Resale Rules for Non-Control Persons Resale – Securities Regulation

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  1. Resale Rules for Non-Control Persons
  2. Resale rules for non-control person who acquired sec through a private placement exemption other than the private issuer exemption

*Exam resale rules question: analysis:

• Ask two questions:

o (a) who are you? if not a control person, throw that away and just use (b) o (b) how did you acquire securities? ^

  • If by prospectus, go sell.
  • If PPE, which exemption?
  • If Private issuer: have to wait until they become a reporting issuer, then you can sell right away. Otherwise, you can never sell again, OR have to sell pursuant to another PPE
  • If any other exemption: hold it for 4 months, then sell.

• If control person: also have to know answer to first question ^ meet both sets of resale rules.

NI 45-102: First Trades, Restricted Period and Seasoning Period

  1. and 2.6 of NI 45-102: if you bought securities pursuant to a PPE, can sell them based on these rules (will be deemed a distribution, UNLESS You satisfy the rules)

• if you’re not a control person, and you bought securities pursuant to a PPE OTHER THAN THE PRIVATE ISSUER EXEMPTION, you can ONLY re-sell them in these circumstances (or issue a prospectus, as per 2.7 below)

Lastman’s Summary of Applicable Rules (Non-Control Persons, Exemptions Except Private Issuer Exemption)

1) Firstly, can sell shares that you bought pursuant to prospectus (as opposed to an exemption), as long as you are NOT a control person

  • RULE: Securities Acquired pursuant to a prospectus are freely tradeable unless the seller is a “control person”
  • RATIONALE: Information is available in the marketplace to allow investors to make an informed investment decision and ongoing continuous disclosure obligations ensure that the information remains current. Other policy considerations prevent control persons from selling securities, even if acquired pursuant to a prospectus.

2) SECONDLY, if NOT purchased by prospectus, but an exemption ^ Resale Rules for All Exemptions EXCEPT the “Private Issuer” Exemption

  • Rule for sales of sec acquired pursuant to PPE: If securities are acquired pursuant to a private placement exemption, the seller cannot resell them unless:

o (a) a prospectus is filed wrt trade of subject securities,

o (b) seller relies on another PPE, or in government incentive securities exemption, the sale is to a member of the, original 50 purchasers, o (c) an exemption order is obtained from OSC (very rare), or o (d) resale rules referred to below are satisfied (set out in instrument 45-102)

  • RATIONALE FOR THIS: The private placement exemptions permit the issuance of securities without the concomitant/related obligation to provide complete disclosure to investors and without the continuous disclosure obligations. The Act permits these transactions because either:
  1. The sophistication of the purchaser or his or her knowledge of the business and affairs of the issuer reduces the need for prospectus-like disclosure; or
  2. (ii) The legislators are trying to address some more important policy objective.

• However, in order to ensure that there are not subsequent sales of securities to persons who need the protection offered by a prospectus, the Act has to regulate the second trade following a PPE in

such securities until such a time as the protections afforded by a prospectus are available.

• Rule: THIS IS 2.5 OF NI 45-102: If securities are acquired pursuant to a private placement exemption, the seller cannot re-sell them unless:

3) Resale Rules for All Exemptions Except the Private Issuer Exemption

o A) The issuer is and has been a reporting issuer in a jurisdiction of Canada for the 4 months immediately preceding the trade (i.e., the date of the resale of the security)

  • 2.7: 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, Manitoba, Nova Scotia, Ontario, Quebec or Saskatchewan and is a reporting issuer in a jurisdiction at the time of the trade (the time that the original purchaser is reselling), in which case the 4 month seasoning period does NOT apply;
  • Can sell day after
  • IF co NEVER becomes a reporting issuer and you cannot find another exemption, you can never re-sell those securities

• also reason why you would put conditions on purchase of PPE (would want them to become a reporting issuer)

o B) At least 4 months have elapsed from the distribution date (the “Restricted Period”);

  • “distribution date” = date of the original private placement (PPE)
  • Rationale is to give people time to digest the info before dumping the securities into the market

o C) Legend: The share certificate of the resale securities must include the prescribed legend setting out the restriction on transfer; (or if there is no certificate, a written notice containing such restriction must be provided)

  • Share certificate received on the PPE will have a legend that says there is a hold on the stock

o D) The trade is not a control distribution;

  • Person reselling the security cannot be a control person

o E) No market manipulation;

  • Nobody prepared the market for this event by artificially inflating or decreasing the value (or advertising)

o F) No extraordinary commission or consideration is paid in respect of the trade; and

o G) The seller has no grounds to believe the issuer is in default of any securities law

***ALL RULES MUST BE SATISFIED

Side notes:

  • just b/c you file prospectus, doesn’t mean you can issue new sec all the time. Any time you issue new securities, have to do PPE or file prospectus
  • so reasons why you’d do PPE: don’t want to file prospectus, OR the company is private
  1. Resale Rules for a Non-Control Person who Acquired Sec through the Private Issuer Exemption

Only difference b/w this and the other exemptions: there is no 4 month hold under private issuer exemption (he can’t tell us why) **only a seasoning period, no restricted (rules from 2.6 apply – seasoning period)

Rationale: not really a concern that they’ll be selling to people who need prospectus-information b/c if the issuer remains a private issuer, it will not be a reporting issuer and will not meet the requirement to be a reporting issuer (seasoning) of the resale rule. A subsequent trade by a person who purchased under the exemption will be a distribution unless the person sells to another person who qualifies under the private issuer exemption (so we re not concerned), or the company becomes a reporting issuer, then purchaser can re-sell right away (b/c issuer is one at the time of that trade 2.7 of45-102 and that information is out in the public domain now) (this is what can’t really be explained)

Lastman’s Summary of Rules:

  1. The issuer became a reporting issuer after the distribution date by filing a prospectus in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec or Saskatchewan and is a reporting issuer in a jurisdiction of Canada at the time of the trade; (the re-sell)
  2. The trade is not a control distribution;
  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.

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