Resale Rules General Rule: 2 Components of Resale Rules – Securities Regulation

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  1. General Rule: 2 Components of Resale Rules

1) Resale rule for non-control persons: (a) all exemptions other than private issuer and (b) resale rules for those acquiring sec through private issuer exemption; 2) Resale rules for control persons (not connected to above rules)

Resale Rules for Control Persons:

  • Buying pursuant to an exemption vs. Prospectus: Advantage of having a prospectus ^ freely tradeable shares, the reporting issuer would be subject to a continuous disclosure regime, so investors presumably have all of the information they need
  • Key Question: How do we sell securities that we bought pursuant to a private placement exemption?****Remember this is what we’re doing/trying to figure out
  • POLICY: Tension b/w efficient capital market + investor protection, you do have to be able to sell them at some point or no one will want them, but you can’t go out and do it right away because that would be “back-door”

Goals achieved by resale rules: Preventing back-door underwriting

Whereby you can sell pursuant to an exemption with no prospectus, and then that person can go sell straight away to secondary market purchasers ^ bad b/c the secondary purchaser may not have the information it needs to make an informed decision (can’t circumvent purpose of the statute)

  1. Ways of Reselling (Generally)

1) If you can get the company to issue a prospectus and offer to sell YOUR securities pursuant to that prospectus (secondary offering)

  • e.g. prospectus – offering and secondary offering. If you can get company to do a secondary offering of Y OUR securities, you can immediately sell them pursuant to that prospectus
  • Problems:

o 1. Unless you’re a significant person in company, co won’t do that for you o 2. Have to pay proportionate share of expenses of public offering; and

o 3. Liability for selling securityholder is basically the same as issuer (unless you can prove that person purchased with knowledge of misrep, you’re liable for misrep)

  1. Rely on another private placement exemption: Sell to Another Purchaser Pursuant to Another Exemption
  • If there’s a policy saying I can sell them to you for $150,000 that same policy would say that I should also be able to sell them to someone else for $150,000 (underlying policy obj is still met)

o e.g. if you bought pursuant to the AI exemption, can sell it to another AI, or pursuant to group of 25, can sell among that group, or with government incentive, can sell among the 50

  • Problems: *Hard to find people that fit these exemptions:

o 1. Hard to re-sell b/c of restrictions: The purchaser you’re selling to will probably have problems re-selling (restrictions), so you may not find a willing buyer

  • e.g. offering a security the purchaser can’t sell for a while vs. offering one they can sell tomorrow ^ the one that has less risk is more attractive and that’s the one you can sell immediately

o 2. Discount: If you’re the re-purchaser and you can’t sell it, but you’re still inclined to buy the sec, will want a discount. You as the re-seller have to sell securities at a discount, so they’re not worth as much. Two securities exactly the same aren’t worth as much if you can’t re-sell immediately.

o 3. Commitment to file prospectus during a certain period of time so I can re-sell eventually:

essentially have to contract that you WILL file a prospectus eventually so that shares can be resold ^ huge penalty if you don’t do it

o 4. Might want an offering memorandum to have information anyway: huge time/expense, similar to a prospectus

  1. Exemption order from OSC
  • Lastman: forget about it, zero for life.
  1. Satisfy Resale Rules – NI 45-102
  • Talking about regulation of second trades of securities sold under an exemption
  1. Def of Distribution is Important Here

RECALL Definition of distribution: Section 1(1) of OSA ^ if it’s a trade In a security that amts to distribution you have to issue prospectus UNLESS an exemption applies

  • 3 branches:

o 1) Trade in sec that haven’t been previously issued (need prospectus)

o 2) Sec you obtained pursuant to a private placement exemption -unless another PPE is avail

  • b/c trying to sell sec you acquired through PPE, that’s a distribution requiring prospectus unless another PPE is available
  • Recall this was noted previously in def of distribution o 3) How control person sells

Why does this matter? *POLICY: for second and third branch: The only way to stop people from selling securities without prospectus is to call it a distribution. So sales by a control person OR sales by someone who acquired the securities pursuant to a PPE are DEEMED TO BE A DISTRIBUTION unless certain rules are satisfied!

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