Month: March 2018

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You are Deemed to own Shares you have a right to acquire within 60 days of the date of any takeover bid (i.e. options)

1. Sections 89(5) and 90(1)

• 89(5) Deemed convertible securities: For the purposes of this Part,

o (a) a security shall be deemed to be convertible into a security of another class if, whether or not on conditions, it is or may be convertible into or exchangeable for, or if it carries the right or obligation to acquire, a security of the other class, whether of the same or another issuer; and

(b) a security that is convertible into a security of another class shall be deemed to be convertible into a security or securities of each class into which the second-mentioned security may be converted, either directly or through securities of one or more other classes of securities that are themselves convertible.

90 (1) Deemed beneficial ownership***

For the purposes of this Part, in determining the beneficial ownership of securities of an offeror or of any person or company acting jointly or in concert with the offeror, at any given date, the offeror or the _person or company shall be deemed to have acquired and to be the beneficial owner of a security, including an unissued security, 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.

1. Sample problems – “Sunlor”

What matters:

• Order of Purchase
• Who Purchasing From

Question 1: If on Day 1, I own 10%, on Day 4, I have an option from the company to purchase 9% of shares exercisable at any time, and on day 6, I consider buying 2% on the open market. Is the acquisition of 2% a takeover bid?

• Yes ^ Own 10%, deemed to own 9% that I can exercise from company (will be outstanding if I buy them), and then I buy 2% = puts me over 20. I bought the portion that put me over 20% and the portion that gives me control (so paying a premium for these) on the open market (I bought 2% of OUTSTANDING shares, which puts me over 20% total ownership) ^ I have to issue a takeover bid circular to all SHs to treat them equally and not give a premium to the SH from whom bought that last 2 on the open market

Question 2: On Day 1, I own 10%, on Day 4, I have option to purchase 9% from an individual, exercisable at any time, and then on day 6, I consider buying 2% on the open market. Is the acquisition of 2% a takeover bid?

• Yes ^ still exercisable at any time, deemed 19%, and the 2% puts me over.

Question 3: Day 1, I own 10%. Day 4, I have option from an individual to purchase 9% of common shares exercisable in 6 months. Then on day 6, I consider buying 2% on open market.

• (a) Is the acquisition of 2% a takeover bid?

o No ^ because I only own 12% and that’s all I’m deemed to own (I can’t exercise option in the next 60 days)

• b) When I exercise the option for 9%, is it a takeover bid?

o Yes ^ I own 12% after buying on market, and the 9% of outstanding shares from the person puts me over.

Question 4: Own 10% on day 1, option from company to purchase 9% in six months, on day 6 I consider buying 2% on open market.

• (a) Is acquisition of 2% a takeover bid?

o No, again, I only own 12% with the option to take the 9 in six months.

• (b) When I exercise option for 9% is it a takeover bid?

o No ^ because if I’ve bought 2% on open market, I now own 12%. I’m then purchasing shares from the COMPANY, meaning that I’m not buying outstanding shares that put me over the 20% (so not being unfair to SHs by offering a premium to some SHs over others for control, it’s going to the company, which really means it’s going to the SHs) o The whole purpose for takeover bid legislation is that when you buy control at a premium it belongs to ALL shareholders because, in theory, they helped to create value o POLICY: premiums are to be shared by all shareholders equally; therefore, if there are not premiums resulting from the proposed transaction (i.e. option being exercised from the company) there is no problem

• Thus, control can be sold by the company and its not a problem b/c the value of that control goes to the company and indirectly to all shareholders
• Only when you’re buying outstanding (already issued) shares from other SHs would you be giving a bigger premium to those SHs ^ this does exactly what the takeover bid legislation is designed to do

• ALSO, ORDER: you bought the part that put you over 20 on the open market, order matters… what you pay for first 49 shares isn’t what you pay for 50 and 51 and 20 is new 50

1. Mechanics of a Vendor Takeover Bid

**remember each of these is achieving one of three things in order to achieve the overall objective of protecting SHs of the target company: (a) time, (b) information to SHs and (c) equality

*Two types:

1. Vendor Takeover Bid and

o If I own no shares of a public company, I can buy as many as I want from wherever, whoever, I don’t have to tell anyone anything.

o When I hit 10%, have insider reporting and early warning, and every 2% thereafter until I hit 20. o When I hit 20%, in takeover bid regime.

