Category: Securities Regulation

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Reasoning: the securities of reporting issuers are traded in markets in which some potential investors will need to know the information that must be disclosed.

o Thus, reporting v. non-reporting distinguishes between issuers whose securities are sold to those presumed to need to know and those who do not.

o Key feature of a reporting issuer is that it is an issuer that has issued securities under a prospectus in the province.

• • 1. Application to Reporting Issuers

Section 1(1) of the OSA: Reporting Issuer “reporting issuer” means an issuer,

• (a) that has issued voting securities on or after the 1st day of May, 1967 in respect of which a prospectus was filed and a receipt therefor obtained under a predecessor of this Act or in respect of which a securities exchange take-over bid circular was filed under a predecessor of this Act,
• (b) that has filed a prospectus and for which the Director has issued a receipt under this Act,
• (b.1) that has filed a securities exchange take-over bid circular under this Act before December 14, 1999,
• (c) any of whose securities have been at any time since the 15th day of September, 1979 listed and posted for trading on any exchange in Ontario recognized by the Commission, regardless of when such listing and posting for trading commenced,
• (d) to which the Business Corporations Act applies and which, for the purposes of that Act, is offering its securities to the public,
• (e) that is the company whose existence continues following the exchange of securities of a company by or for the account of such company with another company or the holders of the securities of that other company in connection with,

o (i) a statutory amalgamation or arrangement, or

o (ii) a statutory procedure under which one company takes title to the assets of the other company that in turn loses its existence by operation of law, or under which the existing companies merge into a new company, where one of the amalgamating or merged companies or the continuing company has been a reporting issuer for at least twelve months, or

• (f) that is designated as a reporting issuer in an order made under subsection 1 (11); (“emetteur assujetti”)
  • 1. Obligation to File Financial Statements
       1. ANNUAL – Section 4.1

Every company must prepare annual, audited comparative financial statements within 90 days of the end of the fiscal year

• • • 1. INTERIM – Section 4.3(1) of NI51-102

An issuer must file cumulative, comparative financial reports for each interim period ending after it became a reporting issuer, and 4.4(a)(i) the filing must be completed on or before the 45^th day after the end of the interim period in a non-foreign jurisdiction (must file every 3, 5, and 9 months) (note: not audited)

• Section 80 of the OSA: exemptions in particular circumstances from financial requirements (we don’t need to know them)

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1. Investor information; (2) accountability technique to encourage more eff management/ deterrent to fraud; (3) Creates equality of opportunity for all investors in the marketplace (sellers & buyers); (4) discourages transactions that don’t meet public scrutiny; (5) allows for disciplining of mgmt. (condemn/ commend)
2. Investor Information: Give investors ability to determine whether they want to buy/sell or not, what price ought to be AND ensure this info remains current
3. Accountability technique to encourage more eff management /deterrent to fraud: a) Should have to let investors know info so they can make educated decisions; (b) Creation of free, open securities markets, requires that there be free/open publicity, competing judgments of buyer/seller reflects just price, establishes true market value
4. Creates equality of opportunity for all investors in the marketplace (sellers and buyers): According to OSC, if you have to disclose everything this leads to an Efficient Market – confidence necessary to run efficient capital markets (object is to make avail at all times, info investor needs)
5. Discourages transactions that don’t meet public scrutiny: sunlight is the best disinfectant
6. Allows for disciplining of management (condemn or commend)

National Policy 51-201: Disclosure Standards

Section 1.1 (1): “It is fundamental that everyone investing in securities have equal access to information that may affect their investment decisions”.

Competing concerns

• Cost of disclosure can be high.
• Too much information can lead to overload. Excessive disclosure can raise the cost of obtaining significant information.

Reporting Issuers ONLY: Only reporting issuers are subject to continuous disclosure (as defined in s.1(1) of OSA)

• In some instances, disclosure may deter productive activity.

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1. Sample Prospectus o See 44-101F1.

o Warning at the top: No securities commission has passed upon the merits (have to tell you whether it is a new issue OR secondary offering (Note: if this was a prelim prospectus would have a red herring at top) o How much $ to UWs/company o Risk factors

o Summary (b/c every prospectus must have a summary)

o Everything about company that is material, including: business of company, use of proceeds (must disclose what you will do with money), financial forecast and warnings, financial statements (capital, principal shareholders, directors/officers), UW agreement details (market out clause: obligations of UW can be terminated), escrow arrangements (to balance risks between new and old shareholders), Material contracts (and risks), AND legal proceedings, certificate of company (strict liab), certificate of underwriters (gives rise to due diligence defence)

o Obligations of UW may be terminated at their discretion based on their assessment of state of financial markets (market out clause), purchaser’s stat rights, remedy for rescission/damage, certificate

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1. Liability for Misrepresentation in a Prospectus
2. Liability

WHO IS LIABLE – Company, directors, selling security holders, officers who signed prospectus, underwriters, and the experts all may be liable for a misrepresentation in the prospectus. Policy- have everyone liable to give incentive to be careful.

• Selling Securityholders:

o (a) have to get company to agree to sell your shares under prospectus o (b) understand that you’re liable for misrepresentation under that prospectus

• POLICY: Why have everyone liable? To give incentive to be careful. Underwriters/Directors/Selling Secholders will be more careful if they’re going to be liable, Directors will actually read it.

o Prob – may have made it harder for high quality directors to serve on boards of public companies as they are worried about liability^ therefore, less competitive companies

s.130: sets out liab, damages and defences for liab

Recall: s.1(1) Definitions: Misrepresentation: (a) untrue statement of material fact or (b) omission to state material fact that is required to be stated or that is necessary to make a statement not misleading in light of circumstances in which it was made.

• Can be liable for not amending the prospectus to reflect a material change, but not for failing to report material FACT (Danier)
• Option of Claims for Purchaser Upon Misrepresentation:

1. CONTRACTUAL CLAIMS: Rescission (get money back)
2. DAMAGES: statutory rights under 130 of OSA ^ 130(10): “these statutory rights are in addition to and not in derogation of any rights at common law”

o

o

• Plaintiff must show: (a) purchase of the security offered under the prospectus, (b) that the purchase was made during the period of the distribution and (c) that there was a “misrepresentation” in the prospectus.
• If they establish this, subject to some defences: plaintiff is entitled to rescission or damages

1. TORT: (a) fraudulent misrepresentation (b) negligent misrepresentation (Hedley Byrne, Queen v. Cognos p. 153)

o

• Fraudulent misrep: D made false statement knowingly or without belief in its truth or was recklessly careless whether it be true or false & P relied on the statement to his detriment
• Negligent misrepresentation: Duty of Care based on a special relationship between representor and representee; rep was untrue, inaccurate or misleading; representor acted negligently in making misrep; representee relied, in a reasonable manner, on the misrep; AND reliance was detrimental (damages resulted)

Establishing a Claim for Damages for Misrepresentation:

In a document:

1. Issuer is either
2. Reporting issuer
3. Any other issuer with a real and substantial connection to the jurisdiction any securities of which are publicly traded.
4. Disclosure “document” contains a “misrepresentation” (which includes both misstatements and omissions) and
5. The P “acquired or disposed of” a security during the period in which the document was released and before the time the misrepresentation was corrected.

OSA, s.130: Liability for misrepresentation in prospectus

1. Liability for misrepresentation in prospectus: Where a prospectus, together with any amendment to the prospectus, contains a misrepresentation, a purchaser who purchases a security offered by the prospectus during the period of distribution or during distribution to the public has, without regard to whether the purchaser relied on the misrepresentation, a right of action for damages against,

• (a) the issuer or a selling security holder on whose behalf the distribution is made;
• (b) each underwriter of the securities who is required to sign the certificate required by section 59;
• (c) every director of the issuer at the time the prospectus or the amendment to the prospectus was filed;
• (d) every person or company whose consent to disclosure of information in the prospectus has been filed pursuant to a requirement of the regulations but only with respect to reports, opinions or statements that have been made by them; and
• (e) every person or company who signed the prospectus or the amendment to the prospectus other than the persons or companies included in clauses (a) to (d),
• or, where the purchaser purchased the security from a person or company referred to in clause (a) or (b) or from another underwriter of the securities, the purchaser may elect to exercise a right of rescission against such person, company or underwriter, in which case the purchaser shall have no right of action for damages against such person, company or underwriter.

1. Defence – ONLY DEFENCE OPEN TO ISSUER/SELLING SEC-HOLDER – STRICT LIABILITY (+ under (7) showing that the diminution in value wasn’t from misrep)

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.

