in the statute The legislation seeks to balance investor remedies with allowing good faith transactions that violate statutory provisions Defences are broad and must be read in the light of recent decisions like YBM and Danier (1) Depreciation not caused by the misrepresentation; (2) Party had knowledge of the misrepresentation; OSA s.130(2) only defence available to issuer! (3) Director had no knowledge of the misrepresentation; OSA s.130(3)(a) o Policy rationale is that Ds who are unaware of the filing of a doc containing a misrep should not be penalized for it, but this raises questions about the extent of investigation that one must undertake to become aware of filing activity or intentions (4) Director withdrew consent and gave reasonable general notice of such withdrawal; OSA s.130(3)(b) o Withdrawal of consent must occur after the issue of a receipt for the prospectus and before the purchaser of securities by the issuer o As soon as the D becomes aware of the misrep o D must prove reasonable notice of withdrawal (5) Reliance on experts opinion; OSA s.130(3)(c) o D must prove he or she had reasonable grounds to believe and did believe there was a misrep or an inaccurate misrep of the experts report (6) Experts defence; o Expert must prove that he or she had reasonable grounds to believe and did not believe that the impugned part of the prospectus was a fair rep of the opinion or report (7) Due diligence defence. OSA 130(4) most imp defence available to primary and secondary market liability o Available for misreps made in a prospectus or takeover bid doc o Available to experts as well in respect of their opinions and reports and for Ds in respect of other portions of the prospectus (non-expertised parts of the prospectus) o Under the legislation, a D is not liable unless he or she failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there has been no misrep o The legislation is ambiguously worded and also contains a stipulation that the D must not have believed there was a misrep o The onus of proof is not clear from the legislation bc it does not say it specifically rests with D (unlike many other defences which do state it explicitly) o The Danier case suggests that the onus is on the plaintiff to prove that the defendant did NOT act diligently o After Danier the question still remains as to whether the onus of proof rests with the P in other defences which do not stipulate the D bears the onus of proof o One would presume this (ARGUABLE) but we wont know for sure until it is litigated o POLICY: isnt it better to reverse the onus to the defendant bc they are in the best position to have evidence regarding whether a reasonable investigation was undertaken o Corporation In order for me to show due diligence defence in financial statement is I have to prove I had internal control and mechanisms at same level of similar sized public co, to avoid that happening involves

o o

96 integrity of financial info, control who has access, need safeguards and procedures as to how that info is kept, who reviews it; certifications from accounting people in house Now the info gets into financial statements, audit committee (independent Ds) needs to review it before it is put out, ask hard questions, met with CEO, accounting ppl and outside auditors to satisfy themselves that financial statements is as accurate as possible If co puts out misleading statement, after all of that, they have a defence Because it is strict liability offence NOT absolute liability Directors I am outside, independent D, I dont work for co, I just show up for Board meetings 4 times a year, I am not on audit committee I am outside D, I knew all these steps were being taken We had good audit committee and they did their job When co gets prosecuted, co can plead guilty in exchange for regulator dropping case for director 3 groups (1) Co and insiders i.e. CEO who work for co (tend to fall together) same defence (2) Outside directors actively involved i.e. audit committee (halfway house between inside Ds) (3) Outside Ds NOT on audit committee Almost always co and inside Ds settle, try to get audit committee better deal or acquittal and you fight really hard for outside Ds not directly involved Need different counsel to represent effectively Escott v BarChris: US case that was our leading case in reasonableness in the case of these defences but then YBM shifted it YBM Magnex International Inc. The actions of the Ds and the info they possessed were clearly relevant in leading to successful reliance on the due diligence defence in certain cases as to avoid being sanctioned by the OSC This decision seems to suggest that individuals in positions of responsibility such as a special committee or the board may not always need to make inquiries about potential omissions or misreps Rather in certain cases members can rely on the info given to them YBM illustrates a mix of subjective and objective tests (whereas BarChris was just objective) Some Ds, the Commission held they ought to have known better While for others, the commission analyzed the knowledge and actions of each individual so as to determine whether he qualified under the defence at issue the variation in treatment of the various individuals in this case is conspicuous with little apparent consistency in the tests applied Due diligence defence is available either in context of civil action under s.130 or defence to charges under s.122 (quasi-criminal) S.127 though contains the public interest remedy, and so OSC concludes it might still hold that an order under s.127 is warranted even where the parties have met their due diligence standards The role of lawyers (see Wilder v. OSC, 2001 CanLII 24072 (ON CA)).

Secondary Market Liability (relatively new) Once shares are traded, liability requirements go down but still real and significant In after market, we are talking about failure to state facts which are necessary to be stated in order to not mislead the market Not a standard of close to perfection like in prospectus It is standard more based on materiality and informational needs of secondary market for shares already traded Most of security litigation in US is secondary market liability Yet only in 2005 we brought in secondary market liability in Cdn marketplace This was a big controversy bc a vast majority of all securities trades occurred in the secondary market The Allen Committee Report, March 1997; Part XXIII.1 (ss. 138.1- 138.14) of the OSA (in force Dec. 31, 2005); 25 cases under the secondary market liability since 2005 (none proceeded to trial yet). Part XXIII.1 of the OSA ON adopted statutory amendments that were largely in response to the collapse of Enron and the waning investor confidence in capital markets The stat amendments gave investors in the secondary market to sue issuers, Os, Ds, experts such as accountants, lawyers, geologists and engineers for making public material misreps, written or oral, about the co or for failing to comply with continuous disclosure requirements (go to 138.3(1) to see who you can sue exactly) Definitions s. 138.1;

97 Distinction between core documents and non core refer to act (diff for Ds, Os, etc) Non core is press releases, statements at annual meeting, etc not the same reliability of core documents For officers of the issuer, core docs include a prospectus, takeover bid or issuer bid circular, Ds circular, rights offering circular, the AIF, MD&A and annual financial statements o For Os who are NOT Ds, core doc is all of those as well as MCRs and interim financial statements Application s. 138.2; Liability for Secondary Market Disclosure - s.138.3 o Creates a right of action for damages for any person or company acquiring or disposing of an issuer's securities during which time the misrepresentation or material non-disclosure (omission)went uncorrected; o Deemed reliance! Under new rules, CL requirement of proving reliance need not be proven which ensures accountability Touchstone of liability is whether the misreps are made knowingly or not, rather than whether investors relied on them For misreps made unknowingly, liability is capped and is proportionate; for misreps made knowingly, liability is not capped and is joint and several Burden of Proof s.138.4: o If misrep in non-core and public oral statements, along with 138.3, except for expert, must also prove: (1) (a) knew, at the time that the document was released or public oral statement was made, that the document or public oral statement contained the misrepresentation; (b) at or before the time that the document was released or public oral statement was made, deliberately avoided acquiring knowledge that the document or public oral statement contained the misrepresentation; or (c) was, through action or failure to act, guilty of gross misconduct in connection with the release of the document or the making of the public oral statement that contained the misrepresentation o Failures to Make Timely Disclosure. (2) (a) knew, at the time that the failure to make timely disclosure first occurred, of the change and that the change was a material change; (b) at the time or before the failure to make timely disclosure first occurred, deliberately avoided acquiring knowledge of the change or that the change was a material change; or (c) was, through action or failure to act, guilty of gross misconduct in connection with the failure to make timely disclosure Defences s.138.4 (similar but not the same from primary, due diligence is most imp again) o Plaintiff's Knowledge; o Due Diligence Defence; o Confidential Disclosure; o Forward-looking Information Safe-Harbour; o Liability of Experts for Misrepresentations; o Lack of Knowledge of Release of a Document; o Reliance on Derivative Information; and o Corrective Action. Damages o Statutory formula s. 138.5; o Proportionate Liability s.138.6; In securities, proportionate liability and their share is set by court based on their level of responsibility (not joint and several) o Limits on Damages s. 138.7 and definitions s. 138.1. We have caps, limits on liability or damages Ie. If you are D or O of public co and you get sued, the cap on your liability is 25k or amount you made from that co in prior year (25k is a joke though and there is D insurance anyway) In Canada, very common fine against D gets paid for by the co (indemnity) That is left pocket right pocket problem If you sold shares though, you no longer cares what happens to co If it is other ppls money then you go get benefit i.e. auditor, insurance policy from D Taking money from corp is NOT benefit for shh bc they are paying themselves for actions of others If D wants co to indemnify them, shh will be upset bc paid for Ds legal fees, cos liability and now Ds Procedural Matters o Judicial Leave to Proceed s. 138.8: Silver v. Imax, 2009: the first proceeding to be brought under Part XXIII.1; [Furthest along] Test o (1) the action is being brought in good faith; and o o o

o o o o o o

Imax issued a press release saying it had completed a record of 14 installations of 3Dtheatre systems in the 4th quarter of 2005 o IMAX reported its forth quarter results in its annual financial statements in March 2006 and issued a press release on earnings and revenue o In August 2006, another press release that says the co is in process of responding to informal SEC inquiry regarding the timing of its revenue recognition and its use of the multiple element arrangement accounting to recognize revenue on theatre systems not yet open up including theatres where the 3D system had not even been installed o The next day, share price dropped by 40% o Ps suing for secondary market misrep o Ps alleged that Imax Corporation's financial results did not comply with Canadian generally accepted accounting principles and were materially false and misleading; Issue: Will leave be granted? Yes; motion for leave to proceed with the statutory cause of action was granted in part; action concurrently certified as a class proceeding Notice requirement s. 138.9; Restrictions on discontinuation and court approval of settlements s. 138.10; Costs to the successful party s. 138.11; Commissions intervention - s. 138.12; Common law rights are preserved s. 138.13; Limitation period s. 138.14. (start action, meaning get court approval BEFORE the 3 yrs is done) number of cases dismissed bc application for court approval made but not approved within 3 years (Timminico) so legislature may act to amend that to say as long as you make the request within the 3 years you are good

o Facts o

98 (2) there is a reasonable possibility that the action will be resolved at trial in favour of P (preliminary consideration of the merits of the action legislature agreed to do that on behalf of issuers bc they were worried about flood of unmerited cases but we have loser class regime, so if you lose, you have to pay so that is a very real deterrent) Court said it is a low threshold to meet