1. Exempt Takeover Bid (see rules below, 100 and 100.1 of OSA)

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Dealt with in Sections 89-105.1 of Securities Act. If you’re not a reporting issuer in province of Ontario, not subject to takeover bid rules

2 Kinds of bids: 1) Exempt takeover bids; 2) vendor takeover bids

Two Kinds of Bids:

1. Exempt Takeover Bids (Next section.)
2. Vendor Takeover bids

• If I own no shares of a public company, I can buy as many as I want from wherever, whoever, I don’t have to tell anyone anything.
• When I hit 10%, have insider reporting and early warning, and every 2% thereafter until I hit 20.
• When I hit 20%, in takeover bid regime.

Overview of Process:

1. Definition
2. Policy/Object of Legislation

Takover Bid: Generally speaking, a takeover bid is the acquisition of shares of a company (the “target”) which, together with the shares already owned by the purchaser, will put the purchaser’s shareholdings in the target over a certain threshold, generally 20%.

• The object of takeover bid legislation is to ensure that shareholders and the investing public receive sufficient information about the terms of the bid and that all shareholders are treated alike.

1. Takeover Bid Circular

Takeover bid circular: communicates details to shareholders – will describe the offer (the price, number of shares and any conditions) and is sent to all SHs

1. Bid Open for 35 Days

Bid Open for 35 D: To ensure that shareholders have an opportunity to receive the circular, review it and decide whether they want to sell (“tender”), a bid must be open for acceptance for at least 35 days.

1. Shareholder Right of Withdrawal

SH right of withdrawal: The offeror can’t take-up the tendered shares for 35 days and the shareholder can withdraw the shares at any time before the securities are taken up.

• This allows shares which have been tendered to be withdrawn if the shareholder changes his/her mind (which generally occurs when a higher offer is made).

1. Director’s Circular of Recommendations

Director’s Circular of Recommendations: recommends acceptance/ rejection/ neutrality + reasons, which are sent by target to all SHs

• Shareholders in deciding whether to tender would generally consider the advice of directors of the target. For this reason, a Directors Circular must be sent out

1. Change in Terms of Offer – Extension of Tendering

Change in Terms of Offer – Extension of Tendering: If a term of the offer is changed (i.e., the offer price increased), this must be communicated to all shareholders who are given an extra 10 days to tender their shares.

• Most changes (other than an increase in price or the waiver of a condition) allow a shareholder to withdraw tendered shares for 10 days.

H. Withdrawal if no Payment

Withdrawal if no Payment: To prevent an offeror from holding on to shares for too long after taking them after having been taken  up, a shareholder can withdraw their shares if not paid for within 3 business days up

I. Shares are Taken up Pro Rata

Shares are taken up pro rata: If the offeror wants to buy a maximum number of shares and more than this number is tendered, the shares are taken-up pro-rata and not first come, first serve.

• This ensures shareholders are not pressured to tender early (and can therefore review all pertinent information) and are treated equally

J. SHs offered Same Consideration and No Collateral Agmts

SHs offered same consideration + no collateral agreements: All shareholders must be offered the same consideration and no collateral agreements may be entered into

This ensures that a higher price per share is not paid for larger blocks or for shares tendered early. If, after shares have been taken up, the offer price is increased, all shareholders, including those whose shares have already been taken up, are entitled to the higher price.

K. Pre-Bid Integration Rules

An offeror must offer to buy from the public the highest percentage of shares at the highest price acquired in that 90 day period

Pre-Bid Integration Rules: Shares purchased before the offer is made but within the previous 90 days from the date of the offer can affect the price of and number of shares the offeror must buy (pre-bid integration).

L. Post-Bid Integration Rules

Post-Bid Integration Rules: An offeror can’t purchase shares of the target for 20 business days after the termination of a bid, except pursuant to another circular bid or the exceptions

M. Exceptions to having to issue a takeover bid circular

Exceptions to having to issue t/o bid circular: 1) 100.1 of OSA: can buy whatever as long as it’s from 5 people or less, and you don’t pay more than 115% of market price (realistically, can probably only use this once, but don’t know); 2) 100 of OSA: can buy 5% on the open market every 12 months, at market price.