1. Idem: No person or company, other than the issuer or selling security holder, is liable under subsection (1) if he, she or it proves,

• (a) that the prospectus or the amendment to the prospectus was filed without his, her or its knowledge or consent, and that, on becoming aware of its filing, he, she or it forthwith gave reasonable general notice that it was so filed;
• (b) that, after the issue of a receipt for the prospectus and before the purchase of the securities by the purchaser, on becoming aware of any misrepresentation in the prospectus or an amendment to the prospectus he, she or it withdrew the consent thereto and gave reasonable general notice of such withdrawal and the reason therefor;
• (c) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on the authority of an expert or purporting to be a copy of or an extract from a report, opinion or statement of an expert, he, she or it had no reasonable grounds to believe and did not believe that there had been a misrepresentation or that such part of the prospectus or the amendment to the prospectus did not fairly represent the report, opinion or statement of the expert or was not a fair copy of or extract from the report, opinion or statement of the expert;
• (d) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an expert or purporting to be a copy of or an extract from his, her or its own report, opinion or statement as an expert but that contains a misrepresentation attributable to failure to represent fairly his, her or its report, opinion or statement as an expert,
• (i) the person or company had, after reasonable investigation, reasonable grounds to believe and did believe that such part of the prospectus or the amendment to the prospectus fairly represented his, her or its report, opinion or statement, or
• (ii) on becoming aware that such part of the prospectus or the amendment to the prospectus did not fairly represent his, her or its report, opinion or statement as an expert, he, she or it forthwith advised the Commission and gave reasonable general notice that such use had been made and that he, she or it would not be responsible for that part of the prospectus or the amendment to the prospectus; or
• (e) that, with respect to a false statement purporting to be a statement made by an official person or contained in what purports to be a copy of or extract from a public official document, it was a correct and fair representation of the statement or copy of or extract from the document, and he, she or it had reasonable grounds to believe and did believe that the statement was true.

1. Idem – DUE DILIGENCE DEFENCE FOR ALL BUT ISSUER/SELLING SEC HOLDER FOR EXPERT PORTION: No person or company, other than the issuer or selling security holder, is liable under subsection (1) with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an expert or purporting to be a copy of or an extract from his, her or its own report, opinion or statement as an expert unless he, she or it,

• (a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation; or
• (b) believed there had been a misrepresentation.

1. Idem – DUE DILIGENCE DEFENCE FOR NON-EXPERTISED PORTION: No person or company, other than the issuer or selling security holder, is liable under subsection (1) with respect to any part of the prospectus or the amendment to the prospectus not purporting to be made on the authority of an expert and not purporting to be a copy of or an extract from a report, opinion or statement of an expert unless he, she or it,

• (a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation; or
• (b) believed there had been a misrepresentation.

o Notes: Thus, have to show (1) you believed there was no misrepresentation, (2) you had reasonable grounds for that belief (3) you conducted investigation to verify that

1. Limitation re underwriters: No underwriter is liable for more than the total public offering price represented by the portion of the distribution underwritten by the underwriter.
2. Limitation in action for damages – that depreciation wasn’t b/c of misrep (hard to prove): In an action for damages pursuant to subsection (1), the defendant is not liable for all or any portion of such damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon.
3. Joint and several liability: All or any one or more of the persons or companies specified in subsection (1) are jointly and severally liable, and every person or company who becomes liable to make any payment under this section may recover a contribution from any person or company who, if sued separately, would have been liable to make the same payment provided that the court may deny the right to recover such contribution where, in all the circumstances of the case, it is satisfied that to permit recovery of such contribution would not be just and equitable.
4. Limitation re amount recoverable: In no case shall the amount recoverable under this section exceed the price at which the securities were offered to the public.
5. No derogation of rights: The right of action for rescission or damages conferred by this section is in addition to and without derogation from any other right the purchaser may have at law.

Section 1(1) Misrepresentation

“misrepresentation” means, (a) an untrue statement of material fact, or (b) an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made; (“presentation inexacte des faits”)

Kerr v. Danier (SCC, 2007), 157

Ratio: Only have to report material CHANGES post-filing, not material facts. A forecast can be the subject of misrepresentation, P does not have to prove reliance, deemed

Facts: Danier began distributing shares under a final prospectus in 1998. Sold for $11.25/share. Forecast of sales (FOFI) contained a warning that “there is no guarantee that such Forecast will be achieved in whole or in part”. After prelim, but before final, had a sale that didn’t go great. Did an internal (not required) review of the numbers, and realized they were lagging behind. Chose not to issue press release, because they believed target would be met by the end of the quarter. Then had a Victoria Day sales promotion, and it did not go well. After final, but before end of distribution, Q4 revenues were lower than forecast. Issued a revised forecast to the OSC. They then issued a press release/material change report and the stock price went down on the date of the announcement. Actual revenues were not that far off of estimate by the end of the year. Danier’s shareholders that lost $ sued to get back $ they lost, and said that it was a misrepresentation for Danier not to include the initial information about lagging behind (saying it was necessary to make the forecast not misleading under (b) of the misrep definition

Decision: In December 2005: ON CA: reversed trial decision. Don’t have to do an amendment for material fact (trial judge didn’t give suff deference to business judgment rule – fact that directors were wrong wasn’t the issue). Leave given to SCC. In 2007: SCC: dismissed the appeal, upheld ON CA’s decision.

• In May 2004, ON TJ held that Danier and its officers were liable for statutory misrep in prospectus relating to an earning’s forecast^poor revenue was a material FACT that Danier was required to disclose.

Implications:

• Issuers do not have an obligation to update prospectus to reflect material facts, only material changes: Issuers do not have an obligation to update a prospectus to reflect material facts after filing and do not have civil liability for failing to do so. To impose civil liability where an issuer has complied with the Act would be contrary to the securities legislative framework. Need only to report material changes, not material facts.
• Purchasers do not have to prove reliance, reliance is deemed if it was misrep at time of purchase:

The plaintiff does not have to prove reliance. Instead, the plaintiff is deemed to have relied on the misrepresentation if it was a misrepresentation at the time of the purchase. It also may apply to secondary market purchases as well, since securities are offered under the prospectus during the period of distribution.

o **HE SAYS SCC APPLIES BJR, and says they won’t interfere with business judgment, but they actually don’t ^ they disagree that the BJR applies (only part of ON CA judgment they don’t uphold) (they actually say that business judgment has nothing to do with disclosure ^ you’re obligated to provide certain disclosure and you cannot “business judgment” your way out of that. The business judgment rule does NOT apply to limit statutory disclosure obligations if an obligation to make disclosure otherwise exists.

o Also note: and “include an omission to make a statement not misleading” is meant to capture “half-truths. ”

3.4.8.2 Damages

UNDER STATUTORY ACTION: Purchaser would claim diminution of security as a result of misleading nature ^[1]

Section 130(8): J&S Liability: all defendants jointly and severally liable for the whole, but they can seek contribution from each other unless the court denies that right to contribution (if not “just & equitable”)

Section 130(7): Defence of showing that SH loss was not from misrepresentation: defendant is not liable for all or portions of damage if diminution is not the result of the misrepresentation, but onus is on D to prove (almost impossible)

• Section 130(2): also not liable if you show they knew about the misrep
• Section 130(9): Can only recover what was spent: the most you can recover is what you spent (what securities were offered to public for), no opportunity costs
• Section 130(6): Proportionate for Underwriters: if more than one, underwriter only responsible for portion underwritten by them (total public offering price of their part)
• Section 130(1)(d): Experts only liable for Expertised Portion: experts only responsible for expertised portion (so if giving tax opinion, then only liable for that)

o Would have to show under 130(4) that you did your due diligence

o Joint and Several Liability if you ARE liable under expert portion

POLICY:

1. Investor protection: j_will be more careful if you’re fully liable (also with J&S liability ^ you’re liable so shouldn’t put the burden on the plaintiff to sue different people to get the $)

• Between two innocent people (expert and buyer, one has to lose money, going to be expert, you can get it back from them)

1. but also need efficient capital markets ^ which is why we have defences

• Absent defences, who is going to play?
• How are we going to get underwriters to sell securities if they’ll be liable for any misrep in any prospectus for hundreds of millions of dollars when they only make 2 million? (if they don’t play, we don‘t need investor protection b/c no one’s selling securities)

3.4.8.3 Defences

POLICY -Why do we have defences?