Common Law Common law still plays a role bc of limited liability caps; so Ps get around that by adding to the security act claims, common law claims To succeed at common law, have to show you relied on that statement to make investment decision and that is very difficult (how to show you relied on forecast so you made decision to buy?) Causes of action: o (1) Negligence and negligent misrepresentation; o (2) Fraud; o (3) Fraudulent misrepresentation or deceit; o (4) Conspiracy; and o (5) Breach of contract. o You can add a number of other common law claims that may be certifiable as class action so that if you can get them certified, you can blow thru caps even if you cannot prove fraud Defences o (1) The business judgment rule; Judges dont interfere with decision of Boards when they exercise biz judgement In order to rely on this defence as a board, have to show you made an honest and good faith effort to get it right In many senses, it is a disguised due diligence o (2) Due diligence and reliance on advisors. Remedies: Damages; Injunctions. Carom v. Bre-X Minerals Ltd. (1998), 41 O.R. o Ps wanted to plea the "fraud-on-the-market theory; o Motion dismissed because in Canada, both fraudulent and negligent misrepresentations require actual reliance.(no deemed reliance bc you are using common law) o Joe argued Bre-X by its nature was a co in its entirety was a misrep argued we dont have to prove reliance because everyone relied on that fact. If they told truth that Bre-X is fraud, who would have invested? No one o So they attempted to get around that argument; they lost for a bunch of technical reasons o Side note: Todays Globe and Mail article: Bre-X saga staggers to an end but its mystery stands Dismisses the Trustees action against few remaining Bre-X people Deloite spent a lot of money on professionals and ran out of money

99 **therefore diff for common law and statute offences and defences is that common law has a larger range of offences but you have to prove reliance whereas in statute you dont have to prove reliance - it is deemed reliance. Also in statute, you just get rescission or damages (there is a cap) whereas in common law there isn t. Also more defences for statutory liability. The American Experience The Fraud-on-the-Market Theory; General prohibition against market fraud: o Section 10(b) of the Securities Exchange Act of 1934; and o Rule 10b-5 of the Securities and Exchange Commission. Extraterritorial jurisdiction: Morrison v. National Australia Bank Ltd., 130 S.Ct. 2869 (2010).

CRIMINAL AND QUASI-CRIMINAL LIABILITY; INSIDER TRADING

Criminal Prosecutions [underdeveloped in Canada] Federal prosecution for violation of Securities Act, Not a prominent feature of securities law but there a number of provisions dealing with securities law infractions i.e. prohibition on insider trading has recently been added 2 key elements of crim liability are proof beyond reasonable doubt and mens rea/ culpability (different levels of knowledge of wrongdoing) Various Criminal Code provisions E.g., ss. 380, 382, 382.1, 383, 384 and 400. S.380(1) makes it an indictable offence to by deceit, falsehood or other fraudulent means defraud the public or any person of property, money, or valuable security or any service where the subject matter exceeds $5000 S.380(2) Fraud affecting public market: creates the offence of affecting the public market price of stocks, shares, merchandise of anything that is offered for sale to the public with intent to defraud S.382 Fraudulent manipulation of stock exchange transaction: makes it an offence to fraudulently manipulate stock exchange transactions by engaging in various strategies, such as matched orders and wash trading to create a false or misleading appearance of public trading S.382.1 Prohibited insider trading: refers to trading in securities of issuers rather than RIs S.383: Gaming in stocks or merchandise S.384: Broker reducing stock by selling for his own account S.400 False prospectus: indicates that anyone who makes, circulates or publishes a prospectusthat he knows is false in a material particular, with intent to induce someone to become a shh or partner or to deceive or defraud members, shh or credits of a co is guilty of an indictable offence Bill C-13 increased the maximum term of imprisonment for those convicted of some of the indictable offences from 10 to 14 years Recent case of the use of the CC to prosecute a securities-related matter was Drabinsky 2009 o charges under ss. 380(1)(a)&(b) of the Criminal Code. Penalties- Imprisonment o E.g., Criminal Code, s. 400 (imprisonment for up to 10 years for publishing false prospectus); o R. v. Scallen (1974), 15 C.C.C. (2d) 441 (B.C.C.A.) o 10 years maximum for insider trading o 14 years maximum and 2 years minimum (if over $1M) for fraud R. v. Drabinsky, 2009 charges under ss. 380(1)(a)&(b) of the Criminal Code for large-scale commercial fraud Quasi-Criminal Prosecutions Quasi-crim is provincial prosecution for violation of Securities Act, while crim is federal prosecution Same results, different legislation For the most part, the primary form of criminal prosecution is quasi-criminal Govt decided to have a distinction between the two because they wanted to have a halfway house- wanted to have the ability to send people to jail in cases involving public welfare or regulatory matters without making prosecutions as difficult as they are in full criminal prosecutions Quasi-criminal is sometimes called strict liability bc no mens rea is required but still require beyond reasonable doubt Show actus reus occurred, then onus shifts to accused to prove even though it took place, they performed reasonable due diligence (in pure criminal, the prosecutor has to prove everything) The idea is that the accused is in best position to mount defence and establish the absence of negligence or recklessness

100 When it comes to regulatory matters, it is not unfair or unduly burdensome to tell corp to mount defence Problem is what happens if the co goes bankrupt and isnt there to mount defence? Is it fair to just have Felderoff of BreX mount a defence? o They made argument that it violates his s.7 and 11 rights to be put into similar position of corp o But for Felderoff the rule was diff in order to convict him to be a party to misleading advertising, Crown had to prove he knew the advertising was false (mens rea) o Although underlying offence was strict liability, so normally mens rea is NOT required, the prosecution in this case had to proceeds as if they needed full mens rea because the corporation did not have the ability to defend itself- the consequence was to the individual if convicted Offences created by s. 122 of the OSA; o breach of Ontario securities law Cases where someone can be sent to jail for breach of ON securities law Does not form part of the public interest o Section 126.1 of the OSA Fraud and Market Manipulation; o E.g., R. v. Fingold (1996), 19 OSCB 5301; R. v. Felderhof, 2007 ONCJ 345 (CanLII). Penalties o OSA, s. 122 (up to $5 million fine or imprisonment for up to 5 years less a day or both); o These provisions intended to operate as a deterrent to breaching substantive requirements of securities law o Many provincial securities regulators have tended not to use prosecution as an enforcement tool, preferring to use their admin powers instead because of the higher criminal burden or proof to be sustained in a quasi-crim proceeding and the greater procedural and evidentiary protections accorded to accuseds in these situations o E.g., Alberta Securities Commission v. Brost, 2008 ABCA 326. Defences o Due diligence defence is available under s. 122 of the OSA (re: ss. 122(1)(a) and (b) but not (c)) 122. (1) Every person or company that, o (a) makes a statement in any material, evidence or information submitted to the Commission, a Director, any person acting under the authority of the Commission or the Executive Director or any person appointed to make an investigation or examination under this Act that, in a material respect and at the time and in the light of the circumstances under which it is made, is misleading or untrue or does not state a fact that is required to be stated or that is necessary to make the statement not misleading; o (b) makes a statement in any application, release, report, preliminary prospectus, prospectus, return, financial statement, information circular, take-over bid circular, issuer bid circular or other document required to be filed or furnished under Ontario securities law that, in a material respect and at the time and in the light of the circumstances under which it is made, is misleading or untrue or does not state a fact that is required to be stated or that is necessary to make the statement not misleading; or o (c) contravenes Ontario securities law, o is guilty of an offence and on conviction is liable to a fine of not more than $5 million or to imprisonment for a term of not more than five years less a day, or to both

R. v. Fingold (1996), 19 OSCB 5301; Facts Significant market participant/ D of many cos He say on the board of Cineplex Drabinsky testified that he said to Fingold in a meeting that Cineplex was going to receive bad results Fingold sold his shares before announcement of bad results Stock went down 30% when announcement came out Fingold avoided losses of 4-5M He raised mistake of fact defence by saying I had honest reasonable belief that what I was being told wasnt material; when I left board meeting, I didnt think stock would react by this announcement Decision: He was acquitted by court on evidence Ratio: Court said in an insider trading prosecution, if you have honest and reasonable belief and that assessment has to be done in objective way, then you can be acquitted not withstanding stock acted in a way that it was material R. v. Felderhof, 2007 ONCJ 345 (CanLII). Who is John Felderhof? A tough field geologist; known for earlier discovery successes in Africa; Hired by Bre-X in May 1993 as General Manager in Charge of Indonesian Operations; December 1993, strikes gold at Busang II.

101 Salting is adding gold to rock When Free Port took over, they drilled own holds and tested results on own lab and those results were fundamentally diff than Bre-X When Felderhof was receiving an award, and Free Port told them all their results were fake, he told De Guzman to go back to Busang to straighten ppl out bc they dont know what they are talking about By end of March, FBI, SEC and US justice dept involved, Interpol Involved, RCMP, OSC, BSSC, AG in ON, AG in BC all involved, national govt of Indonesia and Felderhof was facing prison in many jurisdiction He was eager to take lie detecting test and he passed with flying colours in Montreal The lie detector test was not admissible in court but Joe was able to influence the investigators Felderhof ended up only being charged in ON not for a crim offence, but just 8 counts of violating the OSCs rule

David Walsh Former Stockbroker; Incorporates Bre-X Minerals in May 1989; [Chairman and CEO of Bre-X throughout] Within few months of case unraveling, he went to the Bahamas where he was living where he died of brain aneurism Felderhof and Walsh were the 2 senior officials of Bre-X Michael De Guzman Filipino-born geologist; (Joes personal belief is he is living in Philippines but reports from Indonesia say he jumped out of helicopter) Suicide? Murder? Or another scam? Joe believes he was well aware of difficulties of the property Long-time colleague of John Felderhof; Headed up Busang site for Bre-X as companys Exploration Manager; Cashed in his stock options and became a millionaire many times over. Timeline October 1995 Bre-X announces large quantities of gold being discovered on the site May 1996 Bre-X stock tops $280 per share March 1997 Site is found to contain no significant amount of gold May 1997 Bre-X is delisted from the TSX & co goes bankrupt May 1999 OSC lays charges against Felderhof under the ON Securities Act o 4 primary charges of insider trading in relation to the allegation that he traded his securities, knowing about Baracks effort to steal the property away and knowing about the work being done in Indonesia to try to destabilize Bre-X thus he should have known Bre-X was going to lose a substantial portion of the property (he and his wife profited 80M from profit of the sales) o 4 derivative charges of authorizing, permitting or acquiescing in Bre-Xs issuance of false or misleading press releases (The press releases that Bre-X put out in 1996 about the gold were false/ misleading ) This was where Joe argued that they need to prove full mens rea April 2001 After 70 days of trial, OSC sought to remove J Hryn and start the trial over again before another judge October 2002 OSCs application is rejected by J Archie Campbell of ON Sup Ct June 2003 An appeal of J Campbells decision by the OSC is dismissed by the CA so the hearing resumes before J Hryn July 2007 Felderhof is found not guilty and acquitted by J Hryn on all 8 charges Side notes: Joe says there are real gold deposits there though although it may be a lot but a co would probably not go back because it has been so tained now Geologists spend their whole lives looking or one deposit and most of them dont, Felderhof found not only copper property mentioned, but he was co-discoverer of another part of Indonesia as well So when he came to work at Bre-X he had a good reputation and now Bre-X has ruined his life Insider Trading Felderhofs 4 insider charges [dismissed] Prove 3 things: (1) Person bought or sold securities: Trading includes giving trading instructions, which was the issue in Felderhofs case bc many of his instructions came from his wife so they had to prove which ones were Felderhofs and which one were his wifes (2) Trading in special relationship: Felderhof was a D and an O (insider in purest sense) (3) With knowledge of material fact or material change *this is where the fight was o Someone in Bre-X was claiming title to the Bre-X property and Joe got someone to testify that this person had