1. OSA: Part XX: Takeover Bids and Issuer Bids, s.89(1)

• s.89(1) Takeover Bid: Means an offer to acquire outstanding voting or equity securities of a class made to one or more persons or companies, any of whom is in Ontario or whose last address on the books is in Ontario, where the securities subject to the offer to acquire, together with the offeror’s securities, constitute in the aggregate 20% or more of the outstanding securities of that class
• (this is the important part.. but continues…) (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 Interpretation of Rules:

• If what you own, together with what you’re about to by, is 20% or more – that is a takeover bid! You can’t do that unless you make the same offer to all SHs pursuant to a takeover bid circular
• E.g. if I own 14%, and I want to buy 7%, what I own w/ what I want to buy is over 20, have to do takeover bid and give same consideration to everyone
• Offer to Acquire: means an offer to purchase, or a solicitation of an offer to sell, or an acceptance of an offer to sell
• Indirect Acquisition: defined in s. 92: includes a direct or indirect offer to acquire or the direct/indirect acquisition of securities, e.g. treats (see below)
• Offeror’s Securities: includes securities controlled, beneficially owned, or deemed by s. 90(1) to be beneficially owned by an offeror or persons acting jointly or in concert with the Offeror ^ therefore includes securities you own and anyone you ’re acting jointly or in concert with ^ So A can’t buy 10, B buy 10, and C buy 10 without issuing a circular and then say hah! We have 30% and we now control you
• ^[1]note: for options, deemed owned if exercisable in the next 60 days**
• Problem with 20% Bright Line Test:
• Someone might already own 70% of the company, but then they want to buy another 20%. They ALREADY HAVE CONTROL, so there won’t be a PREMIUM PAID for those extra shares, but they still have to take part in the takeover bid regime. This is where bright line test breaks down
• 102.2(1): Acquisitions during a bid by an acquiror, 5 per cent rule: If, after a formal bid has been made for voting or equity securities of a reporting issuer and before the expiry of the bid, an acquiror acquires beneficial ownership of, or the power to exercise control or direction over, securities of the class subject to the bid which, when added to the acquiror’s securities of that class, constitute 5 per cent or more of the outstanding securities of that class, the acquiror shall disclose the acquisition in the manner and form required by regulation.
• (2) Same, further 2 per cent rule: An acquiror who is required to make disclosure under subsection (1) shall make further disclosure in the manner and form required by regulation each time the acquiror or any person or company acting jointly or in concert with the acquiror acquires beneficial ownership of, or the power to exercise control or direction over, an additional 2 per cent or more of the outstanding securities of the class to which the disclosure required under subsection (1) relates.

**ALSO SEE 7.2 of RULE 62-504: this person has to follow the format for disclosure

POLICY: Why do you need to do this?

• Because there will have to be a PREMIUM on the shares you’re purchasing that put you into a control position

o E.g. If I own 51% of shares of public company, or any company, and you own 49%… I decide I want to pay a dividend, you decide we shouldn’t. Let’s vote, you vote no, I vote yes, I win. I will always win vote (ignoring special resolution), even though I only own 2% more than you.

o If I say I’ll sell you 2% of company, if you thought about it, you’d pay me a lot more for that 2% than what it’s actually worth, with that 2% comes control and control is valuable b/c then you set direction of company

o If shares worth $100, company worth that, if every share is worth $1 and there are 100 outstanding, you’ll pay me more than $2 for those shares

• Premium you ’re prepared to pay to get control of this company

So trick: (Achieving Equality Goal)

• Securities act says as long as you own control, you can exercise it. But b/c you’re public company and you’ve invited everyone else into the game, the price you pay for doing that is that when you go to sell control to someone else, that premium you’re going to get for control does not belong to YOU, it belongs to the whole company and you have to share that evenly with the rest of the company

o You can get that $1 for your shares, but if you’re getting $1.50, the extra .50 is the premium for control and has to be shared with all SHs. Only way you can sell it is if person buying it agrees to buy it at same price/same percentage from all other SHs (they don’t all have to tender to it, but those that do will get a share in the premium) o Note: this is very diff than other aspects of society, where owner gets all of premium o Instead of 51 -49, they say 20 ^ 20% is stupid bright line test (effective control at 20%, BUT this doesn’t work in all fact scenarios)

• Have to make offers to all SHs on same terms ^*

• Section 92: Application to direct and indirect offers: For the purposes of this Part, a reference to an offer to acquire or to the acquisition or ownership of securities or to control or direction over securities includes a direct or indirect offer to acquire or the direct or indirect acquisition or ownership of securities, or the direct or indirect control or direction over securities, as the case may be.

