Resale Rules for Control Persons (Separate Regime) – Securities Regulation

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  1. Resale Rules for Control Persons (Separate Regime)

Analysis:

  • Is this a control person selling shares that they acquired IN ANY WAY (e.g. by prospectus or PPE)? – so basically, is it a control person?
  • Different set of resale rules if person selling securities is a control person Ask:
  • 1. Who are you? If control person (if not control person, go back to rules above)
  • 2. How did you acquire them (exemption or otherwise)?

o DOES NOT MATTER!! STILL HAVE TO SELL ACCORDING TO THESE RULES (and follow the insider reporting rules probably)

  • Prospectus, OSC Exemption, another PPE, another control person
  • PROBABLY will go advance notice route

• Shares freely tradeable, to as many people as you want, any denomination

  1. Section 1(1) of the OSA – Control Person Definition – rebuttable, pure ? offact

Definition of Control Person: S. 1(1) of OSA: Person who alone or in combination with others holds a sufficient # of securities to MATERIALLY AFFECT CONTROL of the company (rebuttable presumption & pure Q of fact – bright-line rule)

• Per s.1(1) of OSA, “control person” means,

o (a) a person or company who holds a sufficient number of the 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 attached to all outstanding voting securities of an issuer, 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, or

o (b) each person or company in a combination ofpersons or companies, acting in concert by virtue of an agreement, arrangement, commitment or understanding, which holds in total a sufficient number of the voting rights attached to all outstanding voting securities of an issuer to affect materially the control of the issuer, and, if a combination of persons or companies holds

more than 20 per cent of the voting rights attached to all outstanding voting securities of an issuer, the combination of persons or companies 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; (“personne qui a le controle”)

■ Main determinant^if you materially affect control!

  • In absence of evidence to the contrary, you are deemed to be a control person if you hold more than 20% of outstanding voting shares of company, so you can hold more than 20% and not be control person maybe, less than 20% and be a control person, this is a rebuttable presumption
  • And this is a pure question of fact
  • Doesn’t always make sense, but this is the bright-line rule
  1. Five Ways a Control Person Can Sell Stock (Lastman Summary)

No matter how a control person acquires securities (even if by prospectus and would otherwise by freely tradeable if they weren’t a control person or by PPE and if they weren’t a control person, would have to follow the PPE resale rules), they cannot be resold unless:

  1. The control person qualifies a prospectus for the sale of the subject securities
  • (get the company to qualify wrt your securities) – same issues, have to get the company to do it, very

expensive, and potentially serious liability consequences

  1. An exemption order is obtained from the OSC (very rare!);
  2. The control person sells pursuant to another private placement exemption;
  • Which gives rise to resale rules and same issues as before – discount, forces secondary buyer to have a

hold period – not attractive to seller (b/c you have to sell at a discount & might not find a buyer)

  1. The control person sells to another control person (also giving rise to resale rules, not freely tradeable and will have to give a discount for that reason); or
  2. The control person sells pursuant to the advance notice route
  • By relying on this, control persons can sell in any denominations to anyone they want, and shares are freely tradeable in the buyer’s hands
  • Want world to know that it’s a control person selling their shares (and # of shares)
  • Before you can sell them, have to tell world you’re selling your shares
  • Says as long as you (a) give advance notice to OSC and stock exchange and make public statement that you’re a control person and want to sell shares ^ for next 30 days (and can be extended), you can sell them in any denom, to anyone you want in the mkt (and stock in the purchaser’s hands is freely tradeable)

o BUT… can only do this if…

  • (1) Company must be reporting issuer
  • (2) You must have held for 4 months (can’t get better treatment than anyone else)
  • (3) No market manipulation
  • RATIONALE:

o Reason for protecting against resale of control persons has nothing to do with policy obj behind reselling those acquired pursuant to PPE

o Here, Securities Act believes you have an unfair advantage: you have more information about the company. If I control the company, I might have access to information that you don’t have. o The policy behind regulating trading by control persons is to prevent abuses by such persons of their access to material information concerning the affairs of an issuer where that information has not generally been disclosed