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102 no credibility, so although he was making those complaints, they would never have attraction in Indonesia Bre-X did not disclose lawsuit to shhs- when is a complaint or lawsuit material? Case law says if lawsuit is by regulator or a govt agency by defn that has to be taken as credible law suit (it meets standard of qualitative materiality), then only issue is whether it is quantitatively material So if charges and max. fine is $100 it is not quantitatively material so no obligation to disclose but if charges co where max fine is 10M, then yes obligation to disclose Or where there is significant issue where credibility of management is questioned, that is quantitatively and qualitatively considered as well What if someone else starts lawsuit? Corp has to look at merits of litigation and has to make materiality assessment. Is this a credible lawsuit? Is it going to be imp for shh to know about itor is it silly lawsuit that no one will pay attention to? The other side got the Globe to publish an article about the lawsuit, so Dr.Geneva looked at the way the market reacted to the Globe story BUT the same day the story ran, other things were also happening in the marketplace (4-5 Bre-X stories on that day, some good and some not so good), other stories about price of gold, other stories about Indonesian politics When you look at material fact or change, you have to isolate that material fact bc law talks about that fact standing alone & Geneva failed to isolate that fact from all the other facts so court rejected her testimony So bc court ultimately concluded each one of the 8 particulars had not been identified as being material, they were NOT material and therefore court dismisses the 4 primary insider trading charges that would have sent him to jail and required him to pay all his profits back

Felderhofs 4 charges on misleading/false press releases [dismissed] First argument Joe tried was press releases were not false or untrue because they are like financial forecasts in that they everything you do in a goldmine is an estimate and not a guarantee When you are looking at estimates, requirement is not to look at whether there was 44 ounces, look at methodology followed to come up to that estimate (Kerr v Danier, bc it is future-oriented, assess it in circumstances estimates were prepared) If co can show you that was reasonable estimate and they exercised reasonable care, then there is no defence Court said NO that is an element of due diligence defence So then Joe mounted the first major successful due diligence defence in Cdn regulatory history in securities He called sig number of witnesses to prove the co had followed reasonable procedures and took reasonable steps to try to protect safety of project Due diligence defence: procedures, protocols and processes co has in place to deal with every day normal events Maybe Bre-Xs practices and procedures would have been ok except there are 18 red flags So Joes job was to knock down each one of those 18 red flags, which he did and to call testimony as to whether many of those red flags were not red [300 pgs of judgement are devoted to lengthy discussion of each red flag] Therefore the judge acquitted Felderhof on last 4 charges as well This case changed significantly with the way commission does disclosure- now they have much more wholesome approach to meeting the Stinchcombe disclosure Grmovsek, Re, 2009 CarswellOnt 6520: Alleged insider trading over the course of 14 years; The scheme involved Cornblum (practising lawyer) getting information on upcoming mergers, acquisitions and passing it on to Grmovsek (law school friend). Lawyer from Osgoode; Guilty plea and now out of custody Within the last 5-6 years that we have had insider trading provisions, there has been only one successful conviction under those provisions (this case)

REGISTRATION REQUIREMENTS
Introduction Huge change in theory of registration since 1960s with advent of modern securities legislation in Canada Change in philosophy (how we regulate securities issuances) as a result of scandal The US has had their modern securities law since the 1930s but Canada got its in the 1960s because of the Windfall Mines incident Windfall Mines (1964) prospectus review for misrepresentation o SO finally in 1967, securities regulators started focusing on prospectus docs describing affairs and omissions

103 o It was entirely info giving to individuals, but then there were more scandals Various scandals (1990s) heightened registrant regulation o Regulatory agencies became not proactive BUT there was an ENORMOUS shift in regulation and resources to monitor that behaviour

Regulatory Agencies (A) Canadian Securities Administrators (CSA) Ontario Securities Commission (OSA) (B) Investment Industry Regulatory Agency of Canada (IIROC) (self-regulated) o Need for SROs to do day to day stuff; enforcement of anything involving dealers (C) Mutual Fund Dealers Association (MFDA) (self-regulated) Overview of registration regime Impt changes on WHO needs to register and what types of activities to regulate Requirement to register: any person or company that trades in a security or acts as an underwriter or advisor (ss.25(1)(a) and (c) of Securities Act (Ontario)) - all words in parentheses are defined terms in the Securities Act (Ontario). New requirement to register subject to business trigger rule trading, underwriting or advising conducted as a business triggers requirement to register. CP contains some assistance with respect to the business trigger. o Whereas advising always had the business trigger, trading was recently added in 2010 o In 2010 decided if you are in the business of trading securities, even if you are not being compensated directly, and even if you are not taking steps in furtherance of a trade, they still want you to register o Advising used to be narrow but now Companion Policy talks about how it includes much more than we thought o From stikemans: With the implementation of 31-103 the adviser and dealer registration requirements will be triggered by being in the business of advising or trading in securities as principal or agent. While the business trigger for trading activities is a change to the existing rules in most Canadian jurisdictions, the current trigger for the adviser registration under the local legislation is generally being the business of advising others with respect to investing in securities Guidance on business trigger from Companion Policy Factors considered in determining whether an individual or firm is trading or advising in securities for a business purpose and thus subject to the dealer or adviser registration requirement (not a complete list; just guidance) o (a) Engaging in activities similar to a registrant o (b) Intermediating trades or acting as a market maker o (c) Directly or indirectly carrying on the activity with repetition, regularity or continuity o (d) Being, or expecting to be, remunerated or compensated o (e) Directly or indirectly soliciting Concurrent repeal of registration exemptions in NI 45-106 It used to be that if the person had to get permission to invest from you, they were the dealer but if they had the discretion to invest, they were the advisor But they decided that the bright line test is too artificial so the new regime is attempt to moderate the standard of care Advisor regime was fiduciary, but dealer was not seen as fiduciary because there was a sophisticated client advising you Now we have the duty to look at the reliance and sophistication of the two parties as to who should bear the loss client or intermediary? But still the difference is as follows: o Adviser ADVISES ppl I have 100k, I want u to invest it, u have full discretion to do whatever u want with it o So adviser manages other ppl money or give ppl advice on how to manage money o Dealer is like broker so if want to buy shares on tsx, go to dealer to buy shares o So dealer trades securities (buys and sells securities on behalf of clients) o Adviser advises on ppl how to invest money or will invest money for them o Big investment houses are both i.e. RBC is dealer and adviser o Adviser will put money with trustee as opposed to it being in their own account Categories of Licencing: (1) DEALERS traded securities (7.1) Categories of Dealers NI 31-103 (7.1) (1) new regime creates 5 categories but a, b and d are the ones people register in (a) Investment Dealer [IIROC deals with it]

104 o Can trade any type of financial instrument i.e. equity, debt, exempt, retail etc., thus the rules are detailed (b) Mutual Fund Dealer [Form of restricted license] o 30-40k MF dealers retailers in Canada o Lots of issues with clients: line up is long for ppl who want to sue MF dealer so regulating them is NOT a fun job (difficult to see what happens after the fact) (c) Scholarship plan dealer *not going to talk about (d) Exempt market dealer o Universal registration; everyone in the business of trading in the exempt market has to register bc after a 20 yr experience, it was determined that alarming stuff outside the prospectus occurs so that is why we have a new category of exempt market dealer: o (i) trading a security that is distributed under an exemption from prospectus requirement o (ii) trading a security that if the trade was a distribution, itd be exempt from prospectus requirement o (iii) receive an order from a client to sell a security that was acquired in situations (i) or (ii) o (iv) act as an underwriter in respect of a distribution exempt from prospectus requirement (e) Restricted dealer*not going to talk about

Dealer Exemptions (1) If another regulatory regime exists that deals with an asset class more specifically e.g. PPSA (2) Existing investor relationship, e.g. DRIPs (Dividend Reinvestment Plans) o Registrant has to determine they know the client to determine appropriate investments for them (KYC-Know Your Client) and suitability (to know the instruments and thus what is best for them) (3) Low risk securities i.e. can purchase from the bank teller like govt bonds (4) Trades through or to a registered dealer o I.e. discount broker dont need to KYC and suitability bc you are exercising trades (5) Trades by portfolio manager of in-house units to managed accounts o Trade on full discretion because they are professionals (6) Non-resident dealers but with limitations (refer to 8.18) o Highly rewarded area; financial services industry o Encouraging big intal groups who have the skill sets not available in Canada while not displacing Cdn salaries (2) ADVISERS advised on securities (7.2) Categories of Advisors 7.2 (1) [used to be 4 but now reduced to 2] (a) Portfolio manager can do anything (b) Restricted portfolio manager [License intended to deal with special circumstances i.e. experience in term types of investments but doesnt translate to all types of securities i.e. can only trade or advise on mortgages ] Advisor Exemptions (1) IIROC discretionary advisors designated IIROC members provide discretionary advice in accordance with bylaws o Same regime under IIROC so they are already registered with IIROC, thus no need to register here o Can deal with brokers in two ways: discretionary advice OR feed-based which is fully discretionary so need to get instruction/ permission [If you dont have full discretionary must call client to ask them] (2) Non-discretionary advice (new)- where such advice is necessary to support trading activities [Primarily a trading role] (3) Generic advice (new) newsletters, etc. [1990 decision (Canadian Share Owners) had to register before] (4) International advisors (new) (replaces international advisor category in Ontario) but with limitations permitted clients only, and cannot advise in Canada on Canadian securities ( 8.26) o If foreign advisor gives advice to Ontarian, ON act used to apply but bc we want to encourage asset strategies not available in ON, we had to change it o Basically the adviser registration requirement doesnt apply to a person or co acting as an advisor to a permitted client if the adviser does not advise in Canada on Cdn securities but there are a bunch of requirements under 8.26(4) before this exemption applies such as (a) advisers head office is in a foreign jurisdiction, etc. o From stikemans: the intro of a new intal advisor permits a non-Cdn advisor registered or operating on exemption from registration under the securities legislation of its home jurisdiction to advise permitted clients in Canada on foreign securities subject to certain conditions (5) Permitted clients subset of accredited investors registrants do not have to comply with certain conduct requirements if clients waive same [Certain types of institutional investors] o Under s.13.3, permitted clients may waive their right to have a registrant determine that a trade is suitable. In order to rely on this exemption, the registrant must determine that a client is a permitted client at the time the