• Defences are rooted in the concept of efficient capital markets – you cannot be leaning so hard toward investor protection that it doesn’t work. Can’t hold them to absolute standard, b/c won’t play ^ but if you say you have an obligation to be CAREFUL ^ that sounds reasonable (due diligence is so that someone will be CAREFUL)
• *It’s hard to get good directors when we over-regulate everything to death, hard to balance

Defences

Defendants can avoid liability by showing that:

1. The person purchasing the securities had knowledge of the misrepresentation.
2. He or she did not consent to the filing of the prospectus or that consent was withdrawn, with reasonable general notice of the withdrawal and the reason for it, prior to the purchase of the securities by the purchaser.
3. The statement was not made by him or her and her or she had no reason to believe, and did not believe, that it was a misrepresentation.
4. He or she conducted a reasonable investigation to produce reasonable grounds for a belief that there was no misrepresentation and he or she did not believe there had been a misrepresentation: due diligence defence.
5. the depreciation in the value of the security was not caused by the misrepresentation.

s.130: Defences

1. Issuer OR security holder: “Strict” Liability (no Due Diligence Defence, tho, J&S Liability, has options i or v above)

• Even if innocent mistake in misrep, who should suffer b/c of it? Issuer, not investor, you should have known everything, investor has cleaner hands than you, unless they knew, you had all info
• Thus, the issuer/selling securityholder only has two defences (both extremely hard to prove) and NO due diligence:

o Section 130(2) and (7)

■ (2) Defence – ONLY DEFENCE OPEN TO ISSUER/SELLING SEC-HOLDER –

STRICT LIABILITY (+ under (7) showing that the diminution in value wasn’t from misrep)

• 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.

■ (7) Limitation in action for damages – that depreciation wasn’t b/c of misrep (hard to

prove)

• In an action for damages pursuant to subsection (1), the defendant is not liable for all or any portion of such damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon.

1. Experts (Joint and Several Liability, and only for expertised portions – has all defences from above available + 1)

• Experts are only liable for expertised portions, have a defence for DD, diminution in value, the “they knew”, did not consent, and statement not made by them (failure to fairly rep opinion)

o s. 130 (2) Again – showing they knew.

o (3) Idem – LIABILITY FOR NON-EXPERT FOR EXPERTISED PORTIONS (and also some stuff for experts about those portions) – “reasonable grounds” – see below or above.

• (a) that the prospectus or the amendment to the prospectus was filed without his, her or its knowledge or consent, and that, on becoming aware of its filing, he, she or it forthwith gave reasonable general notice that it was so filed;
• (c) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on the authority of an expert or purporting to be a copy of or an extract from a report, opinion or statement of an expert, he, she or it had no reasonable grounds to believe and did not believe that there had been a misrepresentation or that such part of the prospectus or the amendment to the prospectus did not fairly represent the report, opinion or statement of the expert or was not a fair copy of or extract from the report, opinion or statement of the expert;

o (4) Idem – DUE DILIGENCE DEFENCE FOR ALL BUT ISSUER/SELLING SEC HOLDER FOR EXPERT PORTION: No person or company, other than the issuer or selling security holder, is liable under subsection (1) with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an expert or purporting to be a copy of or an extract from his, her or its own report, opinion or statement as an expert unless he, she or it,

• (a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation; or
• (b) believed there had been a misrepresentation.

• Notes: Thus, have to show (1) you believed there was no misrepresentation, (2) you had reasonable grounds for that belief (3) you conducted investigation to verify that

o (7) Limitation in action for damages – that depreciation wasn’t b/c of misrep (hard to prove): In an action for damages pursuant to subsection (1), the defendant is not liable for all or any portion of such damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon.

1. NON-EXPERTS (e.g. Due Dilig defence for everyone except the issuer and selling securityholder – e.g. Directors, officers)

Have defences that purchaser knew, due diligence, and depreciation not from misrep and also have separate defences for their liability of the EXPERTISED portions ^[2]

• (3) Idem – LIABILITY FOR NON-EXPERT FOR EXPERTISED PORTIONS (and also some stuff for experts about those portions) – “reasonable grounds”: No person or company, other than the issuer or selling security holder, is liable under subsection (1) if he, she or it proves,

o (a) that the prospectus or the amendment to the prospectus was filed without his, her or its knowledge or consent, and that, on becoming aware of its filing, he, she or it forthwith gave reasonable general notice that it was so filed;

o (b) that, after the issue of a receipt for the prospectus and before the purchase of the securities by the purchaser, on becoming aware of any misrepresentation in the prospectus or an amendment to the prospectus he, she or it withdrew the consent thereto and gave reasonable general notice of such withdrawal and the reason therefor;

o (c) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on the authority of an expert or purporting to be a copy of or an extract from a report, opinion or statement of an expert, he, she or it had no reasonable grounds to believe and did not believe that there had been a misrepresentation or that such part of the prospectus or the amendment to the prospectus did not fairly represent the report, opinion or statement of the expert or was not a fair copy of or extract from the report, opinion or statement of the expert;

o (d) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an expert or purporting to be a copy of or an extract from his, her or its own report, opinion or statement as an expert but that contains a misrepresentation attributable to failure to represent fairly his, her or its report, opinion or statement as an expert,

• (i) the person or company had, after reasonable investigation, reasonable grounds to believe and did believe that such part of the prospectus or the amendment to the prospectus fairly represented his, her or its report, opinion or statement, or
• (ii) on becoming aware that such part of the prospectus or the amendment to the prospectus did not fairly represent his, her or its report, opinion or statement as an expert, he, she or it forthwith advised the Commission and gave reasonable general notice that such use had been made and that he, she or it would not be responsible for that part of the prospectus or the amendment to the prospectus; or

o (e) that, with respect to a false statement purporting to be a statement made by an official person or contained in what purports to be a copy of or extract from a public official document, it was a correct and fair representation of the statement or copy of or extract from the document, and he, she or it had reasonable grounds to believe and did believe that the statement was true.

• (5) Idem – DUE DILIGENCE DEFENCE FOR NON-EXPERTISED PORTION: No person or company, other than the issuer or selling security holder, is liable under subsection (1) with respect to any part of the prospectus or the amendment to the prospectus not purporting to be made on the authority of an expert and not purporting to be a copy of or an extract from a report, opinion or statement of an expert unless he, she or it,

o (a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation; or

o (b) believed there had been a misrepresentation.

• Notes: Thus, have to show (1) you believed there was no misrepresentation, (2) you had reasonable grounds for that belief (3) you conducted investigation to verify that
• (7) depreciation wasn’t b/c of misrep

DUE DILIGENCE DEFENCE

Due Diligence : Standard of Reasonableness – s. 132

s.132: In determining what constitutes reasonable investigation or reasonable grounds for belief for the purposes of sections 130 and 131, the standard of reasonableness shall be that required of a prudent person in the circumstances of the particular case.

POLICY and Client Info: due diligence is a judgment call:

• Difficult to tell your client what a “reasonable investigation” actually means, and there is little guidance in the OSA
• Difficult to balance efficient markets and investor protection, this is the best we have. Just tell client there’s an obligation to be careful (not necessary to be right) and you’ll be judged in hindsight, so keep that in mind.

Escott v Barchris (USA, 1968), 163

Ratio: Attempts to define level of due diligence required, but really only says what is not acceptable ^ It does not matter whether you can read/ understand the prospectus; if you sign it, you are liable.

There is an overriding obligation to the public and the capital markets. I need to have a reasonable investigation to avoid a misrepresentation

Facts: BarChris was a construction company building bowling alleys. Alleys forced to shut, industry overbuilt. In the middle of financial troubles, BarChris sold debentures containing several misrepresentations in the registration statement and prospectus. Customer failures in payments were understated, company failed to state it was operating bowling alleys.