Russell Holdings (Treats)

Ratio: Indirectly trying to acquire through what is essentially a takeover bid will count as one EXAMPLE OF NO SMART GUYS WITH TAKEOVERS ^ if you’re going to buy a public company/gain control of it through a private company, you have to issue a takeover bid circular

Facts: Russell Holdings, private company, holds 60% of treats, a public company. 5 SGs own Russell holdings. Smart Guy came and said, treats is trading at 10/share, I don’t want to buy all shares at $20 a share to gain control because that’s a lot. Takeover bids don’t apply to private companies (they don’t have to share premium with anyone else who might own piece of it). Don’t want to pay SHs $, therefore, offered the owners of the private company that OWNS Treats $25 a share for their ownership in Russell Holdings. Then “Smart Guy” controlled Treats through that private company. SGs got a huge premium, treats SH got nothing and control changed hands

Two things happen:

1. OSC said damn, no law stopping it (t/o bids don’t apply to private companies), but stopped it anyway.
2. s. 92 introduced by OSC^no one in universe knows what this means. Other than know that you can’t do that above situation.

Note: Sec commission knew about this, b/c of need to report after ownership of more than 10% of shares (insider rules)

• Why did he go after the Russell holding shares? ^ strategic – Smart Guy could have bought shares from all shareholders of Treats pro rata (maybe for same price) ^ BUT b/c it would be pro rata, Russell would only be able to sell a fractional amount of its shares (wouldn’t want to do that)

Policy Notes:

• Cannot indirectly acquire a company without issuing a t/o bid circular: So if they were going to take over the private company, buy public through private, have to make a takeover bid
• Bad Facts make Bad Law: That’s what happens when entire sec act is 92stupid people do stupid things, end up with stupid legislation; Dumbest section in. 

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You can grab notes on other topic from here.

1. Policy Reasons for why we regulate takeover bids and the legislative objectives wrt them

Kimber Report Rationale: To protect investors of offeree company

• Traditional reason given for why we legislate/regulate takeover bids, is they want to protect interests of target SHs (the SHs of the company being taken over)
• Make an informed decision on whether they want to sell you their shares or not

o Per Kimber Report: “Primary objective of any recommendations for legislation wrt takeover bid transactions would be protection of the interests of the SHs of the offeree company (the company being acquired)… SHs should have made available to them sufficient updated information to allow them to come to a reasonable decision about the desirability of a bid for their shares… but also balance: ensure recommendations would not unduly impede potential bidders or put them at commercially disadvantageous position or in a hostile situation with offeree company”

**on exam, whenever talking about the regulation of takeover bids, always mention what objective is being carried out with that rule (info, time or equality)

Objective of protecting shareholders of offeree company is manifested in 3 ways in carrying out t/o bid rules: 1) Information (inform investment decisions); 2) Time (i- for SH’s to think about it, ii- to get opinion from mgmt., iii- to allow for an auction); 3) Equality

• *Exam: are rules here to provide time, information, or equality? If you can’t find somewhere to put it, you don’t understand d the rule (from here to end of course)

How objective of protecting SHs is manifested in t/o bid rules:

1. Information (Inform Investment Decisions): Designed to give target SHs sufficient information to make an informed decision to whether they want to tender their shares
2. Time – Time for SHs to think about it
   1. There is no point in giving people information if we don’t give people time to digest it
   2. IF you want them to tender shares to a takeover bid, give them time to think about it
3. Time to get an opinion from management: Also gives management time to inform SHs of what they think (good or bad idea, good or bad price)
4. Time also allows for an auction: Best thing it could happen for regulators (and SH), come in and push it to highest price available, means market is efficient and someone doesn’t get deal at a bargain (so more people will play)
5. Time to give another bidder to come forward
6. When company is in play, this is their chance to get it, so need time for bidders
7. Equality: All SHs of target company/offeree must be treated the same. Manifested in regs as follows:
8. Have to take shares from everyone who tenders, pro rata***

i. I can buy 50% or 100% of company. Not first come first serve or choose which ones you want to buy, you have to take 50% of everyone’s shares!