105 client waives their right to suitability. Under s.13.13, 14.2 and 14.4, registrants do not have to provide certain disclosures to permitted clients. In order to rely on these exemptions, registrants must determine that a client is a permitted client at the time the client opens an account (6) Mobility registrants can continue to deal with up to five (individual registrants) or ten (firm registrants) clients that move to jurisdictions in which registrant is not registered

(3) INVESTMENT FUND MANAGER (7.3) *recent category; added 2 years ago bc structure of the product market exploded * needed to ensure oversight of these participants New category that is unique to Canada (dont have it in the US) Permitted to direct the business, affairs and operations of an investment fund No business trigger analysis - any person or company performing investment fund manager services must register Key test is basically are we dealing with an Investment Fund Manager? Do you have the ability to control the direction or are you passive? Have to be involved strategically in the asset class [Most hedge funds would have to register here but are exempt in US] Initial Registration Requirements Harmonize, streamline and modernize registration requirements across Canada so it is simpler coast-to coast (until the 80s it was not harmonized so OSC was regulating so differently than BC) Create a more efficient business environment for regulated individuals and firms Reduction in the regulatory burden for affected individuals and firms Benefit investors through more effective market regulation Madoff rised 40B and didnt invest any of it, then the SEC was approached by a group trying to replicate it (2011 whistleblower), so testing for problems that arose in Madoff; want to ensure that they are good people, knowledgeable and accountable to regulatory agencies Observations Firms may register in more than one category (in order to achieve your business objectives) Capitalization and insurance requirements are not cumulative (just need to meet higher requirements) Most stringent proficiency requirements apply (similar to above) Register in jurisdictions where advice is given AND where advisor is resident Individual Categories In order to sustain registration, need first 2 if you are a dealer or the first 3 if you are an advisor (1) Ultimate Designated Person o The senior person who is next in line in case there is a problem with the dealer/ advisor o Promotes compliance and oversees effectiveness of compliance system o CEO, sole proprietor or equivalent; No proficiency requirements (2) Chief Compliance Officer o Operating officer, monitors and oversees compliance system; establishes and updates policies and procedures; reporting function to ensure following procedure of policies o Must meet proficiency requirements [education AND experience] o Need edu i.e. lawyers, accountants, engineers and experience ( s.3 of 31-103) o Difference experience required if you are a dealer or advisor i.e. for dealer the focus is on operations system trading o The OSC views registration as a priv not a right so it is a big deal if auditor discovers CCO has no edu/experience (3) Dealing and advising representative [Senior person who oversees all advice] o Broadest category of advisor, may advise in respect of any security on which the individual's firm is permitted to advise o There is a rigorous edu requirement: CFA charter and 12 months relevant investment management experience in the 36 month period before registration, or CIM (Canadian Investment Manager) designation and 48 months of relevant investment management experience, 12 of which was in the 36 month period before registration o The major difference between us and the US is that they dont have proficiency requirements so they didnt know how to deal with sophisticated instruments, but recently they are slowly trying to import Cdn requirement for proficiency o Canada is also doing field audits it slowly turning everything upside down and sending you a letter (4) Associate advising representative

106 o o o Intended to be younger people who have edu (either CFA or CIM) but not enough experience Essentially, apprentice advisor or one who does not wish to become advisor representative May advise in respect of a security that the individuals firm is permitted to advise on, if the advice has been approved by an advising representative

Observations Can be registered in more than one category Exam based proficiency opposed to course based focus- CSA publishes additional exams itll accept in various categories S.3 passed within 3 years but dont need to refresh if still in the industry Look-Through Analysis ...has been eliminated from stikemans: the elimination of the look through analysis of certain CSA members w respect to the adviser registration requirement for non-resident advisors to foreign investment funds o OSC has historically taken the view that advice to an investment fund flows through to the investors in the fund. The effect of this interpretation has been to require that non-Cdn advisers providing investment advice to an investment fund located outside Canada be registered or exempt from registration BUT in the Notice to 31103, the CSA have confirmed that this interpretation will be discontinued. As a result, non-Cdn advisers to investment funds established outside Canada which sell securities in a Canadian jurisdiction will no longer have to be registered as an adviser or rely on an adviser registration exemption in that jurisdiction it is a theory of what constitutes business advertising Registration required in jurisdiction of residence and in jurisdiction where advice is given o See if exemptions available in either 8.18 or 8.26 of 31-103 Initial Registration Required Filings *registration in the 30s, deal with 30 and 80s mostly in practice (1) Form 31-103F6 [Info document that gives all info of corp/ trust/ entity registering] (2) Form 31-103F4 (3) Audited Financial Statements (4) Confirmation of Insurance (5) Business Plan [What you propose to do within the next 3-5 years, priorities where to get the money] (6) Policies & Procedures Manual Most impt o Required to develop document that identifies policies that will allow you to meet compliance o Take it seriously but dont say something that you actually arent going to do o Organic document (evolves as the biz evolves) (7) Formation Documents Ongoing Requirements Annual Renewal (December 1st) Annual Audited Financial Statements (within 90 days of financial year end) Calculation of Excess Working Capital (within 90 days of financial year end) Audits/ Enforcement Action [OSC dedicates many resources to this now so be proactive and comply!] rate registrant as low, moderate or high risk I.e. hedge fund operators (derivatives, alternates etc) = high risk field audit within 18 months of registration {high risk gets it within 6 mos so be prepared to be held accountable immediately!] deficiency lette: In every case pretty much issued a deficiency letter (can be long and thus copied to SWAT team) or can be small and not copied, and instead just have 1-2 pages of non serious things OSC Enforcement "SWAT" Team: accountants, lawyers will tear a part your business from an info basis & seek to have Terms and Conditions for continuance of licensing

TAKEOVER BIDS AND SPECIAL TRANSACTIONS

Introduction to Take-over Bids An acquiror making an offer to acquire some (partial bid) OR all of the outstanding shares of a target company. Under securities legislation, such an offer is a takeover if it would on its own or in combination with shares already held by the bidder, result in the bidder acquiring 20% or more of the targets shares The process is regulated under applicable securities and corporate laws need to have regard to the various provisions governing the conduct of the offeror, the target and its management.

107 More securities than corporate but often target cos are corps so must refer to corporate laws too particularly when looking at conduct of Ds If you had NO rules, incentive for buyers would be coercive- would want it done quickly, want shhs under max amount of pressure to decide so whole series of rules at securities law to reduce coercive practices May be the only way to acquire the target, particularly if the targets management is hostile. o

Takeover Bids Distinguishable From Other Forms of Control Transactions (1) Amalgamations; o In friendly transactions can arrange for an amalgamation o Under the corporate statute, if a co is amalgamated, it is a new co o Amalgamation docs can set out shh of pre-amalgamated co get shares of a certain # of the new co o Amalgamations mean change of control particularly when it is a CPC (2) Plans of arrangement re business combinations; o Way of affecting transaction that otherwise cannot be affected by the CBCA o Not possible to put every type of transaction in the CBCA so you can go to the court and have them bless your transaction if it is not listed [often used in friendly merger transactions] o The court will almost always require shh approval (3) Proxy battles: Dont really acquire shares so not really shh control change but shhs may change who they want on the Board so thats how they change control Consequences of changing shareholder identity o Replacement of existing management, potentially; [usually stated purpose is that management is not managing efficiently], which gives rise to defensive tactics; o Stakeholder debate. [BCE; change of control] Computation of time s.89(4) of OSA For the purposes of this Part, a period of days is to be computed as beginning on the day following the event that began the period and ending at 11:59 p.m. on the last day of the period if that day is a business day or at 11:59 p.m. on the next business day if the last day of the period does not fall on a business day *critical Take-over Bids in Canadian context: Friendly vs. Hostile Friendly: target management and the Board approve of bid and cooperate with bidder in selling the bid to target shhs o Cooperation issue; [management of both cooperate] o Diligence; Permit acquirer to perform diligence (acquirer might not know some of targets info bc management has to disclose only what is material); receive info otherwise not public o No shop used to be standard in friendly agreement, meaning cannot shop around for other deals but was replaced with go shop because of the Ds fiduciary duty to act in the BIOC So often target will urge to say find a better bid and if you cannot then we will go with ours and that way Ds can say to shh we did what we could to find the best deal o Break fee (receive and/or pay); (often part of agreement) If there is a better deal, may have to pay break fee but may go other way too- if you find better acquisition, you better pay us too o Greater structuring flexibility; o Actions to thwart transaction (regulatory, court, suasion). - Not going to face regulatory battles Hostile: target management and/ or the Board do not invite the bid and are not generally in favour of the bid o No negotiation; o May be faster; o Clean house; [if hostility, not going to be able to work with management of target co so they are gone] o Less potential for selective disclosure Because there is NO disclosure Other Considerations Factors affecting decision to make a take-over bid: o financing the transaction; [Bidder offers target shhs cash, shares or a combo of the two] Where shares are offered, target shhs are offered a per share ratio of the bidders shares in exchange for their shares in the target (paper financing) If cash, MUST have the cash on hand, cannot be conditional o tax implications; Ideally structure it so you get tax rollover treatment If consideration you give is cash, at least target shh have money to pay for the tax but if you offer them shares as consideration, they dont have the money to pay the tax and maybe they cannot even sell the

108 shares if no one wants them o support required; want to get at least 67% so that can move onto 2nd step and acquire the shares that were not tendered o regulatory issues (Competition Act, Investment Canada Act); I.e. Cdn heritage type of biz might have difficulty getting passed regulators o consequences of hostility of target. Outgoing management may get out a major client, might give quotes to the media that arent in favour of the transaction, influencing shhs not to tender, etc. May need second step transaction if not all shares are tend ered to the bid (66.7% vs. 90%) o Typically you want to own 100% of shares and to do that you usually need 2 steps o If you get 90% that tender to your bid, that permits you to get the other 10% without formality of a meeting o OR if you only acquire 67%, do 2nd step under MI61-101 which is you hold a meeting and do an amalgamation with wholly owned subsidiary; Shh of target at the meeting receive the same consideration as the shhs who tendered, but they do lose their shares o So you can have ppl vote against but if you reach 66.7%, then the other shh dont have a choice, Going private transaction MI61-101