Decision:

• Company liable, strict liability. Can only evade liability if they prove purchaser purchased with knowledge of misrepresentation. They could not, so liable.
• Treasurer, CFO: liable. No evidence of due diligence. You cannot simply rely on experts, you need to do your level of due diligence.
• President and Vice president found liable. Irrelevant whether they knew what they were signing; ought to know the facts, if not, liable.
• Lead underwriter found liable—relied on its legal counsel to do the investigation. Lead underwriter not excused on the basis that it relied on its legal counsel. Underwriters need to make reasonable efforts to verify the data submitted to them.
• Auditors also liable. Should have known BarChris was operating a bowling alley.
• Outside director (lawyer): liable. Knew about some of the contracts that were not enforceable, and did not investigate others. Cannot simply ask management if prospectus is accurate—you cannot simply rely on management, founders, or anyone else to found a due diligence defence. Need a reasonable investigation of your own.
• Counsel: young lawyer, liable. Seniority does not matter. Know your obligations and investigate. Implications:
• What is not acceptable for due diligence: This case doesn’t actually define due diligence. It simply establishes what is not acceptable (only a guideline).

o No better way to say be careful than to be careful, and no way to define it other than be careful in that particular set of facts with that particular company. o POLICY: Integrity of capital markets needs you to be careful

• It does not matter whether you can read/ understand the prospectus. If you sign it, you are liable: In

this case, applied to President/VP. Even if you have limited education and cannot read or understand the prospectus, but you sign it, you will be liable if there is a misrepresentation

o McLean J. noted that “a check of matters easily verifiable [would not be] unreasonable”. Appears to have imposed a higher standard on directors who are also company counsel. o Underwriters argued they were entitled to rely on statements of officers of company. McLean noted that the purpose of making underwriters liable was investor protection. If they were allowed to escape liability on the basis of officers’ statements, “then the inclusion of underwriters among those liable.. .affords the investors no additional protection”.

Feit v. Leasco

Ratio: Underwriters’ gatekeeper role ^therefore has obligation to challenge issuer’s disclosure and go beyond automatic reliance on what issuer presents

Standards for inside vs. outside directors ^ inside directors expected to make more complete investigation and have more extensive knowledge of facts than outside directors

Facts: Takeover of Reliance Insurance by Leaseco. Leasco offered shares and warrants in exchange for shares of Reliance. Registration statement failed to disclose amount of Reliances’ “surplus surplus” which consisted of liquid assets of an insurance company which were available for use in non-regulated enterprises. An action was brought against Leaseco and its directors.

Decision: Court, reiterated the views of McLean J. in BarChris, noting that “a completely independent and duplicate investigation is not required…[but] the defendants were expected to examine those documents which were readily available”.

Implications:

• Different directors may be held to different standards for due diligence:

o Inside Directors vs. Outside: “Inside directors with intimate knowledge of corporate affairs… will be expected to make a more complete investigation and have more extensive knowledge of facts supporting or contradicting inclusions in the registration statements than outside directors ”.

o Underwriter “Gatekeeper”: The underwriter “is a gatekeeper of the public interest” and

therefore also has an obligation to challenge the issuer’s disclosure and go beyond automatically reliance on what the issuer presents

YBM Magnex (OSC)

Standard of due diligence^should be ongoing, but only to the extent of tying up lose ends. Threshold of materiality ^ must be considered in light of all facts available

Facts: YBM issued a prospectus noting, in its discussion of risk factors, the risk of doing business in Eastern Europe, but did not mention specific investigations against its directors for criminal behaviour over there.

Decision: Commission held that YBM failed to disclose that it was “subject to unique risks”.

Implications:

• Threshold for materiality – in light of all facts available: Materiality must also be considered in light of all the facts available to the persons responsible for the assessment, exercise of judgment and reasonable diligence.
• Due diligence should not be ongoing , only tying up loose ends: Due diligence should be ongoing following the filing of a preliminary prospectus, but only to the extent that “the remaining work only consists of tying up loose ends” When further significant investigations are required, this is not the proper process. A course of conduct must be completed before an underwriter can affirm that to the best of its knowledge, information and belief, the document contains full, true and plain disclosure.

1. Limitation Period & Common Law Rights

• Statutory civil right is in addition to and not in derogation of any other right. This preserves the common law rights of action which may be of value given limitation periods.
• For example, rescission is limited to 180 days from the date of the transaction, BUT LIABILITY FOR MISREP UNDER STATUTE HAS NO BAR!!!!!!

Jones v Deacon

Implications: Why misrepresentations are all so scary, and why you need to take it seriously^Court found that sale of securities is so fundamental to our law, that is NEVER statute-barred, and it forever voidable at the instance of the purchaser

Facts: Deacon Hodgson was an investment dealer. In 1980, created private company called Bachova investments to invest in oil business. Offered or sale shares of Bachova without a prospectus, without properly relying on a private placement exemption. Hodgson Bought the shares in 1982, and in 1986… Jones was charged with fraud in Australia (the buyer). As part of that fraud case, which has nothing to do with bachova investment, Cam Deacon was ordered to fly down to Australia to testify against Jones (completely unrelated). As part of Cam’s testimony, Jones was put in prison in Australia, 4 yrs after he bought securities. Jones in Australia, pissed, nothing to do. Buys securities act. Looks at investment 4 years ago, realizes that investment in Bachova was against the rules. Cam never gave me prospectus, and never properly relied on exemption, I want my $ back. From prison, brought action against Hodgson in Ontario.

• Three year limitation: Was no prospectus, no proper compliance on exemption ^ but 3 year statute of limitations period. Deacon said ha ha, too bad, statute barred. Jones ->Idon’t think this is ever statute barred

Decision: court found that the sale of securities (our general rule that no person shall trade w/o being registered, distrib w/o prospectus, etc.) is so fundamental to our law, that it is never statute-barred, and it is forever voidable at the instance of the purchaser -fright now this is the law! (never been appealed)

Implications:

• Sale of securities is never statute barred!!!: When you combine fact that there is no statute bar and these exemptions are so flaky, want to cry b/c it’s real money. Whether you’re liable or not b/c you told them I don’t know, doesn’t help client relations if you lose. 

You can grab notes on other topic from here.

You can grab notes on other topic from here.

1. Failure to Deliver

Penal, Admin and civil sanctions HOWEVER in reality, there are few penalties according to Lastman

1. Penal Sanctions

• Failure to deliver a prospectus may expose the dealer (who would act as principal or agent) to a penal sanction of fine or imprisonment.

1. Administrative Sanctions

• Imposed by securities commission or administrator
• Can include cease trade orders, reprimand or sanction, denial of exemptions, an order directing compliance, restriction on registration.

1. Civil Sanctions

• Where the prospectus is not delivered as required, the purchaser has a right of action for (1) rescission (undoing the contract from the beginning) or (2) damages against the dealer who failed to deliver the prospectus.

• This is subject to a limitation periods

o OSA 138(a): 180 days after the date of the transaction that gave rise to the cause of action o In any action other than rescission: 138(b): the earlier of (i) 180 days after P first had knowledge of the facts giving rise to the cause of action or (ii) three years after the date of the transaction that gave rise to the cause of action

1. Failure to File (likely not needed)

Penal, administrative, and civil sanctions.

1. Penal Sanctions

• Failure to file a prospectus where required, or distributing a security without having obtained a receipt for a prospectus as required can lead to penal sanction of a fine or imprisonment.

2. Administrative Sanctions

Can lead to order that trading in security is ceased until prospectus is filed and receipt is obtained, may lead to denial of exemptions, under OSA may lead to order that a person resign from any position as director/officer of an issuer or be prohibited from becoming or acting as a director or officer of an issuer (s.127(1) paras 8-

8.4), or may also lead to reprimand of registrant or suspension, cancellation, or restriction of a registrant’s registration

3. Civil Sanctions

• Can lead to order that trading in security is ceased until prospectus is filed and receipt is obtained, may lead to denial of exemptions, under OSA may lead to order that a person resign from any position as director/officer of an issuer or be prohibited from becoming or acting as a director or officer of an issuer (s.127(1) paras 8- 8.4), or may also lead to reprimand of registrant or suspension, cancellation, or restriction of a registrant’s registration

You can grab notes on other topic from here.

You can grab notes on other topic from here.

1. Closing & Any Post-Final Amendments

• Assuming you’ve made all the changes, finally deliver prospectus to anyone who asked/anyone we want to sell it to, no section 61 problems, take out red herring, put in price/matters dependent on price, sign underwriting agreement, get receipt for final prospectus which finally gives you right to sell securities, now get ready to close

• Closing is really nothing more than collection of cheques. Want to issue share certificates in these denominations to these people, sign a bunch of doc, deliver cheques, certificates distributed, something occurs, then the company is a reporting issuer under laws of Ontario

1. Delivery of Prospectus & Inclusion of Purchaser’s Rights

• Final prospectus must be delivered to everyone (except to those whose 2 day cooling off period has expired)

o A dealer upon receiving an order or subscription for a security offered in a distribution must send the purchaser a copy of the prospectus before or within two business days of entering into a written confirmation of sale of the security o Further, the purchaser has a two-day cooling off period to change their mind

OSA- Prospectus Distribution

s.60: Statement of Purchaser rights: Every prospectus shall contain a statement of the rights given to a

purchaser by sections 71 (withdrawal rights) and 130 (right to sue for misrepresentation).