1. All SHs whose shares you’re buying have to get identical consideration

i. Can’t enter into agreements giving some people higher premiums than others (or have diff types of consideration e.g. cash v shares)

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1) Move assets to their most desired uses; 2) Create synergies, 3) Force mgmt. to be efficient

1. Moves assets to their most desired uses: Move assets together, become more valuable than they are apart
2. Creates synergies: B/c ACC owns leafs + raptors is a way more efficient building than if it only owned one of them
3. Forces management to be efficient: Threat of being taken over forces management to behave properly

Non-Socially Useful Reasons for Takeover Bids

1. 1) Premium for acquirer; 2) empire building; 3) creating monopolies; 4) tax advantages
2. Premium for themselves: IF buying companies under-value, taking premium for themselves which doesn’t help anyone
3. Empire building: Combine assets with no synergies (at one time, Labatt owned TSN, beer, food, etc. – didn’t make bus sense)
4. Creates Monopolies: If no price pressure, just keep charging more
   1. w/ takeover bids: people often argue it’s a monopoly and that we should stop it (e.g. Star trying to take over Sun Media ^ showed that advertisement in Toronto was cheaper than in SK ^ so much competition for advertising in Toronto, keeps prices down, if TorStar bought Sun Media, prices would go up)
5. Tax Advantages: Not helpful for anyone if this is the reason you’re doing it

You can grab notes on other topic from here.

You can grab notes on other topic from here.

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

You can grab notes on other topic from here.

You can grab notes on other topic from here.

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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You can grab notes on other topic from here.

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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You can grab notes on other topic from here.

1. NI 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations (Also section 25 of the OSA)

Business Trigger Test: if you are a market participant in the business of trading in securities, you must be registered. If in the business of trading securities, have to be registered

• Used to be exemptions from registration, but then people behaved badly.
• Thus… b/c it was putting integrity of marketplace into question: now have universal registration system
• If you’re in business of trading in securities, have to be registered
• Always need to use a registrant!!

o And instead of entering in UW agreement, enter into agency agreement ^ looks like UW agreement, except almost always “using best efforts” to sell securities on your behalf

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You can grab notes on other topic from here.

1. The Private Placement Exemptions

4 Groups of exemptions: 1) exemptions based on wealth/ sophistication of purchaser (accredited investor, min amount); 2) Limited offering exemptions (govt incentive sec, founder/control person/ family); 3) trades in sec of private companies; 4) Isolated trades (isolated distrib by issuer).

• *also random: discretionary ruling under 74(1) of OSA – never going to happen!

1. Exemptions based on wealth/sophistication of purchaser

• POLICY: sophisticated investors can take care of themselves, don’t need protection of securities act
• Includes:

o A) Accredited investor exemption (s.2.3 of NI 45-106)

• Can use it as many times as you want, to as many purchasers, as long as you’re selling to Accreditor Investors ^ no disclosure required

• s 1.1 of Definitions: banks, pension funds, insurance companies, someone recognized as OSC as AI, and rich people (see definition on p. 1476)

• Rich people: Those individually or with a spouse own financial assets of aggregate realizable value before taxes of $1m, or those whose net income reaches $200,000, or combined w/ spouse exceeded $300,000, reasonable expectation of exceeding that in current year, or those who individually or spouse have net assets of at least $5m
• *Note problem with offering memorandum (don’t have to, but if you do…): What you have delivered is then deemed to be an offering memorandum and if so, it will have a contractual right of action if there is a misstatement / omission.

o B) Minimum Amount Exemption (Section 2.10 of NI 45-106):

• (1) You can sell securities without a prospectus, as long as a (a) purchaser purchases as principal, (b) has an aggregate acquisition cost of not less than $150,000 paid in cash at the time of the trade, and (c) it’s from only one issuer (at $150,000 – incentive to be careful)

• Note: (2): corporation could buy like this, but NOT if you only set it up just to use the exemption, (NSGs)

• They want to know that you have enough $ that you’ll protect yourself (if you could drop this much money at one time, then will take precautions themselves)

• *SAME ISSUE WITH OFFERING MEMORANDUM and practical reality that no one will invest $150,000 a pop with you without getting information, then must have contractual right of action

o If you got 30 people to raise the $150,000 (even if you created a corp to do so)- would NOT allow- no wise guys! This circumvents the rationale that you have the money and will protect yourself

o If another (legitimate) corp bought $150K of securities, that’s ok. B/C it was created for a legitimate purpose and not to circumvent the spirit of the legislation