Motivations for launching take-over (1) Replace inefficient management [often a stated objective] (2) Synergies [if same type of business, they think they can realize synergies by acquiring] (3) Desire to increase market power/empire building [rather than increase business organically, if similar business, they can empire build thru takeover] (4) Undervaluation of shares bargain hunting [think shares are undervalued] (5) Others? [I.e. in biz of collecting; other motives relating to tax law etc] Regulatory objectives in relation to take-overs (1) The primary objective of the take-over bid provisions of Canadian securities legislation is the protection of the bona fide interests of the shareholders of the target company. (Equal treatment of, and provision of adequate information to, offeree issuer security holders [NP62-203 Take-over Bids and Issuer Bids]) o JUST shh of target so creditors, suppliers, customers, management, shhs of bidder are NOT protected o Shh of bidders shares are being diluted if more shares being offered to target o Alternatively, if acquirer gives cash to target, this may affect bidder shhs dividend o Seems legislator purposely limits the class of persons who are protected to encourage takeover bids (2) A secondary objective is to provide a regulatory framework within which take-over bids may proceed in an open and even-handed environment. [NP62-202 Take-over Bids Defensive Tactics] THUS a clear objective of takeover bid legislation in Canada is to encourage takeover bids bc they are good for the eco Firms run by inefficient managers lead to depressed stock prices that do not exhibit true value of the firm so a takeover bid that results in the replacement of inefficient managers will enable the firm to operate more efficiently overall *Policy reason for takeover rules: if someone wants control, they should pay premium for control & also as an investor, you want to know if someone is taking control (so thats why they came up with the 20% threshold) Series of Obligations that Govern the Bidders Behaviour [go under primary objective] (1) Equal Treatment [NO ONE should get collateral benefit] 1. Pro rata take up [Pre-Bid Integration Issues] o If bidder seeks to acquire less than 100% of outstanding shares of the target (PARTIAL BID), under s.97.2(1) OSA shhs of the targets are assured that the bidder will take up the shares on a pro rata basis so that the bidder purchases the same number of shares each shh tendered [replaces the first come first serve concept] 2. Identical consideration for all security holders (OSA s.97(1)) o Prohibition on collateral agreements (some kind of benefit) (s.97.1(1)) Collateral benefits include any consideration of greater value than that offered to the other holders See OSC Rule 62-504 s.4.1 for exception i.e. employment compensation arrangement, severance or other employment benefit (there are conditions) o If consideration increases later in the bid, shhs who tendered initially will not be deprived of the higher offer price, rather all shhs must receive the same offer price so no shh will be disadvtged by tendering early S.97(3) o Prevents bidder from making side deals with certain securitiesholders i.e. controlling shh who want a premium o If you buy shares of target co during 90 day period prior to commencement of the bid, in order to ensure you wont just try to buy it beforehand for a lower price, you must offer the highest price (93.2(1)(a)) and highest percentage (b) purchased from any one vendor [that price and % governs what you will get in takeover bid]

109 93.2 (1) If, within the period of 90 days immediately preceding a formal take-over bid, an offeror acquired beneficial ownership of securities of the class subject to the bid in a transaction not generally available on identical terms to holders of that class of securities, (a) the offeror shall offer, [highest price] (i) consideration for securities deposited under the bid at least equal to and in the same form as the highest consideration that was paid on a per security basis under any such prior transaction, or (ii) at least the cash equivalent of that consideration; and (b) the offeror shall offer to acquire under the bid that percentage of the securities of the class subject to the bid that is at least equal to the highest percentage that the number of securities acquired from a seller in any such prior transaction was of the total number of securities of that class beneficially owned by that seller at the time of that prior transaction. [highest percentage] Lock-up agreements (s.93.1(1)) are enforceable contractual agreement that you will tender if the offeror makes a takeover bid, so that the offeror can get an accurate idea of how many ppl are interested Kimber Committee stated that management of the target should have ample time to inform target shhs of its analysis of the bid and that target shh are given adequate info and sufficient time to form a reasoned judgement whether or not to tend to the bid; Downside is that increased burden on bidders and adds complexity which impede the economic efficiencies of the markets and impose direct costs on participants in the take-over bid process o

(2) Disclosure Underlying reasoning is that before shh can make a decision to tender they must have the info at their disposal to make an informed decision- disclosure ensures that shhs have full info about the bid and the bidder All shhs are entitled to receive the bid docs; even when commenced by ad, the bidder must deliver a bid circular to all shhs of the target after receiving a list of the target shhs (a) Offerors Circular Requirement to prepare and send circular (s.94.2(1)) Prescribed Format: OSC Rule 62-504FI To whom should bid be delivered? Filed with OSC and sent to: o all holders of the class of securities subject to the bid who are in Ontario [S.94] o offeree issuer s. 94.2(3)] Variation of terms of bid s.94.4(1)] (i.e. extension of period) OR material information S.94.3(1), then must: issue and file a news release and send notice to whom the takeover bid circular or issuer bid circular was required to be delivered to and whose securities were not taken up at the date of variation Certification of bid circular and changes required which give rise to civil liability Form 62-504F1, Item 26 o S.99 (a) (i) CEO or person that performs similar functions must certify (ii) CFO or person performing similar functions (iii) and 2 Ds who are not the CEO or CFO Civil liability [s.131(1) and (2)] if misrep in circular Issues re Circular in Canfor/Slocan Facts Canfor bid for all the shares of Slocan; Allegation by Slocan re adequacy of disclosure in circular. The target business was regulated by another act which had control requirement that said you must get consent of authorities to change control; He wants to acquire the co now but knows he will not get the consent right away Canfor was always going to issue securities not cash but they didnt want to issue shares in case they didnt get consent bc difficult to unwind those transactions so he proposed to issue deposit receipts (convertible securities) The terms were if Canfor receives approval, the deposit receipts can be converted for a specific amount but if no approval, then you receive the Slocan shares back Issue It was a hostile bid so Slocan challenged a number of things including: o (1) Disclosure in circular bid (common to allege inadequate disclosure in context of a hostile bid) Disclose you received legal opinion so you know that there is no change of control yet until you have confirmation from authorities, but you didnt adequately disclose that so ppl could be misled into thinking you already got approval and had control Also, upon receiving approval, might have conditions put on by authorities that will materially effect the bid but that is not disclosed o (2) Canfor didnt pay for the shares Decision (1) OSC agreed that there was not adequate disclosure but said this was cured by the fact that Canfor disclosed it in management disclosure (Courts generally wont stop transactions on technical deficiencies unless it is so egregious)

110 (2) Yes, deposit receipts were freely tradable and could have been traded on the exchange, so they were liquid and thus this constituted payment

(b) Directors Circular Once the bid as been commenced by either mailout of circular or by advertisement, target Board has obligation to prepare a Ds circular and deliver it to target shh recommending to either accept or reject the bid not later than 15 days after date of bid (OSA 95(1)); 62-504F3 (see Items 7,8) Failure to do this is a quasi-criminal offence or possibility of admin action if it contravenes the public interest ( OSA s.127) Need for recommendation: s.95(2) Either say we (a) recommend you tender your bid or we recommend you do not tender, or (b) can say we do not have a recommendation at this time but either way need to provide reasons If you say you do not have a recommendation at this time, you do have the obligation to follow up later Although ultimately, it is the shhs who choose in the end, idea behind a recommendation is management knows more than anyone (one school of thought is management knows the true value of the co, although another school of thought is that the market displays the true value) Early Warning Rules (part of disclosure) Legislation requires any person who acquires control over 10% of voting or equity securities of an issuer triggers the early warning requirements (OSA 102.1(1)) o Often acquirers will get toeholds which may trigger early warning rules o In many cases they dont even know they are an acquirer and they are triggering early warning rules o Policy behind this rule is that other shh should be warned if someone will be acquiring a greater stake in a co Ie. If someone owns 51% you have no control over the election of Ds which may affect your investment decision o On the day you acquire, regardless of whether you acquired from treasury or outstanding, if you have 10% or + INCLUDING convertible securities even if they havent been converted yet, this triggers the early warni ng rules The early warning requirements are in OSC Rule 62-504 (7.1) o (a) promptly issue and file a news release containing the information required by NI 62-103 (3.1) [which must identify the person as well as the extent of his or her control aggregate; NI 62-103 App E for content] o (b) within 2 biz days from the day of the acquisition, file report containing info required by NI 62-103 (3.1) which includes your intention with resect to the holdings [rare to admit their intention is to have a take over bid; they will usually say they are buying so many shares for investment purposes and they dont know yet whether they will sell or buy] Additional news release/reporting requirements where subsequent acquisition of additional 2%, or change in any material fact in early warning report (OSA 102.1(2)) o Theoretically you could do 1 increments so that early warning rules wouldnt apply anymore but you may be considered an insider and thus trigger disclosure requirements elsewhere in the statute o Under current rules if you sell more than 2% after the 10% you DONT have to disclose but one of the new rule proposes that you do have to disclose this bc it may affect your investment decision The effect is to give targets a warning of potential takeovers, sometimes called creeping takeover bids Time restrictions on further acquisitions [OSA s.102.1(3)] o For 1 day after disclosure, cannot buy anymore to give market time to absorb the info Disclosure re acquisitions by persons other than offeror [ OSA s. 102.2 (1) and (2)] o If takeover bid launched, some people will be willing to take the risk and buy securities so these people have a disclosure obligation if they buy 5%+ of shares in context of a take over bid Alternative reporting system for eligible institutional investors (NI 62-103 Part 4) (not impt for us) Policy objectives of early warning rules: On the one hand, you make it easier on bigger cos, but on the other hand, it is not the same kind of disclosure you get in market from institutional investors There are exemptions from early warning requirements listed in NI 62-103 such as o Mutual funds or eligible institutional investors o Entities that have an increase in a class of securities of a RI that arose solely due to certain actions of the issuer o Underwriters if they own securities only as underwriters and have made certain disclosure by news release Also discretionary exemptions to be made by the regulator Proposals for Amending the Early Warning Rules Note that new EWR rules are currently proposed: [prof thinks they have a good chance of being implemented] o (1) Drop threshold to 5% for first time reporting (like in US); o (2) Disclose sales as well as purchases of 2% or more; Keep purchases but also make it applicable to disposition because extra 2% is so impt

111 o o o (3) Enhanced disclosure of interests held through derivatives; (4) Enhance disclosure of voting interests and intentions; (5) Change alternative monthly reporting eligibility.