  • Critique/Rationale:

o double protection: might seem kind of dumb b/c already have insider trading rules ^ but it’s safer if control people can’t SELL STOCK without meeting certain conditions ^ this is why we

have these rules IN ADDITION to how they ACQUIRE STOCK (controlling it from both ends, selling/purchasing)

Again, REMEMBER*** Distribution:

• ***Only way to stop people from selling securities without prospectus is to call it a distribution (to stop, PPE resale is a distribution and sales by control person is distribution if certain conditions are not met ^ in definition of distribution, third branch)

If you ’re a control person and you don’t want to issue a prospectus, you don’t want to be subject to resale
rules, and you can’t get an order from OSC Go advance notice route

  1. Advance Notice Route
  • Issuer would Do this because: Can issue freely tradeable shares instead of having the person who’s purchasing them from you be stuck with the resale rules (hold periods and other bad things about it), and avoid having to discount your shares b/c they’re subject to those rules
  • Rationale behind reg of trading by control persons: The policy behind regulating trading by control persons is to prevent abuses by such persons of their access to material information concerning the affairs of an issuer where that information has not been generally disclosed
  • Conditions for Advance Notice Rule:
  1. The issuer is and has been a reporting issuer in Alberta, British Columbia, Nova Scotia, Ontario, Quebec or Saskatchewan for the 4 months immediately preceding the trade (i.e., the date of the resale of the security) unless the issuer became a reporting issuer after the distribution date (i.e., the date of the original private placement) by filing a prospectus in Alberta, British Columbia, Nova Scotia, Ontario, Quebec or Saskatchewan and is a reporting issuer in a jurisdiction of Canada at the time of the trade, in which case the 4 month seasoning period does NOT apply;
  2. The control person has held the securities for at least 4 months;
  3. No market manipulation;
  4. No extraordinary commission or consideration is paid in respect of the trade; and
  5. No grounds to believe issuer is in default.
  6. No tacking with control persons **Also note with tacking:
  • If I buy pursuant to AI exemption and hold for 2 months, then I sell them to a control person, when can control person sell them? If control person wasn’t a control person, could sell two months later b/c of tacking.
  • But control person ^ have to hold for 4 months, no tacking for control persons b/c no relationship b/w two resale rules
  1. Resale Rules Class Examples (Handout)
  2. Private placement of securities of a reporting issuer pursuant to the accredited investor exemption on Jan 1, 2010. When can purchaser resell? ^4 months

a. company is a reporting issuer, so they need a hold period 4 months from the date of the trade

  1. Private placement of sec of a private issuer pursuant to the private issuer exemption on Jan 1, 2010^ private issuer becomes a reporting issuer on Feb 1, 2010 by filing a prospectus in ON. When can purchaser resell? ^1 day

a. only exemption that doesn’t have a hold period is when you become a reporting issuer

  1. Private placement of security of a private issuer pursuant to the accredited investor exemption on Jan 1, 2010-^ private issuer becomes a reporting issuer on Feb 1, 2010 by filing a prospectus in ON. When can the purchaser resell? ^May 1

a. Since can only sell the later of: i) 4 months from the date of the private placement, or ii) date the company becomes a reporting issuer

  1. Private placement of sec of a reporting issuer pursuant to the accredited investor exemption on Jan 1, 2010 to Bob ^ Bob sells sec to Melissa pursuant to the accredited investor exemption on April 1, 2010. When can Melissa resell? ^May 1
  2. tacking is permitted – it doesn’t matter that the sec since changed hands, May 1 would still be 4 months after the AI exemption was used
  3. Melissa acquired sec that had a 4-month hold period originally. HOWEVER, by the time, she bought them 3 months had already gone by. Since the 4-month hold period is attached to the security, and not the holder, there is still only 1-month hold period left.

Note: Bob would have never been able to sell to Melissa if she was not accredited investor OR paid $150k

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