Category: Securities Regulation

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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

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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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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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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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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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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

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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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You can grab notes on other topic from here.

Actions by or on Behalf of the Reporting Issuer

• Issuer can bring action against insider. Issuer must show that the person was an “insider”, “affiliate” or “associate” of the issuer, that the person bought or sold with knowledge of material information, or informed, and that they did so before the information was generally disclosed.
• The Securities Commission can bring an application for leave to bring an action in the name of and on behalf of the issuer to enforce the duty to account if the issuer does not.

1. Administrative sanctions
2. Cease trade orders
3. Removal of exemptions
4. Prohibitions from acting as a director or officer
5. Administrative penalty
6. Insider reporting.

*subject to defences above

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You can grab notes on other topic from here.

1. “Make Use of Defence – no longer applicable

• Used to be a defence in Canada saying that you had info, but didn’t MAKE USE OF IT (I would have bought it anyways)

o E.g. Martha Stewart ^ knew it, but made decision to trade before I knew this (found guilty of lying about insider trading, not guilty OF Insider trading)

• Made it impossible to convict anyone or find them liable for insider trading (to prove that they USED that knowledge to buy the securities, not just that they bought it)

o People in securities market not happy ^ can’t have an efficient market if you have such severe consequences and a broad rule

o In response to that: created another defence under OSA- now only requires that person “has knowledge” of a material fact that has not been disclosed (although Crim Code insider trading provision, s.182.1, requires that accused sold sec “knowingly using insider info” – therefore, may hamper effectiveness of provision)

1. “Protecting Integrity of the Info” (s.175 of Regs)

If you take all reasonable precautions to protect integrity of info and someone else trades, not guilty (only if reckless)

• Under agency law: partner is deemed to know what partners now (when in reality, you don’t)

o Thus, if you take all reasonable precautions to protect integrity of that information and someone else trades, not guilty, but if you’re reckless and they’re still not sure, rather take $ from you than investor

o Policy considerations to protect shareholders

Rule:

• If you’re a person in a special relationship, you buy/sell securities with knowledge of material change/fact that hasn’t been generally disclosed, you’re NOT guilty of insider trading if ALL of the following conditions are met:

o (a) only reason you’re deemed to have knowledge is bc info was known to one of your officers, directors, partners or employees

o (b) decision to buy/sell was made by someone who did not have ACTUAL knowledge of the information

o (c) no advice was given by person who had actual knowledge to person who made decision to trade

o (d) appropriate mechanism (wall) was in place to prevent flow of information from person who had actual knowledge to person who made decision to trade o firm or business took reasonable precautions to protect the integrity of that information

REGULATIONS, s.175

• s. 175(1) A person or company that purchases or sells securities of a reporting issuer with knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed is exempt from subsection 76 (1) of the Act and from liability under section 134 of the Act, where the person or company proves that,

o (a) no director, officer, partner, employee or agent of the person or company who made or participated in making the decision to purchase or sell the securities of the reporting issuer had actual knowledge of the material fact or material change; and o (b) no advice was given with respect to the purchase or sale of the securities to the director,

officer, partner, employee or agent of the person or company who made or participated in making the decision to purchase or sell the securities by a director, partner, officer, employee or agent of the person or company who had actual knowledge of the material fact or the material change, o but this exemption is not available to an individual who had actual knowledge of the material fact or change.

• (2) AGENTS/INVESTMENT PLANS/FULFILLING CONTRACTS: A person or company that purchases or sells securities of a reporting issuer with knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed is exempt from subsection 76 (1) of the Act and from liability under section 134 of the Act, where the person or company proves that,

o (a) the purchase or sale was entered into as agent of another person or company pursuant to a specific unsolicited order from that other person or company to purchase or sell;

o (b) the purchase or sale was made pursuant to participation in an automatic dividend

reinvestment plan, share purchase plan or other similar automatic plan that was entered into by the person or company prior to the acquisition of knowledge of the material fact or material change; or

o (c) the purchase or sale was made to fulfil a legally binding obligation entered into by the person or company prior to the acquisition of knowledge of the material fact or material change.

• (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) or (3) of the Act.
• (4) A person or company who purchases or sells a security of a reporting issuer as agent or trustee for a person or company who is exempt from subsection 76 (1) of the Act and from liability under section 134 of the Act by reason of clause (2) (b) or (c), is also exempt from subsection 76 (1) of the Act and from liability under section 134 of the Act.
• (5) A person or company is exempt from subsections 76 (1), (2) and (3) of the Act where the person or company proves that such person or company reasonably believed that,

o (a) the other party to a purchase or sale of securities; or o (b) the person or company informed of the material fact or material change, o as the case may be, had knowledge of the material fact or material change.