(3) Timing [strict timelines to follow] 35 day rule o Takeover bid must remain open for at least 35 days in order to provide target holders with ample time to consider offer and allow target Ds with ample time to seek other merger possibilities if it is hostile OSA s.98(1) o The bidder is NOT permitted to take up or accept for purchase, any shares deposited by tendering shhs (OSA s.98(2)) until 35 day period has expired THUS shhs who deposited shares are permitted to withdraw them Taken up has no definition When you agree to purchase (either when all the conditions are met or another indication that offeror will take up); Not necessary to have payment o Offeror has to take up securities not later than 10 days after expiry of bid (OSA 98.3(1) Flexibility in the 35 day rule o Bidders are permitted to extend the date on which the offer will expire in order to provide shhs with more time to tender shares BUT only permitted if the securities previously deposited are first taken up (OSA s.98.3(4)) o Exception to this rule if the takeover bid is extended during a period in which withdrawal rights exist so in such circumstances, no mandatory take-up of shares is required before the bid is extended (OSA s.98.3(6)) Securities must be paid for not more than 3 days after take up ( s.98.3(2)). Take up in the context of partial bids (pro rata basis) (s.97.2(1)). Issues of (a) take up and (b) payment in Canfor/Slocan. o (a) Take up: The court said that taking up means the communication by the offeror of its irrevocable decision to complete the purchase of the shares tendered under its offer, and must take place before or at time of payment In this transaction, taking up will occur before or at the time of the issuance by Canfor of Deposit Receipts in payment for the tendered Slocan shares OSC said take up is agree to purchase (which occurred when decided the deposit receipt will be issued) o (b) Payment: The issuance of Deposit Receipts in exchange for tendered Slocan shares will constitute payment for the Slocan shares being taken up (Payment was 3 days after the deposit receipt issued) Withdrawal - 3 potential scenarios, via s.98.1(1): (a) withdrawal any time before end of 35 day period; (b) withdrawal before end of 10 days from date of notice of change; (c) withdrawal if securities not paid for within 3 days of take up . Bid Conditions (Financing) When it is a cash deal or combo of securities and cash, there is usually financing which is allowed (97.3(1)) BUT it is subject to conditions (2) One main condition is usually that you have to reasonably believe that no factors affect who you are financing from (certain cash will be available) UNLIKE U.S. where if you agree to purchase a house but dont want to do it anymore, tell the bank dont approve me for financing cannot do this in Canada! 97.3 (1) If a formal bid provides that the consideration for the securities deposited under the bid is to be paid in cash or partly in cash, the offeror shall make adequate arrangements before the bid to ensure that the required funds are available to make full payment for the securities that the offeror has offered to acquire. (2) The financing arrangements required to be made may be subject to conditions if, at the time the bid is commenced, the offeror reasonably believes the possibility to be remote that, if the conditions of the bid are satisfied or waived, the offeror will be unable to pay for the securities deposited under the bid due to a financing condition not being satisfied. When is a take-over taking place? take-over bid OSA s. 89(1) means an offer to acquire outstanding voting securities or equity securities of a class made to one or more persons or companies, any of whom is in Ontario or whose last address as shown on the books of the offeree issuer is in Ontario, where the securities subject to the offer to acquire, together with the offerors securitie s, constitute in the aggregate 20 per cent or more of the outstanding securities of that class of securities at the date of the offer to acquire but does not include an offer to acquire if the offer to acquire is a step in an amalgamation, merger, reorganization or arrangement that requires approval in a vote of security holders. o Takeover bid being made to ON shh o If friendly deal, merger, and cos decide securities going to be acquired by offeror, then takeover rules dont apply bc will be protected by other rules (last part of defn impt)

112 MAKING of offer, not completion of a transaction itself The point at which effective control is achieved may vary widely from one case to another but decided 20% is a good threshold Offer can be to acquire voting or equity securities o equity security means a security of an issuer that carries a residual right to participate in the earnings of the issuer and, on liquidation or winding up of the issuer, in its assets o If outstanding convertible and non voting then they are not voting or equity thus not subject to takeover bids Securities being acquired must be outstanding [NOT secs from treasury] Offer to acquire OSA s.89(1) means, Not necessary to have a sale to trigger it o (a) an offer to purchase, or a solicitation of an offer to sell, securities, o (b) an acceptance of an offer to sell securities, whether or not the offer has been solicited, or o (c) any combination of the above; Consequences of making a take-over bid offeror must make the same offer to all target shh by way of offering document mailed to such shareholders and filed with regulators (takeover bid circular) Offerors securities means securities of an offeree issuer beneficially owned, or over which control or direction is exercised, on the date of an offer to acquire, by an offeror or by any person or company acting jointly or in concert with the offeror o o

Counting Rules [many provisions bc ppl tried to get around them] Acting jointly or in concert : OSA s.91(1) distinction btw deemed and presumed (a) the following is deemed to be acting jointly or in concert with an offeror: o (i) a person or company who, as a result of any agreement, commitment or understanding with the offeror or with any other person or company acting jointly or in concert with the offeror, acquires or offers to acquire securities of the same class as those subject to the offer to acquire, and o (ii) an affiliate of the offeror; and o *Deemed means regardless of the truth, if certain conditions are met, you are acting jointly or in concert (b) the following is presumed to be acting jointly or in concert with an offeror: o (i) a person or company who, as a result of any agreement, commitment or understanding with the offeror or with any other person or company acting jointly or in concert with the offeror, intends to exercise jointly or in concert with the offeror or with any person or company acting jointly or in concert with the offeror any voting rights attaching to any securities of the offeree issuer, and o (ii) an associate of the offeror. o *Presumed means it is rebuttable but the presumption is still there Can say just bc I am voting the same doesnt mean I am acting jointly BUT regulators presume it when they have evidence so you have to disprove them with evidence In these circumstances, the legislation requires both the bidder and the person with whom is acting jointly and in concert to count their shares together for the purposes of analyzing whether the 20% threshold has been reached Thus two or more parties cannot divide up the number of securities that they are bidding for in order to avoid the takeover bid rules (OSA s.90(3)) Doesnt have to be in writing (they amended the act bc a common group would have common goals thus act jointly but there was no written agreement to prove it) It is a question of FACT so the OSC can make determinations Deemed beneficial ownership rules [OSA s.90(1)] Securities convertible into relevant class w/in 60 days (even if havent converted yet & dont plan to) are included This gets around the situation where you own 19% and then all of a sudden you convert immediately, not giving the market time to absorb the info Not always clear if converted by certain triggering event, then look at caselaw, ask the commission etc. (make a judgement call based on that info, it is not block and white) Deemed beneficial ownership 90. (1) If the offeror or the person or company is the beneficial owner of a security convertible into the security within 60 days following that date or has a right or obligation permitting or requiring the offeror or the person or company, whether or not on conditions, to acquire beneficial ownership of the security within 60 days, by a single transaction or a series of linked transactions *when you have convertible shares, you add them even if you dont convert them for both the early warning and takeover bid threshold BUT whereas early warning is triggered regardless of how you acquire shares (private placement or stock market), the takeover bid provisions are only triggered if you have a transaction in the PUBLIC market after the 20% threshold

113 Launching a Takeover Bid - 2 ways (1) Traditional means of delivering a takeover bid circular to all of the shhs of the target in a prescribed format [OSA 94.1(1)(b)] o Must know who the shhs are and their addresses, so can request it from TA of target co and Broadridge [If friendly you will get the list quickly, but if not, they will take full 10 days before they give you the shh list] o File the bid and the bid circular and deliver them to the offeree issuers principal office on the day the bid is sent, or as soon as practicable after that s.94.2(1)(3)] (2) Publishing an announcement of the takeover bid in a major daily newspaper [OSA s.94.1(1)(a)] o The day the article is published is the day the bid is commenced and you must file and deliver a copy of the bid, along with the takeover bid circular to the target cos office [94.2(2)(a)] o On the day of the ad or before must request a list of securityholders [94.2(2)(b)] They will probably take 10 days to send it to you (not more bc then OSC will scrutinize them) o Within 2 days of receiving a list of the targets shh, bidder must deliver the circular to all the shhs of the target [94.2(2)(c)] o One of the first takeover bids in which the bid was commenced by ad was the Sherritt/ ON Teachers Pension Plan bid for Fording in Oct 2001 The advertisement route moves along 10-15 days quicker While the bidder prefers the bid process to be as quick as possible, the target co prefers a longer bid period so it can launch alternatives/ survey alternatives

EXEMPT BIDS
Takeover bid legislation offers a number of exemption to the strict requirements of the statute or MI If bidders qualify under any of the exemptions, they are not compelled to follow the rules relating to disclosure and other provisions of the legislation

(1) Normal course purchases : s.100 A normal course purchase involves the purchase of not more than 5% of any class of the offeree issuers outstanding voting or equity securities in a 12 mo period Elements of exemption o 1. The bid is for not more than 5% of the outstanding securities of a class of securities of the offeree issuer. o 2. The aggregate number of securities acquired in reliance on this exemption by the offeror and any person or company acting jointly or in concert with the offeror within any period of 12 months, when aggregated with acquisitions otherwise made by the offeror and any person or company acting jointly or in concert with the offeror within the same 12-month period, other than under a formal bid, does not exceed 5 per cent of the outstanding securities of that class at the beginning of the 12-month period. o 3. There is a published market for the class of securities that are the subject of the bid. o 4. The value of the consideration paid for any of the securities acquired is not in excess of the market price at the date of acquisition as determined in accordance with the regulations, plus reasonable brokerage fees or commissions actually paid. This is useful for significant shareholders wishing to acquire additional securities. Also need to comply with stock exchange rules (2) Private agreement exemption: s.100.1(1) The purchaser may enter into a single agreement or separate agreements to purchase target securities from a maximum of 5 vendors including persons outside of ON, offering a premium of not more than 15% above the current market price Referred to as private agreement exemption bc the offer cannot be made to securityholders generally Calculation of market price re allowable premium (OSC Rule 62-504, s.1.3) Although this is an limitation on the idea of equal treatment, derogation from the basic principle of treatment is acceptable in certain circumstances like this bc it is in the interest of facilitating changes of control in limited situations 115 is only a slight premium; probably not buying for control if willing to find seller to sell to you for a little premium bc otherwise the sellers would say, do a take over bid and offer me a higher premium, then I will tender to you To get around this, could have the 5 ppl buy from 5 ppl each and then you are buying from 25 essentially BUT not allowed if you had actual knowledge of that occurring or should have had the knowledge Elements of exemption o 1. Purchases are made from not more than five persons or companies in the aggregate, including persons or companies located outside of Ontario. o 2. The bid is not made generally to security holders of the class of securities that is the subject of the bid, so long as there are more than five security holders of the class.