• Section 71 (1) Obligation to deliver prospectus: A dealer not acting as agent of the purchaser who receives an order or subscription for a security offered in a distribution to which subsection 53 (1) or section 62 is applicable shall, unless the dealer has previously done so, send by prepaid mail or deliver to the purchaser the latest prospectus and any amendment to the prospectus filed either before entering into an agreement of purchase and sale resulting from the order or subscription or not later than midnight on the second day, exclusive of Saturdays, Sundays and holidays, after entering into such agreement. R.S.O. 1990, c. S.5, s. 71 (1).
• (2) Withdrawal from purchase (2 day cooling off period): An agreement of purchase and sale referred to in subsection (1) is not binding upon the purchaser, if the dealer from whom the purchaser purchases the security receives written or telegraphic notice evidencing the intention of the purchaser not to be bound by the agreement of purchase and sale not later than midnight on the second day, exclusive of Saturdays, Sundays and holidays, after receipt by the purchaser of the latest prospectus and any amendment to the prospectus.

o NOTE:You want to deliver the prospectus as quickly as possible after entering into the agmt of purchase and sale b/c they have this two day period to change their minds o POLICY: The cooling off period gives purchasers an opportunity to have time with the final prospectus (for every offering, not just IPOs

Withdrawal Right Explanation & Examples (from class handout)

When does the cooling off period?

• Scenario A: if you agreed to buy 6 days ago and received the prospectus today^Day 3
• Scenario B: if there was a fire 6 days ago, then you agreed to buy 4 days ago, received prospectus today and amendment delivered on 2^nd day^Day 4 (b/c that’s when you received info)
• Scenario C: if you agreed to buy 4 days ago, you received prospectus today, but a fire occurs on day two and amendment delivered on day 12 ^Day 14 since buyer has not had 48 hour with all info until Day 12
• Scenario D: if you agree to buy 4 days ago, receive prospectus today, a fire occurs on day 2, amendment delivered on Day 6, a strike occurs on day 12 and amendment delivered on day 16^ Day 8 b/c it is 48 hours after the provision of the latest information – recall can’t give you more than 48 hours so strike is just tough luck
• Scenario E:

o Day 1: Prospectus Delivery; o Day 2: I say I’ll buy and do; o Day 6: fire occurs; o Day 8 : Amendment filed; o ANSWER: On Day 4:1 am bound.

• As long as you’ve had 48 hours with all the information, you are bound.
• Whereas if the fire occurred on day 3, and the amendment comes out on day 6, I’m not bound until Day 8 because I didn’t have all the information until Day 6. ^ it matters WHEN the CHANGE happened, and WHEN I became AWARE of the change

Effective Delivery – NP 11-201 (Delivery of Documents by Electronic Means)

• NP 11-201: allows the prospectus to be delivered electronically if four components are met for satisfactory delivery:

o I) Notice: recipient of document should receive notice that the doc has been or will be sent electronically

o II) Easy Access: recipient should have easy access to the document o III) Evidence that doc has been delivered: deliverer has to have evidence that doc was delivered or otherwise made available to the recipient o IV) Must not be different: the doc received by the recipient must not be different than the doc delivered

• First 3 can be satisfied if informed consent of recipient is obtained, and fourth ^ deliverers are supposed to take proper steps to ensure that the docs arrive at their destination in an unaltered form
• See liability under s.130 (below) = second statutory right

1. Changes Post Filing of Final Prospectus (Any change must be reported in amendment)

• Closing: If you have to raise $200m, haven’t been able to enter into binding agreements of purchase and sale. Send prospectus, get printed, send copies, collect cheques, then go to company, sign papers, exchange cheques for certificates and close, but that takes a long time (let’s say 3 weeks)
• But company doesn’t stand still for those 3 weeks ^ sign contracts, strike, fire, etc. ^ things can change

If there is a material change in affairs of company b/w final receipt and closing, you have to deliver an amendment ^ positive OR Negative change …But during waiting b/w receipt for prelim and receipt for final, s. 57(1) says you only have to do an amendment for material adverse change (you can for any change, if you want)

OSA 57(1) again except this time, Any Change! Not Just Adverse!

1. Where a material adverse change occurs after a receipt is obtained for a preliminary prospectus filed in accordance with subsection 53 (1) and before the receipt for the prospectus is obtained or, where a material change occurs after the receipt for the prospectus is obtained but prior to the completion of the distribution under such prospectus, an amendment to such preliminary prospectus or prospectus, as the case may be, shall be filed as soon as practicable and in any event within ten days after the change occurs.

POLICY BEHIND DIFFERENCE:Why would you have to do amendment for MAE during waiting, but positive or negative has to be disclosed?

• During waiting period

o If negative ^ We don’t know if people will read the whole thing again at the final stages, so if something negative happens, want to bring it to your attention

o But if it’s positive, don’t mind b/c it ’ll be picked up in the final prospectus o We’re more worried about negative things than positive things, b/c they can disclose positive if they wish (and probably would to induce sales)

• After receipt for final prospectus

o There is no document IN BETWEEN the final prospectus and the continuous disclosure regime that kicks in AFTER they become a reporting issuer (nothing to keep the file complete during closing) ^ need something to make sure information is always picked up

o B/w receipt and closing, only thing to make sure it’s entirely complete, demand there’s an amendment for positive or negative change Otherwise, there could be a gap.

1. Lapse of Prospectus

Distribution can continue for 12 months from date of receipt for the preliminary prospectus. After this period, the prospectus is said to have lapsed (per s.62(1)) and no further distributions of the security can be made without a renewal of the prospectus (per s.62(1.1))

Section 62(1)

s.62(1) Refiling of prospectus: “lapse date” means, with reference to a security that is being distributed under subsection 53 (1) or this section, the date that is 12 months after the date of the most recent prospectus relating to the security.

(1.1) Same: No distribution of a security to which subsection 53 (1) applies shall continue after the lapse date, unless a new prospectus that complies with this Part is filed and a receipt for the new prospectus is obtained from the Director.

1. National Offerings (NI11-202 Passport System)

With national filings, there is a principal regulator (main rule for choice of PR is jurisdiction in which issuer’s head office is located). If head office is in a location that isn’t in any of the jurisdictions of potential principal regulators, then it’s the regulator in the jurisdiction with which the issuer has its most substantial connection

• Procedure:

o Issuer files prelim prospectus and supporting material with regulator in each province where securities are to be distributed. Issues a decision document if satisfied (the PR), which serves as a receipt for the prelim.

o The non-principal regulators have to use best efforts to advise PR within 5 days if they have any material concerns that would cause them to opt out o If they have no material concerns, indicate on SEDAR filing status screen that they’re ready to receive final prospectus. When comments have been dealt with, principal jurisdiction can issue MRRS decision document that operates as a receipt for the final prospectus on behalf of PR and NPRs that have not opted out

You can grab notes on other topic from here.

You can grab notes on other topic from here.

1. Filing the Final and Obtaining a Receipt and Changes Post-Filing

3.4.4.1 Final Receipt

• This is when the OSC moves away from regulating disclosure and the quality of it, and ACTUALLY goes on to regulate the MERITS of the offering
• This section gives them a mandate to review the offering. The Commission (lawyers and accountants) has the authority to say no to the public offering, even if you’ve disclosed everything. Even if investors are fully informed, the Commission has the authority to say no.

POLICY:

• May not be a good thing for them to be refusing a receipt for the reasons typically used (e.g. because the company is too new, venture is too risky, etc.)
• HOWEVER.. overall: Lastman is comforted by this provision, in that an objective third party is looking after the efficiency/integrity of the capital markets (someone with a greater interest than individual investors who think they know better)
• See after case examples below:

OSA – Prospectus Distribution – Final Receipt (s.61)

s.61: (1) Issuance of receipt – PUBLIC INTEREST: Subject to subsection (2) of this section and subsection 63 (4), the Director shall issue a receipt for a prospectus filed under this Part unless it appears to the Director that it is not in the public interest to do so.