• NOTE: securities is an area of law that doesn’t allow for certainty, only trying to promote right vs wrong

1. Limited Offering Exemption

• (A) Government-incentive security exemption (s.2.1 of OSC Rule 45-501, p. 1561):

o Policy behind the exemption is different: government has said that they want to promote activity in the oil/gas industry, gold business w/e, in order to create activity that’s good for the country, going to make it easier for companies to sell securities by designating them as government incentive securities so they can sell them easier (has to do with nature of company/business the govnt is trying to promote) o Unlike other exemptions_where regulators feel good b/c nature of investor made investor protection more likely/unnecessary, here, dealing with naked purchaser (not differentiating purchasers, differentiating activity) ^ Therefore are more severe on the preconditions to use b/c have to protect purchase

o STEPS:

• First, need to have government-incentive security (designated by regulators as being 1, from time to time)
• Preconditions to use:
• (a) Can only solicit 75 people, can only sell to 50, each of whom must purchase as principal

o Have to be smart, can’t solicit more than 75, so be careful who you solicit (# OMs from 1-75) must be careful b/c if you get caught soliciting 76, it’s over, you can’t fix that.

• (b) Must give an offering memorandum with certain info (see p. 1561), but things like officers/directors, identifying promoters, giving particulars of qualifications, etc.

• (c) Before you can enter into agreement with someone, must provide them with substantially same information that a prospectus would provide

o They’re “scared,” need to “dress the naked purchaser” and do that by wrapping them in something that sounds/looks/feels like a prospectus (although doesn’t have to be reviewed by the regulator it is very similar) o AND (ii) Purchaser has to be executive officer or director, spouse or child of those, or (i) person by virtue of net worth/investment experience is able to properly evaluate investment. These are the only people you can solicit/send info to. o Have to Put rep in document: you are a person who by virtue of net worth/investment experience is able to properly evaluate the investment (might not be enough)

o Losing sight of policy for exemptions, moving more toward investor protection: Need to raise $ for businesses, if you make them prep document like a prospectus, then it’ s basically the same

• (d) Cannot advertise in connection with this exemption

o if you did, you would be soliciting to more than 75 people o Regulators freaked out by advertising ^ if you do that, no one will read prospectus/OM, whatever, should show low lights if highlights, etc.

• (e) Cannot use this exemption more than once in any calendar year!

o NOTE: *There is nothing wrong with combining exemptions ^i.e. raising some money with $150k exemption and $500k with govt incentive-exemption. Need to be smart about this though- first ask ppl if they are an accredited investor before govt-exemption (b/c govt exemption one is ltd to 75 ppl and once per yr while other is unltd)

• (B) Founder, Control Person and Family Exception

o Prospectus requirement doesn’t apply if you Purchase as principal and you are:

• a founder of company (who alone or with others, started business)
• an affiliate of the founder of the issuer
• a spouse, parent, brother, sister, grandparent, grandchild or child of an executive officer, director or founder of the issuer, or
• a person that is a control person of the issuer

1. Trades in Securities of Private Companies (s.2.4 of NI45-106)

To help companies in their early stages, it’s how they get going

Have to satisfy two things to rely on exemption:

1. Private Company

• Look at articles of incorp to see if there are these 3 things:

o (i) Restriction on transfer of shares: no one can buy/sell shares of company unless they get authorization from board transferring shares from A-B; o (ii) Number of shareholders in company (exclusive of employees/former employees) cannot exceed 50

o (iii) Restriction has to say that only a certain IDENTITY of person can buy your shares (can’t distribute shares to public)

1. Specific identity as a purchaser

• In third part of the articles.
• Who you can sell to: (see p. 1482 – s.2.4(2))

o (a) a director, officer, employee, founder or control person of the issuer o (b) a director, officer or employee of an affiliate of the issuer

o (c) a spouse, parent, grandparent, brother, sister, child or grandchild of a director, executive officer, founder or control person of the issuer

o (e) a close personal friend of the director, exec officer, founder or CP (knows someone well enough that they trust them; must be direct)

o (f) a close business associate of director, exec officer, founder or CP (ind who has had suff prior bus dealings; direct)

o (g) a spouse.. ..etc.. ..of selling security holder or selling security holder’s spouse o (h) securityholder of the issuer o (i) an accredited investor […] o (L) *A person who is not the public