114 3. If there is a published market for the securities acquired, the value of the consideration paid for any of the securities, including brokerage fees or commissions, is not greater than 115 per cent of the market price of the securities at the date of the bid as determined in accordance with the regulations. 4. If there is no published market for the securities acquired, there is a reasonable basis for determining that the value of the consideration paid for any of the securities is not greater than 115 per cent of the value of the securities.

(3) Non-reporting issuer exemption: s.100.2 No published market for the securities that are the subject of the takeover bid See also OSC Rule 62-504 s.6.1 few other conditions such as there are no more than 50 holders of securities that are the subject of the takeover bid at the commencement of the bid (4) Foreign target exemption: s.100.3 If you have have the following elements, foreigner doesnt have to comply with our laws bc no one gets hurt o 1. Less than 10% of registered and beneficial security holders in Canada; o 2. The offeror reasonably believes that security holders in Canada beneficially own less than 10 per cent of the outstanding securities of the class subject to the bid at the commencement of the bid. o 3. Published market with greatest dollar volume that occurred during the last 12 mos preceding the bid was outside Canada; o 4. Security holders in Ontario are entitled to participate in the bid on terms at least as favourable as the terms that apply to the general body of security holders of the same class. If target issuer and shhs are not in ON, then OSC doesnt care to protect because not subject to its laws (5) De minimis exemption: s.100.4 Elements of exemption o 1. The number of beneficial owners of securities of the class subject to the bid in ON is fewer than 50 and the securities held by them constitute, in aggregate, less than 2 per cent of the outstanding securities of that class. o 2. Security holders in Ontario are entitled to participate in the bid on terms at least as favourable as the terms that apply to the general body of security holders of the same class. o *McMillan noted in their report on Takeover Legislation in Canada that In some cases, the OSC can be persuaded to extend this exemption to include moderately more than 50 resident security holders or moderately more than 2% maximum holdings. See also section 100.5 re availability of exemptions in ss. 100.3 and 100.4 o Restriction, required disclosure o 100.5 A take-over bid described in s 100.3 or 100.4 is not exempt from the formal bid requirements unless, (a) the information and documents specified by regulation are provided to security holders in Ontario in accordance with the regulations; and (b) the info specified by regulation about the bid is made public in accordance with the regulations. Should Takeover bid Rules apply to Arrangements? NO. Should the rules governing takeover bids be extended to apply to arrangements aimed at gaining control of a co as well, since both are a form or acquisition transaction? 5 year review committee & BCE says NO Five Year Review Committee decided maintaining separate regulations for each transaction was appropriate bc the law pertaining to arrangements is intended to be inherently flexible and principle-based, which is in contrast to the statutory requirements of takeover bids which are to be more rule-based In BCE (CB 553), the ON Teachers Pension Plan announced that it intended to acquire BCE thru a plan of arrangement and this upset the debentureholders bc their securities would be devalued Test (articulated in BCE) In determining whether a plan of arrangement is fair and reasonable, the judge must be satisfied that: o 1) the plan services a valid biz purpose AND o 2) it adequately responds to the objections and conflicts between diff affected parties (strikes a fair balance) o whether these requirements are met is determined by taking into account a variety of factors such as but not limited to: necessity of the arrangement to the corps continued existence the approval if any of a majority of shh and other security holders entitled to vote proportionality of the impact on the affected groups BCE has expanded the list of principles to be considered in the arrangement context but has retained the principlesbased flexibility that has traditionally characterized this area of law It thus seems sound to maintain separate regimes for arrangements and takeover bids bc the rationale for their separate treatment is still applicable

115

DEFENSIVE TACTICS DURING TAKEOVER BIDS

Introduction A defensive tactic is a strategy or mechanism adopted by the target board in the face of a hostile bid in order to thwart or delay a takeover bid (although poison pills can be put in advance Defensive tactics are litigated and regulated by securities and torts In Canada, defensive tactics are permitted to delay the bid in order to give the board more time to consider it and seek alternative offers Since Cdn markets exhibit a high degree of concentration in ownership, it is easier for them to implement a break fee or sale of a crown jeweller o If a target is signing an agreement with a white knight, it will likely seek the approval of any controlling shh who will likely have representation on the board it allows for more certainty so that co is more confident in pursuing the strategy In order to avoid a takeover, and not have to put up a defence, companies should be well run o That way there is no real value in buying shares and shh are happy so they wouldnt tend anyways Guidelines for the Use of Defensive Tactics NP 62-202 sets forth guidelines that govern the boards conduct with regard to defensive tactics Policy says that cos are permitted to adopt defensive tactics but must not deny shhs the ability to make their own decisions nd they must not frustrate an open bidding process Common Defensive Tactics (1) White Knight Find a white knightwhich is a third party that makes a friendly take-over bid for the shares of a target company for which a hostile take-over bid is in place. Target board may strike a special committee to review the proposed transaction and alternatives to the bid The law requires the special committee to canvas the market (Maple Leaf Foods) If a bid emerges that is friendly in the sense that it is invited, accepted and favoured by management in the face of a hostile bid, the bidder is known as a white knight If the target does not strike a special committee but seeks out instead and obtains an alternative offer, the entity making the offer is the white knight The target and white knight typically negotiate a merger agreement that may contain terms that constitute other defensive tactics such as the break fee Shares will be acquired either way by another co, but a white knight will have a great that management can live with For instance in a hostile bid, management almost always loses their job but that might not be the case in a white knight situation or even if it is, it is a deal that management can live with The other defensive mechanisms work to buy time to find a white knight i.e. poison pills Golden parachute is a variation of this o Specifically says that a change in control of the co will constitute constructive dismissal which is where employee is not terminated, but the terms of contract have changed so much that they can have a legitimate claim to say their job description has changed a lot and they were not hired to perform those duties o In the event of dismissal, here are my termination rights i.e. 3 years of pay and benefits, etc. (2) Sale of Crown Jewels/ Asset Option Putting anti-takeover clauses into effect which compel the sale of a targets most valuable asset(s) if a hostile takeover occurs in order to deter would-be hostile acquirers Canwest talks about it in CB o Target entered into an agreement with a 3 rd party which allowed them to have crown jewel o By giving the 3rd party the option to acquire the crown jewel, the hostile acquirer wont want the co bc they want the crown jewel o This case also had a break fee in place o It was found the Ds had acted appropriate and thus won bc they maximized shh value by putting crown jewel and break fee into effect Court in Canwest lists factors to be considered in deciding whether the granting of an asset purchase option to a potential bidder is a proper and acceptable measure for a target corp o (1) whether the process by which the Ds of the target co exercised their obligation to max shh value complied with their duties as target Ds o (2) whether the overall commercial balance and proportion between the auction inhibiting and auction stimulating effect of such an agreement in the circumstances has been struck

116 (3) whether the price for the optioned asset is within a range of reasonable value attributed to that asset or whether it represents such a discount that it would result in a disproportionate erosion in the value of the corp making it uneconomical for others to bid o (4) whether the competing bid induced by the asset lock-up agreement provides enough additional value to the shhs to justify the granting of the option Judge concludes that the defensive tactics used by the target in this case were not illegal but could become illegal depending on the circumstances of the case Blair J appears to have 2 considerations: 1) reluctant to intervene in decision of the target board (deference to business judgement) 2) seeks to ensure that target boards have flexibility in responding to a bid o

(3) Litigation, Regulatory Complaints Strategy Litigation e.g., Canfor/Slocan, BCE and many others. Target boards have access to the treasury of the company to fund legal challenges to would-be acquirers, usually on the basis of non-compliance with applicable regulations. Target boards can also fund defenses to court challenges. Employed as a strategy bc it delays the inevitable even if no chance of success Capital markets change frequently so the more you delay it, the less chance of success Acquirer has to fund themselves and litigation is so expensive (4) Break Fees 2-3% of the value of the deal to acquirer any higher and may discourage white knights. Fee paid by a target company if the pending deal is terminated, ostensibly to recoup costs and fees associated with due diligence during an acquisition, but have effect of thwarting a white knight. Break fees deter the target from breaking its agreement with the white knight and can also induce the white knight to enter into an agreement with the target to begin with (Bc even if hostile bidder wins, at least the knight gets money) Break fees are legally binding Fid duty for target Ds permitting Ds only when there is better offer, to get out of deal, and then the break fee is triggered Courts have the power to nullify it; Sec regulators hinted they would be prepared to step in and strike down a break fee (although havent done it yet) if they felt it was coercive or unfair or not put into place for a proper purpose Court in Canwest accepts that break fees are appropriate in such circumstances where: o (1) they are necessaryin order to induce a competing bit to come forward o (2) that bid represents a better value for the shhs and o (3) the break fee represents a reasonable commercial balance between its potential negative effect as an auction inhibitor and its potential positive effect as an auction stimulator (5) Poison Pills Definition of poison pill (Producers Pipeline) defensive tactic that the Board of directors of a target corporation could use to provide the board with a reasonable period of additional time to seek to maximize shareholder value by soliciting an alternative bid or transaction or improvements to the existing bid Legality? Defensive tactics such as a poison pill may be taken by a board of directors in a genuine attempt to obtain a better bid; however, tactics that are likely to deny or limit the ability of shareholders to respond to a take-over bid may result in action on the part of the regulators to remove the poison pill. Just say no defense traditionally not permitted in Canada legal in the USA if (i) board acts in good faith, (ii) after reasonable investigation and reliance on the advice of outside directors, (iii) and is able to articulate a legitimate threat to the corporate enterprise. Can be adopted by a corp prior to or during a takeover bid If the poison pills is adopted during a bid without shh approval, the pill is referred to as tactical A typical poison pill is a document that sets forth instances in which a takeover bid will be permitted be the co; often one of the terms is Ds obtain approval from Board So when shhs are originally issued shares, they have a common share and a right Once activated, the typical pill provides shhs of the target co with the right to purchase additional shares of the class that is subject to the bid at a very low price- the shares are issued to all shhs except the bidder The effect is to dilute the bidders holding and thus make it more difficult to complete the takeover Still an economic benefit though for all other shhs other than bidder bc even though your original shares may be diluted, you are buying additional shares for a cheaper price, which you can then sell for a higher price It is about double what the hostile acquirer has to pay for shares Immediately after a poison plan is triggered, the hostile acquirer will run to the commission to get a cease trade order OSC will ask the target: what are you dong to find a white knight? If you arent why should shhs hold onto their shares? The securities commission has said it is not a question of IF we cease trade, it is a question of WHEN That right is only triggered when the takeover is certain to occur (immediately before that, the rights crystalize)