1. Defence in Practice – Law Firms

• Protect themselves against inadvertent trade – they all have rules on insider trading.

o Restricted List: Some say, every time you have transaction involving public company that is material, you have an obligation to phone a designated person and put that company on a restricted list so that someone in the law firm knows that people in that law firm cannot buy/sell shares b/c “we have knowledge of..

o Either way, trying to stop inadvertent/unintended insider trading claim. Integrity of information is protected (so you can use the defence) o In investment banks: Geographic separation b/w traders/investment bankers doing the deal, so bankers can’t get access to broker’s information (doesn’t work in law firm)

1. Trading as an agent & you ’ve given no advice (s.172((a) of Regs)

If you trade as AGENT for another person pursuant to unsolicited order, and you gave NO advice, you’re not guilty of insider trading

• I phone my broker, say buy apple. My broker knows that apple is about to make a massive announcement. What should my broker do?

o Not say anything. If broker tells me I can’t do that trade, I’ve learned something. In absence of defence, if my broker executes that trade, he’s guilty of insider trading. He shouldn’t be. So there’s a defence.

• 1. .5.5 Automatic Investment Plan (175(2)(b) of Regs)

If automatic dividend reinvestment plan, not guilty of insider trading, even if you knew

• Example: Disney: automatic dividend reinvestment plan: don’t want to send you cheques every quarter for .05 if you own 1 share ^ accumulate dividends for you, when it reaches price of a share, we buy you one

If you know someone is going to bid for Disney and they automatically buy you a share pursuant to Automatic Dividend Reinvestment Plan, you ’re not guilty of insider trading, even if you knew. They’re doing it for you w/o you asking

1. To fulfill legally binding agreement that happened before material info was known (s.175(2)(c) of regs)

Defence b/c entered into legally binding contract BEFORE You had knowledge, then you subsequently get

knowledge, don’t have to breach contract (Policy rationale dno uneven playing field I- not making decisions

w/ knowledge)

• E.g. Enter into legally binding agreement that on Halloween, you’ll buy 100 shares of apple from me, we both know nothing. Then I get insider info that stock is going down. Halloween comes, what should law be? dOKAY
• What if I have an option, then I learn information? No, b/c option not a legally binding contract.

1. Trades between 2 People Who Both Know the Info (s.175(5) of Regs)

Fine b/c both have same info, no one has advantage over someone else. Playing field still level.

• NOTE: insider trading isn’t designed to create equal opportunities or be fair in every circumstanced can’t do everything

1. Actions, Sanctions & Penalties for Insider Trading
2. Penal sanctions – CRIMINAL

Under s. 382.1 Criminal Code prohibits trading on basis of material info concerning an issuer that has not been generally disclosed (similar to OSA s.76)

Conviction for insider trading: Prosecution must prove:

1. Accused was in a “special relationship”
2. Accused purchased or sold securities of the reporting issuer
3. Accused made the purchase or sale with knowledge of a “material fact” or “material change” concerning the affairs of the reporting issuer; AND
4. That the material fact or material change had not been generally disclosed.

Conviction for tipping/informing:

1. Accused person was in a special relationship with reporting issuer
2. Accused informed another person of a material fact or material change with respect to the reporting issuer.
3. Accused informed another person of the material fact or material change before it was generally disclosed.

*also note: that unlike OSA, Crim Code does not cover tippees of tippees

*also makes no distinction between reporting issuers and non-reporting issuers (who would not have to disclose insider trading under OSA)

4.6.6.2 Civil Actions

Defencedinformation was given in the necessary course of business of the reporting issuer; a defence where the giving of the information is necessary to effect the takeover, business combination or acquisition; finally where the person reasonably believed the information had been generally disclosed.

The Act provides for an action for damages against a person trading on inside information by the person with whom the trade was made.

P must show:

1. D was in “special relationship” with RI
2. D purchased or sold securities of RI
3. D made purchase or sale with knowledge of a material fact or change
4. Material fact or change had not been generally disclosed.

Tipping: The Act also provides for an action for damages against a person who informed another of the inside information.

P must prove:

1. D is RI was in “special relationship” with issuer
2. D informed another person of material information
3. Information was given before material information generally disclosed.

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