• Policy: Stupid for good intentions- worried about protecting purchaser. Want efficient capital market to allow private companies to raise money from people that aren’t members of public, but you don’t know members of public are

o These categories are very diff to qualify/ define ^ if it is found that you are not one of the permitted purchasers, it has a large econ impact (can’t be used again)

WHO IS THE PUBLIC? A Question of Fact – Case Law

Two Tests: 1) common bonds AND 2) “need to know”

R v. Pipegrass (AB CA) – Common Bonds Test

COMMON BONDS TEST: If persons are not in any sense friends or associates of the accused, or persons having common bonds of interest or associations, they are considered to be the public, if they have common bonds, then not the public

IS A FINDING OF FACT ^ the court must see if the sale transcended sales beyond private concern

Facts: Promoter sought 50k by soliciting farmers with whom there was a previous business dealing.

Issue: Were these 5 people “the public”? – YES.

Decision: Constitutes a distrib to the public Reasons:

• Private corp can’t seek to sell securities – it is clear that it is impose to define what is meant by the term, “offer for sale to the public”; differs in each instance.

SEC v. Ralston Purina – “Need to know ” test

Need to know test (Test of whether you’re selling to “the public” -in which case, can’t use private issuer exemption). TEST: Persons b/c of their sophistication or relationship with company who don’t need protection ofprospectus are not members of the public. Focus of inquiry is NEED of offerees for protection afforded by the act.

Facts: Company did NOT SOLICIT ANYONE, but offered shares to employees. Among those who bought were several production employees, a clerk, bakeshop foreman, electrician, secretary. Etc.

US Ct Decision: common bonds test is dumb, it’s “need to know” test. Employees aren’t necessarily going to qualify as not being the public and therefore being able to sell to them under the exemption. Some will (e.g. exec officers), and some will not. Employees here did not have access to the info that a prospectus would provide.

Implications:

• The exemption is for those for whom there is no practical need for application of the prospectus. So should turn on whether the class of persons affected needs protection of the act. Those who are able to fend for themselves = not a public offering.
• **BOTTOM LINE: Not sure which test applies, but it’s like what a security is ^ if they think that the act ought to apply, it will. If the court or regulators think that they need the protection, or they don’t, they’ll act accordingly.

1. Isolated Trades (s.2.30 of NI45-106)

Distribution must be an isolated one that is not made (a) in the course of continued and successive transactions of a like nature or (b) by a person whose usual business is trading in securities.

• Very rarely used (prob not on exam)

1. Discretionary Ruling (74(1)) – not going to happen

Exemption order (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: 1. A ruling that any person or company is not subject to section 25; 2. A ruling that any trade, intended trade, security, person or company is not subject to section 53. (2) can impose conditions

1. Offering Memorandum (and problems with it)

Some and at least one of the exemptions gives legal obligation on company to deliver document that meets definition of offering memorandum (looks/acts like a prospectus)

1. What is an offering memorandum?

Rule 14-501 Definitions (s.1.1(2)) & OSA (s. 1(1); same as s.1.1(2)) (also see 5.6(2) of CP 45501 for what isn’t one)

Offering memorandum: a document prepared by a seller of securities which describes the business and affairs of the company in order to provide the prospective purchasers (investors) with sufficient information as to whether they want to make an investment

Not sure what it is, and no statutory authority to clarify, just know you need truth and no omissions, sounds like full, true and plain disclosure ^ Thus offering memo is no less complicated than a prospectus

• All the guidance we have:

o (a) as long and short as necessary, o (b) can’t be ambiguous, o (c) needs statutory right of action

• Not every doc is an offering memorandum: per s.5.6(2) of CP 45-501 ^ if you provide a term sheet JUST setting out the deal, that’s not an OM

o Again, practical import of that is zero ^ no one lets you sell securities just by laying out deal

1. Must Contain Statutory Right of Action (if you deliver one) (Rule 45-501 s.5.3) & Deliver (s.5.4) for rescission

OSC RULE 45-501, s.5.3: you don’t have to deliver any document to AIs in connection with the securities, but if you CHOOSE to issue them an offering memorandum, must contain a contractual right of action saying

you can sue us if there’s a misrepresentation (not only misstatement of material fact, but also omission of MF)

• Exemptions Should technically be fast, but problem: (Inv prot v. eff cap mark):
• If you give an OM, have an obligation to be accurate and include everything
• Tension and Critique: if you give NO information, that’s cool, but if you do, we’ll call it an OM and it has to give all info you need to know