117 Securities regulators can cease trade of that right and it is a matter of when The view is that takeover bids are good because they promote efficient running of the co so they should be permitted to go ahead in certain ways Regulators will permit the poison pill to stay in place to give co time to demonstrate why shhs shouldnt tender or enough time to find a better bid When a poison pills should be ceased traded is determined on a case-by-case basis although there are new proposals in place to have a process regulated by policy and procedural, so that the acquirer doesnt run to the regulator every time

(6) Securities Issuances When you dont have a poison pill in place and dont want one Target board authorizes sale of securities in the face of a bid to increase the number of securities subject to the bid, and to reduce the percentage of shares committed to tendering to the bid Sold at market price; try to get them in friendly hands so they wont tender See Fibrek/Resolute and Petaquilla/Inmet The acquirer would have to run to the OSC right away to cease trade private placement They would try to argue that it is not in their fiduciary duty or not in public interest You need an exemption to be able to do private placement so by defn you are NOT offering these shares to the public, thus can only approach certain people i.e. accredited investors or anyone to which trade would be exempt So cant to anyone that doesnt fall under an exemption or otherwise that would be considered in furtherance of a trade and you need a prospectus for that When will regulators strike down Poison Pills? Pulse Data (ASC) declined to cease trade poison pill o no reasonable prospect of alternative bid. o majority of shareholders had approved the poison pill. [they knew of the takeover bid and thus recently approved the poison pill] o ASC satisfied recent and fully informed decision of shareholders was response to the offer - not in public interest to cease trade poison pill. NEO (OSC) - declined to cease trade poison pill o Same facts pretty much as Pulse Data o shareholders had ratified poison pill after the take-over bid had been announced. o SCC n BCE Inc. - may not be appropriate to intervene if target board considers option of pursuing business plan as being in best interests of the corporation - provided the decision within range of reasonableness. o Also, unfavourable market conditions - board not looking for other offers Lions Gate (BCSC) ceases trade bc no steps by co to find alternative acquirers o Relied on public interest policy principles in NP 62-202 and related jurisprudence, and affirmed that, in the absence of any attempts by the target board to take steps to increase shareholder value through an improvement of the bid or the presentation of an alternative transaction, there can be no basis for allowing a rights plan to stay in place for any additional period of time. o Even if ratified, poison pill can no longer serve only purpose for which it is justified buy additional time for target board to solicit a competing bid. o deprive Lions Gate shareholders of ability to tender their shares to the offer. Baffinland (OSC) ceased trade **prof said this is main case o Clarified that NEO did not establish a new basis for upholding a rights plan, but that shareholder approval of a rights plan in the face of a hostile bid was an important element. o Gave OSC the chance to clarify NEO so they distinguished Neo by saying it has no precedential value except for cases exactly like Neo o Said whether shhs approved plan is ONE of the factors to consider Petaquilla (BCSC) ceased trade o Traditional analysis cease traded plan to allow bid to go to the shareholders. o BCSC is a little more aggressive in this regard o But again nothing being done; poison pill is just entrenching management New Developments for Defensive Mechanisms Two proposals; from the CSA and AMF. o Both approaches pull away from the Cdn approach and get closer to the US approach o They both propose to enhance ability of target board to defend against unsolicited offer, and both would reduce intervention by securities regulators. o CSA only talks about poison pills while AMF is broader

118 Address two concerns: current regime is too bidder friendly and shareholders cannot act collectively. (1) Proposed NI 62-105 Security Holder Rights Plans o Focuses on poison pills and not other defensive mechanisms. o Removes role of regulator in deciding on case-by-case basis whether poison pill should be cease-traded. Due to scarce resources, it is a big deal o Sets out regulatory scheme for the regulation of rights plans. Content of the plan when shh approval has to be obtained, etc so instead of facing OSC panel and trying to convince them to cease trade, everything will be in the regulations and only exceptional cases will go to the OSC (2) AMF consultation paper An Alternative Approach to Securities Regulators' Intervention in Defensive Tactics (Quebec) o Replace NP62-202. o Defensive tactics are not prejudicial so long as inherent conflicts of interest are managed appropriately regulators should not intervene unless unusual circumstances exist. o Change to bid mechanics: irrevocable minimum tender condition of more than 50% of the outstanding target securities, and obligation to extend bid for additional 10 days following announcement that minimum tender condition has been met. o Maybe poison pills arent so bad and we should give deference to business judgement rule if management believes the plan should stay in place longer (as long as it doesnt have an improper purpose)

Legal Responsibilities of Target Board Conflict bc Ds are obliged to act in BIOC but target Ds and management fear to lose their positions if the bid is successful Conflict between court and regulator in trying to balance corporate law principles (BIOC) and securities principles of protecting shh and thus trying to get a max value for them See NP 62-202. What does the fiduciary duty mean in the context of a hostile takeover bid? o (1) Do boards have a duty to maximize shareholder value? See Blairs discussion of PP in WIC case (CB p.582) Blair says Producers Pipelines goes too far in imposing an evidentiary burden on the Ds of a target co to justify their actions and biz decisions Blair really agrees with the business judgement rule Canvass the market (Maple Leaf at CB p.588) There is NO duty on the board to conduct an auction- here, they did not conduct an auction but just canvassed the market and the court said that is sufficient; just like BCE (so long as you take it into account; so long as you canvas the market you will be given the benefit of the business judgement rule) This is in comparison to the American case Revlon where if a co is up for sale, the Ds have a positive obligation to conduct an auction of the cos shares- but this is NOT the law in ON (Pente v Schneider) BCE decision (SCC) [paras 84, 112] this is the leading case Para 84- There is no principle that one set of interests- for eg the interests of shhs should prevail over another set of interests. Everything depends on the particular situation faced by the Ds and whether, having regard to that situation, they exercised biz judgement in a responsible way Ds act in BIOC and in doing so have to be diligent and actions have to be within a range of reasonableness and then the court/OSC will not interfere o Para 112: Provided that, as here, the Ds decision is found to have been w/in the range of reasonable choices that they could have made in weighing conflicting interests, the court will not determine whether their decision was the perfect one They should canvas the different interests during the process (so long as they take them into account, that is sufficient) I.e. they took the bondholders into account which was sufficient (even though the transaction ultimately prejudiced them) Ds may seek to max shh value in the context of a takeover bid but they are under no legal obligation to do so- court has left the fiduciary obligation wide open by holding that the duty of the board is to act in the BIOC o (2) Role of special committees When faced with a hostile bid, target boards will often set up a special committee of Ds to review the terms of the bid and alternatives to the bid in order to make recommendations to the board Although not required, the special committee is typically comprised of independent Ds bc nonindependent Ds suffer the conflict of BIOC v their jobs, while independent ones dont

119 Maple Leaf Foods at CB p.587 The reason behind a special committee independent of management and the controlling shh is to protect the interests of minority shhs and to bring a measure of objectivity in the assessment of the bids If sr management is on the special committee the purpose might be compromised but not always bc like in CWS, involvement of sr management didnt taint its approval of the bid to undermine the transaction and the committee had conducted itself in a fashion that enabled the Ds to carry out their objectives of maximizing shh value

Who is appropriate decision-maker?: Shareholder rights vs. fiduciary duty analysis; Jurisprudence on poison pills (1) Improper purpose (Producers Pipelines): The courts first applied a proper purpose test which is founded on the notion that a board could not exercise its powers for an improper motive or purpose o No reason was advanced by the Ds for failure to put the matter to th e shhs. The only inference which can be drawn from that is that the Ds wished to make the decision themselves in order to ensure their continued control of the co. They thus acted for an improper purpose. There are a number of other reasons which support a conclusion that the defensive action was neither reasonable in proportion to the threat posed, nor taken in the best interests of the co but was taken with a view to further entrench the Ds o (a) Board made no effort to show that the takeover would be harmful to the corp except to show that it was $2 below the appraised value o (b) Board made no effort to negotiate with takeover for better price o (c) They did not seek any competitive bids except own issuer bids even though evidence indicated that a couple of other parties had indicated an interest in making an offer o (d) They made no effort to show that tender of shares to the issuer bid would ultimately result in a better value to the shhs than a takeover bid o (e) they agreed amongst themselves they would not permit a bid under the shareholders rights plan at less than 25% above the appraised value o (f) They offered no valid biz reason from the POV of the co for the issuer bid o THUS the Ds did not meet the onus upon them to show that their actions were necessary in the BIOC. o Also a decision of that nature was one to be taken by the shhs and the Ds shouldnt have deprived them of that right o ***More recently, Cdn courts have reformulated the test in Teck v Miller, Ds who acted in what they considered to be the BIOC were held to have satisfied their fiduciary obligations (it is not clear whether the proper purpose test and the BIOC test are 2 diff tests; some argue they are not distinct bc in both cases the Ds need to have acted properly or business judgment (WIC) (2) Checklist to structure Regulatory discretion: In Royal Host OSC, commissions discussed the issue of when a pill must go and decided there is no holy grail that determines when the time has come; instead, the circumstances of every case will be impt [not all of the following factors will be relevant for every case as affirmed in Chapters] o Whether shh approval of the rights plan was obtained o When the plan was adopted o Whether is a broad shh support for the continued operation of the plan o The size and complexity of the target co o The other defensive tactics if any, implemented o The number of potential, viable offerors o The steps taken by the target co to find an alternative bid or transaction that would be better benefit for the shh o The likelihood that, if given further time, the target co will be able to find a better bid or transaction o The nature of the bid, including whether it is coercive or unfair to the shh of the target co o The length of time since the bid was announced and made o The likelihood the bid will not be extended if the rights plan is not terminated Themes of this chapter Takeover bid law as grown to be a complex, yet harmonized body of law that compels the bidder to adhere to certain practices when making a bid (or when seeking to be exempt from a bid) Various ways in which takeover bid legislation attempts to protect the interest of target shhs Such protection is afforded thru provisions that ensure that target shhs have ample opp to consider the original and any competing bids, receive equal treatment and receive proper disclosure regarding the bid and the bidder Interrelationship between corp and securities law (particularly in the duties of the target boards in the face of a takeover bid)