(2) Refusal of receipt: The Director shall not issue a receipt for a prospectus or an amendment to a prospectus under the following conditions

1. the prospectus or any document required to be filed with it,

• (i) does not comply in any substantial respect with any of the requirements of this Act or the regulations,
• (ii) contains any statement, promise, estimate or forward-looking information that is misleading, false or deceptive, or
• (iii) contains a misrepresentation;

1. an unconscionable consideration has been paid or given or is intended to be paid or given for any services or promotional purposes or for the acquisition ofproperty;

• Note: Clear statutory authority to eval prospectus on its merits (discretion of commission at play)

1. the aggregate of, (i) the proceeds from the sale of the securities under the prospectus that are to be paid into the treasury of the issuer, and (ii) the other resources of the issuer, is insufficient to accomplish the purpose of the issue stated in the prospectus;

• Have to include “use of proceeds” in prospectus, what you’re doing with $ and where it’s going, basically have to show that you have financing so that there’s less risk to the investor’s $ and they can make an appropriately informed decision

1. the issuer cannot reasonably be expected to be financially responsible in the conduct of its business because of the financial condition of

(i) the issuer,

• (ii) any of the issuer’s officers, directors, promoters, or control persons, or
• (iii) the investment fund manager of the issuer or any of the investment fund manager’s officers, directors or control persons;

1. the business of the issuer may not be conducted with integrity and in the best interests of the security holders of the issuer because of the past conduct of,

• (i) the issuer,
• (ii) any of the issuer’s officers, directors, promoters, or control persons, or
• (iii) the investment fund manager of the issuer or any of the investment fund manager’s officers, directors or control persons;

o Notes: *so on that past exam, could mention that they may not ISSUE a receipt if they’re concerned about this (even if it’s just a rumour)

o *POLICY: is WAY beyond disclosure, is about regulating the merits of the offering, are not going to allow you access to the public markets if unhappy with your director or whoever’s conduct. Balance b/w investor protection/ confidence in the market and efficiency of the market (want to have IPOs, but not if it sacrifices investor protection and confidence)

1. unacceptable professional discretion: a person or company that has prepared or certified any part of the prospectus, or that is named as having prepared or certified a report or valuation used in connection with the prospectus, is not acceptable; (same kind of deal, if they’re unhappy with an expert)
2. an escrow or pooling agreement in the form that the Director considers necessary or advisable with respect to the securities has not been entered into; or

• Note NP 46-201: Escrow for Initial Public Offerings:

o Remember IPO is first time that company is going public with shares (doesn’t apply to more mature companies returning to the market). Therefore, worried that all the investors will give the company their money, then the company will bail, sell all their shares in the secondary market and peace out. That doesn’t sound good.

o Therefore, have to enter into satisfactory escrow arrangement that provides that you are not entitled to sell more than 1/3^rd of your shares every year for the first 3 years (termed escrow agreement). Balance of risk b/w new owners/old owners to ensure that you’re not buying into something where the founders don’t have any skin in the game

1. adequate arrangements have not been made for the holding in trust of the proceeds payable to the issuer from the sale of the securities pending the distribution of the securities.

CASE EXAMPLES OF OSC REFUSAL

(3) Hearing: The Director shall not refuse to issue a receipt under subsection (1) or (2) without giving the person or company who filed the prospectus an opportunity to be heard

Rivalda

Failed to issue receipt for a junior mining company offering b/c felt directors were too inexperienced, even though they indicated and DISCLOSED that they were inexperienced

Lake Forest Fund

Deprenyl

Failed to issue receipt because they did not like the disclosed fee structure, thought too much money would go to the promoter.

Facts: Parkinson’s sufferer goes to US and finds a drug that helps the symptoms- therapy for late stage Parkinson’s. He took it and felt better. Decided to come back to Canada and form a private company (Deprenyl). Files Prelim prospectus to raise $ to get FDA approval. Was obvious in doc that they might never get approval, and then your $ is lost.

POLICY NOTES

Decision: OSC wouldn’t issue a receipt for final prospectus because success depended on FDA approval of a drug and thus too risky – company made this very clear on the face of the document that drug was not permitted in Canada and needed FDA approval – finally OSC approved – ended up getting FDA approval (but what would happen if no approval -see policy)

POLICY (keep in mind these are outliers, and overall, he loves the OSC, decisions are typically effective)

– This is a paternalistic approach: why not just force them to give the information to the public, but then LET THE PUBLIC DECIDE?

• Seems hard/sketchy in a situation where you have lawyers/accountants at the OSC telling people suffering from late stage Parkinson’s that they can’t get access to this great drug because the OSC thinks it’s too risky (even though disclosure is all there)

BUT COUNTER-ARGUMENT: Cost to society is that people will not invest markets if we don’t protect its integrity and if people lose all their $ on risky investments

• need to take steps to protect the economy, even against people who think they know better. We need to protect our capital markets b/c if they suck, investors will go elsewhere and then we’re bankrupt.

His take on OSC:

• Confident to have fate held in reasonable hands of reasonable people making decisions in the interest of the public good

o As long as they’re acting in the best interests of the public (which they do), then decisions are almost always right

o Decisions made by people that are thoughtful/caring, which comforts him as opposed to arbitrary code.

• At the end of the day, not trying to protect one investor (not that myopic), but protect integrity of capital markets (sometimes means companies can’t go public, or can’t bring beneficial drugs to market, then that’s a price worth paying to protect integrity of capital markets b/c without that, we don’t have anything, no company can go public, no drug can come to market, etc. if we don’t have confidence in those markets) (cost-benefit analysis to keep markets efficient)

You can grab notes on other topic from here.

You can grab notes on other topic from here.

1. The Waiting Period, Vetting/ Comment Letter and Amendments

• At this point, there’s a trade in a security that constitutes a distribution, filed a preliminary prospectus, obtained a receipt, then waiting period begins.
• The preliminary prospectus is the sole document containing representations about the security during the waiting period. It gives potential investors time to consider the features of an investment.
• Interval of time b/w when you get receipt for PPr when you get started gathering interest
• Securities cannot be sold until the final prospectus is filed and a receipt is obtained.
• Can be 3-4 weeks or longer

Section 65 of the OSA – Waiting period

s.65(1) “Waiting period” defined: In this section,“waiting period” means the period prescribed by regulation or, if no period is prescribed, the period between the Director’s issuance of a receipt for a preliminary prospectus relating to the offering of a security and the Director’s issuance of a receipt for the prospectus.

• (2) Distribution of material during waiting period: Despite section 53, but subject to Part XIII, it is

permissible during the waiting period,

o (a) communicate re: price and such, IF it has name of place where they can get prelim: to

distribute a notice, circular, advertisement or letter to or otherwise communicate with any person or company identifying the security proposed to be issued, stating the price thereof, if then determined, the name and address of a person or company from whom purchases of the security may be made and containing such further information as may be permitted or required by the regulations, if every such notice, circular, advertisement, letter or other communication states the name and address of a person or company from whom a preliminary prospectus may be obtained;

o (b) distribute prelim: to distribute a preliminary prospectus; and

o (c) soicit expressions of interest, IF a copy is then forwarded: to solicit expressions of interest from a prospective purchaser if, prior to such solicitation or forthwith after the prospective purchaser indicates an interest in purchasing the security, a copy of the preliminary prospectus is forwarded to him, her or it.

1. Purpose of the Waiting Period

Policy: 3 reasons for waiting period: 1) review for deficiencies; 2) giving investors time to review; 3) allowing for underwriter’s assessment of the market

1. Deficiencies

a. When you deliver that PPr to the Securities Commission, they assign some accountant/lawyer to your prospectus and they review that document to list deficiencies you have to fix before you get a receipt for the final Prospectus (this is the lie – by saying they haven’t passed on merits, the OSC, lawyers, etc. go through and give a list of deficiencies)

1. Investors have time to Review
2. No point giving investors information if you don’t give them time to digest it.
3. No fast sales-person tactics, impulse buying, instead, lots of time to read it.
4. Underwriter’s Assessment of the Market

a. underwriter that’s going to sell them and be responsible for the sale has to assess the market, need time for company to deliver copies of Ppr to the investors, then communicate to underwriter to determine demand and therefore price

1. Vetting & Comment Letter

When vetting is complete, a “comment letter” or “deficiency letter” will be provided.

Conflicts Between Issuer and Securities Commission

• Accountant/lawyer at SC will issue the comment letter ^ issuer may not agree with deficiencies, can cause tensions. You can challenge the deficiencies.
• Example: Pictures: OSC freaks out about pictures b/c don’t want it to be too flashy/salesman-ish. (e.g. pictures of chef in the prospectus for Four Seasons ^ not selling chefs ^ are you selling hockey, or Stanley cups?)
• POLICY: You’re going to lose if you challenge the comments ^ they’re protecting the investing public.