OSC RULE 45-501, s.5.4: Delivery of OM^If you do deliver it have to send copy of doc to securities commission w/In 10 days of date of trade

o Problem in Practice: Try to make it easy, but now we’ve made it very difficult. Not likely anyone will give you $ without information, so you end up being in prospectus territory (“looks/costs like one”)

o Actually a huge burden: have to (a) tell the truth and (b) not omit anything (which forces you to think about what you don’t know)

1. Liability under Offering Memorandum (s.130.1 of OSA)

s.130.1 (1) Liability for misrepresentation in offering memorandum where a misrep, the purchaser has the following rights: 1) right of actions for damages against issuer and selling securityholder; 2) right of rescission against person/ company; (2) Defence: not liable if purchaser knew of misrep

• (1) Where an offering memorandum contains a misrepresentation, a purchaser who purchases a security offered by the offering memorandum during the period of distribution has, without regard to whether the purchaser relied on the misrepresentation, 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.

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.

• (2) Defence: No person or company is liable under subsection (1) if he, she or it proves that the purchaser purchased the securities with knowledge of the misrepresentation.
• (3) Limitation in action for damages: In an action for damages pursuant to subsection (1), the defendant is not liable for all or any portion of the damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon.

*if including a forecast, must still comply with NI 51-102, or else takes you out of the exemption

You can grab notes on other topic from here.

You can grab notes on other topic from here.

1. Private Placement & Exemptions
2. General Rule

General rule: no trading in security, unless you are registered. If it’s a distribution, without prospectus or proper reliance on private placement exemption

Policy: These are primarily meant to promote efficient capital markets (balanced w/ investor protection)

Two Requirements

• Disclosure requirement – satisfied by prospectus, comprehensive disclosure document
• Registration requirement – satisfied by underwriter selling securities

Tension b/w Investor Protection vs. Efficient Capital Markets

• In third segment, see tension b/w investor protection (do a prospectus) and efficient capital markets (not every company can feasibly do a prospectus)
• Allows sale of securities to public without time, trouble and expense of using a prospectus through private placement exemptions

The Concept of the Closed System

• Securities will only be allowed to trade outside of this closed system if that trading is supported by adequate continuous disclosure.

o Trading within the closed market: Secondary market trading within closed market can only occur in reliance on an exemption. Exemption available only where purchasers do not need to know prospectus information o Trading outside the closed market:

• (i) Prospectus Disclosure Followed by Continuous Disclosure. Need to provide adequate information to the investing public. Provide a prospectus, continuous disclosure.
• (ii) Resale Restrictions: allow a person who purchased under an exemption to sell to members of the investing public as long as certain conditions concerning adequate disclosure are met. Purpose to protect investors by (1) access to information to those who care to gather it; (2) information for professional investment advice; (3) base of information to sophisticated investors whose trading causes market price to reflect underlying value. This requires a “seasoning period”: the period of time to allow a build-up of information.

1. Advantages & Objectives of Private Placement *Exemptions found in NI 45-106 OR Rule 45-501

Adv: (1) Speed (No Prior Regulatory Review, like with prospectus, but still highly regulated!!); (2) Confidentiality (almost always more confidential than prospectus)

Policy Objectives of private placement exemption: All of them reflect a trade-off b/w investor protection and efficient capital markets – this is at least what they’re TRYING to do, even if there are inconsistencies

• No flexibility on these exemptions so be very careful

1. Identity of Purchaser: Purchaser is so sufficiently sophisticated or wealthy that they do not need the protections of the securities act. E.g. Bank ^ you’ll protect yourself, hiring lawyers, accountants, advisors

All exemptions focus on :(1) identity of purchaser; (2) inherently safe securities; (3) Info already available; (4) another superior policy objectives

Inherently Safe Securities: Securities are so inherently safe that to need OSA to get involved is stupid (e.g. Canada Savings Bonds ^ not worried that if you buy these, govnt will default on obligation to pay)

1. Information already Available: Information already available in a different form, so to require it again is stupid
2. Another Superior Policy Objective: Some other policy objective trumping investor protection to some extent. E.g. Trying to promote investment in oil/gas, gold, electric cars, etc. ^ trying to do something that, from a policy perspective, is important enough to give exemption even if it detracts a bit from investor protection

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