29

1. Constrained selling activities during waiting period

Selling activities during the waiting period are constrained: You can only solicit expressions of interest (s. 65) and deliver the preliminary prospectus (s. 66), and have to keep a list of whoever you deliver it to (s. 67) in case you have to amend it. OSC can also stop any of these s. 65 “trading” activities cease until a revised prelim is filed if the prelim ends up being defective (s. 68)

All you CAN DO is: advertise that there IS a security, the price, and where you can get a copy of the prospectus (NI 41-101)

POLICY: Selling during the waiting period is constrained. The reason is that it would defeat the purpose of a prospectus with statutory liability for misrepresentation if selling were allowed. If representations were allowed prior to a final prospectus, the investor would not be protected by statutory liability for false representations.

OSA, Part XVI: Distribution Generally

Sections 65, 66 and 67

Section	Description	Page
65(2)(a)-(c): Waiting Period	(2) Distribution of material during waiting period Despite section 53, but subject to Part XIII, it is permissible during the waiting period, to distribute a notice, circular, advertisement or letter to or otherwise communicate with any person or company identifying the security proposed to be issued, stating the price thereof, if then determined, the name and address of a person or company from whom purchases of the security may be made and containing such further information as may be permitted or required by the regulations, if every such notice, circular, advertisement, letter or other communication states the name and address of a person or company from whom a preliminary prospectus may be obtained; to distribute a preliminary prospectus; and to solicit expressions of interest from a prospective purchaser if, prior to such solicitation or forthwith after the prospective purchaser indicates an interest in purchasing the security, a copy of the preliminary prospectus is forwarded to him, her or it. Notes: Can have some advertising, identifying security, price, where it can be bought, and can give out prelim prospectus (41-101)
66: Distribution of Prelim Prospectus	Distribution of preliminary prospectus Any dealer distributing a security to which section 65 applies shall, in addition to the requirements of clause 65 (2) (c), send a copy of the preliminary prospectus to each prospective purchaser who, without solicitation, indicates an interest in purchasing the security and requests a copy of such preliminary prospectus.
67: Distribution List	Any dealer distributing a security to which section 65 applies shall maintain a record of the names and addresses of all persons and companies to whom the preliminary prospectus has been forwarded. Why? In case there is a material change, so everyone who got a copy of the prelim can get a copy of the amendment

1. Limitations on advertising during waiting period POLICY:

68:	Defective preliminary prospectus	.
Defective	Where it appears to the Director that a preliminary prospectus is defective in that it
Prelim	does not substantially comply with the requirements of Ontario securities law as to
Prospectus	form and content, the Director may, without giving notice, order that the trading permitted by subsection 65 (2) in the security to which the preliminary prospectus relates shall cease until a revised preliminary prospectus satisfactory to the Director is filed and forwarded to each recipient of the defective preliminary prospectus according to the record maintained under section 67.

If you allow advertising, it circumvents the role of the prospectus ^ if you can advertise with glossy brochures with high lights and no low lights, you’ve circumvented the whole process because investors never get to read the risks via final prospectus

PART 6 OF NI 41-101 COMPANION POLICY: Advertising or Marketing During Waiting Period

OSC Test for Whether or not Advertising is Okay

All you can do in terms of advertising during the waiting period is: IDENTIFY the securities, state the price of the securities, and state the name/address of a person or company who you can buy them from, and where you can get the prospectus.

FACTUAL TEST^ in furtherance of a trade: OSC staff said in determining whether ads are prohibited, would apply factual test based on whether advertising could reasonably considered to be in furtherance of a trade no

forecasts, no projections, no predictions

• OSC will look at why you’re advertising: normal corporate image advertising is acceptable, but acting in furtherance of a sale in securities will result in penalties (because it’s a TRADE without a prospectus)

This creates bizarre results

EXAMPLES

• Eg. Sharon, Lois and Bram goes public ^ interviewed the elephant (No – Advertising during waiting period, can’t sell securities pursuant to the elephant)
• E.g. Canwest Global goes public ^ in waiting period, 6:00 news, put their leading story to say guess what, we’re going public. SC says you can’t do that, advertising during waiting period (CTV’s gonna play it at the same time, SC – too bad)
• E.g. The Brick ^ goes public, does that mean during 6 weeks of waiting period, can’t put ads on TV of no payment until 2078 ^ corporate image advertising is okay, but can’t use that to promote sale of securities.

Does this make sense?

• E.g. in UK, no restrictions on advertising during waiting period ^ BP for instance.
• OSC Argument:

o b/c capital markets are so fundamental to our operation as a country – can’t allow system to be governed by slick advertising, has to be governed by real integrity (need a legitimate, credible capital markets system that ppl can rely on)

o We can’t police the advertising, impossible, so have to make these rules to ensure that integrity of capital markets is paramount

• Other Side:

o POLICY: All we’re doing is excluding the 99% of people benefitting from these transactions. The 1 % that has a broker and has access and knowledge and gets prospectuses/isn’t normal, gets the profit from the stuff and the entire public doesn’t.

• People make lots of $ off public offerings ^ “we’re going to protect you so much that we deny you access to the capital markets, b/c as a normal person, won’t even know it exists (protecting you from big profit ^ don’t advertise so people don’t know about them)”
• Legal Fiction ^ how can you advertise a preliminary prospectus is available if you can’t advertise? ^ you don’t, and you don’t get to play/participate!
• They ’re saying if you’re not rich, you’re not smart enough to figure out the risks of the market

o Countering the huge risk argument ^ once it’s on the TSX, you can go buy them. Don’t have to be sophisticated, just have to be sophisticated when it first goes public for $6 *good question – should you be able to advertise them in a flashy way? *Exam

o Can just advertise the prospectus, maybe not the actual sale of it, say we’re gonna sell it, here’s where you can get a prospectus, and you should

o I think it’s elitist to assume people won’t understand it. Would need some protections, but none of us understood this until we heard it in this course

o Dumb b/c whole reason for prospectus fiction is to protect the investors (the big investors don’t need the protection, will hire lawyers/accountants to do protect themselves)

o Note: Perhaps this will change with social media/ internet – ppl will engage in uncontrolled advertising

1. Amendments if there are changes during the waiting period

Because there’s a period of time b/w receipt for prelim and final prospectus, obviously there’s a risk that there

will be a change in the business (e.g. fire, new k)

If a material ADVERSE change occurs, you have to file an amendment ASAP or in any event within 10 days (s. 57(1)), and then send a notice to all investors under your s. 67 list (s. 57(3)).

Section	Description	Page
1(1):	“material change”,	.
Material	(a) when used in relation to an issuer other than an investment fund, means,
Change	(i) a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer, or
	(ii) a decision to implement a change referred to in sub-clause (i) made by the board of directors or other persons acting in a similar capacity or by senior management of the issuer who believe that confirmation of the decision by the board of directors or such other persons acting in a similar capacity is probable, and [… investment blabla]
57(1): Amendment to Preliminary on Material Change	(1) Where a material adverse change occurs after a receipt is obtained for a preliminary prospectus filed in accordance with subsection 53 (1) and before the receipt for the prospectus is obtained or, where a material change occurs after the receipt for the prospectus is obtained but prior to the completion of the distribution under such prospectus, an amendment to such preliminary prospectus or prospectus, as the case may be, shall be filed as soon as practicable and in any event within ten days
	after the change occurs. […] (3) Notice of amendment

OSA – PART XV – Prospectus Distribution Sections 1(1), 57(1) and (3)

Amendments on Material Change

	An amendment to a preliminary prospectus referred to in subsection (1) shall, forthwith after it has been filed, be forwarded to each recipient of the preliminary prospectus according to the record maintained under section 67.
	***NOTE: B/w prelim and final, only ADVERSE changes must be reported. B/w filing final and end of distribution, ANY CHANGE must be reported (adverse/not) • Reason for difference: more important for investors to know about neg than pos things. HOWEVER, in the time btwn final prospectus and closing there is no other time to correct (must send amendment)

You can grab notes on other topic from here.

You can grab notes on other topic from here.

1. Creating the Preliminary Prospectus: What must be included

See Form 41-101F1 or 44-101F1 for short-form, OSC rule 45-501. Long-Form Prospectus: very open ended including all “material facts” (fact that sig affects market price/ value).

• List of factors that it must include are on p. 112 of the text or look at ToC for 41-101F1. Includes 1) # and types of securities offered under prospectus, 2) method of distrib, 3) use of proceeds of issuance, 4) name and structure of corp, 5) description of issuer’s business, 5) financial statements of issuer

Preliminary prospectus provides specific items of disclosure and “full, true and plain disclosure of all material facts”. Need to file it (s. 54(1)), and then you will get a receipt for it (s. 55)

Section 54 of the OSA – Preliminary Prospectus Requirements (And Excluded Info)

• (1) Preliminary prospectus: A preliminary prospectus shall substantially comply with the requirements of Ontario securities law respecting the form and content of a prospectus, except that the report or reports of the auditor or accountant required by the regulations need not be included.
• (2) Idem: A preliminary prospectus may exclude information with respect to the price to the underwriter and offering price of any securities and other matters dependent upon or relating to such prices.

o **Also note s.60: Statement of rights – every prospectus shall contain a statement of rights given to a purchaser by s.71 and 130

Section 55: Receipt for Preliminary Prospectus: The Director shall issue a receipt for a preliminary prospectus forthwith upon the filing thereof.

Section 54(2): a preliminary prospectus is exactly the same as a final except it can omit the price and what the underwriters get paid and any matters dependent on price

• It need not contain information about the offering price or anything else relating to or dependent on the price (things like price, maturity date, interest rate, dividend amt, etc. are often not included ^ things affected by market conditions that may change b/w filing of prelim and filing of final prospectus)

National Instrument 41-101 (Form 41-101F1): General Prospectus Requirements

Policy: Can Exclude Pricing Information because: (1) It’s NOT FINAL, you’re not selling securities pursuant to it; (2) Gives underwriters an opportunity to assess the market for demand so that they can price it properly

Section	Description	Page
Item 1.1: Required Statement (Lies)	Both prelim and final prospectus (in SA is the phrase prelim, not final, is just prospectus) must contain on the outside front cover a statement that says, no securities commission or regulatory authority has in any way passed upon the merits of this offer. Is actually kind of a lie (b/c sec comm will have looked at it), but… POLICY: Letting public know that no securities commission has blessed this (but not completely true, but want to make sure that no one’s buying this based on comfort that a securities commission has reviewed it).	1185
1.2: Prelim prospectus disclosure (Red Herring)	Every preliminary prospectus must have a statement printed in red ink and in italics at the top, front cover, saying that this is a PRELIMINARY prospectus, Information is incomplete, and no one can buy securities from this doc until a final receipt is obtained This is removed in final prospectus	1185

*Remember that preliminary is NOT a draft document! ^Liability + credibility

• Can be held liable for it (even though you can’t sell sec under it)
• If it’s wrong ^ have to make amendments to it (when you say it was wrong, people lose faith in you, you lose credibility (don’t get a 2^nd chance to make a 1^st impression)
• Therefore, do not treat the document causally

1. Certification Process

• When all parties are done preparing this prelim prospectus, identified all risk/explained business, put in red
herring, hasn’t passed upon merits, financial forecast, complied with law, certification process begins…

FORM 41-101F1 AND OSA

Section	Description	Page
37.2 AND 58(1) of OSA: Issuer Certificate	**ALSO NOTE CORRESPONDING 58(1) OF OSA Every preliminary prospectus shall contain a statement signed by the CFO, CEO, and two other directors, certifying that the prelim prospectus constitutes full, plain and true disclosure of all material facts. (the instrument says “except in Ontario. but have OSA to cover it) Issuer has an obligation to be RIGHT (they have more access to information) Notes: At the end of EVERY prelim and final prospectus, statement that certifies by these people that foreaoina in document constitutes full disclosure, and they sign it (have to do so via securities act regulations)	1123
Item 37.3	…**ALSO NOTE CORRESPONDING 59(1) OF OSA	1124
AND 59(1) of OSA: Underwrite r Certificate	Underwriter certifies: To the best of their knowledge, information and belief, the document constitutes full, true and plain disclosure of all material facts relating to the securities being offered. They have an obligation to be careful/ responsible, but NOT an obligation to be right!! POLICY: Additional protection for investor, that the underwriter feels comfortable saying that (directors, officers, lawyers, underwriters all have to be comfortable signing this) ^ should show that they ’ve done their due diligence
	Notes: Why different requirement for UWs? b/c company ought to know everything about itself ^ feeds perfectly into investor protection but also need capital markets that work ^ if underwriters are liable for ANY misrep for prospectus for any co they’re involved in they are not going to play ^ wouldn’t have efficient capital market Have to put some bumper guard on the underwriter’s liability (to the best of their knowledge/belief, not that it IS true) Defences: have obligation to be responsible/careful, but not an obligation to be right (company has an obligation to be RIGHT (directors are personally liable) Difference is b/c it’s practical, balances is the best regulators can achieve b/w investor protection and efficient capital markets

Why certify? ^ b/c of liability for misrepresentation

• Under s. 130(1) of the OSA: if there is a misrepresentation in that prospectus (omission or misstatement) ^ the company has STRICT liability
• For Issuer: Only defence is that purchaser purchased with knowledge of the misrep. Doesn’t matter if they intended to make a mistake, were careful, if there’s a misrep in that doc you didn’t know about and onus is on company to show that you know about it (almost impossible), then they’re liable. Underwriter has a due diligence defence

o Huge obligation. But just $. If Innocent misrep and one of them has to lose money, it ought to be the company over you. More culpable than you are.

1. Filing with Administrator & Obtaining a Receipt for Prelim

First receive a preliminary receipt (if comply with all requirements -s.54; then per s.55- Director SHALL issue receipt), then delivery the prelim to those who have expressed interest in buying (solicited or not) per s.66 of OSA

1. Preliminary Receipt:
2. Complete prelim (certified, signed, red herring)
3. File with Administrator along with supporting docs
4. Administrator gives receipt for the prelim if there has been substantial compliance with filing requirements of the OSA and regulations
5. Section 54: prelim must be in compliance with all requirements of ON Securities law, respecting form/content, and
6. Section 55: Director SHALL issue receipt if doc is in substantial compliance (very little discretion with giving receipt for prelim as long as it appears to have all the things required)
7. waiting period begins + delivery

a. It is only upon the receiving of a receipt for a final prospectus that the actual sales of securities can begin

1. Delivery of Prelim to those who have expressed interest in buying (solicited or not)

• You must deliver the preliminary prospectus to all those who have expressed an interest in purchasing (whether you’ve solicited their interest or not – so even if unsolicited)

Section 66 of the OSA – Distribution of Preliminary Prospectus

• S.66: Any dealer distributing a security to which section 65 applies shall, in addition to the requirements of clause 65 (2) (c), send a copy of the preliminary prospectus to each prospective purchaser who, without solicitation, indicates an interest in purchasing the security and requests a copy of such preliminary prospectus.

You can grab notes on other topic from here.

You can grab notes on other topic from here.

1. Summary of Steps
2. Complete prelim (certified, signed, red herring) (although requires material facts, does not require price, maturity date, interest rate or dividend amount);
3. File with Administrator along with supporting docs (eg. auditor’s comfort letter, tech reports, consent letters, underwriting agreement, material contracts, resolution of BOD approving prelim, financial statements);
4. Administrator gives receipt for the prelim if there has been substantial compliance with filing requirements of the OSA and regulations (s.54-55)

• Section 54: prelim must be in compliance with all requirements of ON Securities law, respecting form/content, and
• Section 55: Director SHALL issue receipt if doc is in substantial compliance (very little discretion with giving receipt for prelim as long as it appears to have all the things required)

Waiting period begins: time between receipt for prelim and receipt for final (if anything material changes during this period, make amendments)

• Limits on advertising during this time (policy^ to protect public)

1. Print/Deliver the document to those who expressed interest
2. Staff vet the prospectus

• Vetting is not a passing on the merits of the securities offered, nor is it a representation that it contains full disclosure ^ it is a determination of:

o (a) whether the required items of disclosure have been provided and

o (b) whether there are any gaps in the information that are apparent from the material filed (can take several weeks)

1. Staff provide a comment letter
2. Clear up deficiencies, once they’re cleared…
3. Final prospectus/supporting docs can be filed and a receipt obtained (at discretion of securities commission whether it is in the public interest to do so – even if you met all requirements)

It is only upon the receiving of a receipt for a final prospectus that the actual sales of securities can begin

You can grab notes on other topic from here.