NOTICE OF PROPOSED RULES AND COMPANION POLICY UNDER

AND RESCISSION OF ONTARIO SECURITIES COMMISSION POLICY 5.7 AND UNIFORM ACT POLICY 2-03

AND UNIFORM ACT POLICY 2-04 AND PORTIONS OF ONTARIO SECURITIES COMMISSION POLICY 5.1

Introduction

This Notice is accompanied by a proposed Rule, four Forms and a Companion Policy, each of which is being published for review and comment. Rather than inviting interested parties only to comment on the specific changes discussed in this Notice, readers are encouraged to review each of the instruments and provide comments on any aspect of the instrument. The instruments described in this Notice are:

Rule 41-501 General Prospectus Requirements

Form 41-501F1 Information Required in a Prospectus

Form 41-501F2 Collection of Personal Information

Form 41-501F3 Issuer Form of Submission to Jurisdiction and

Appointment of Agent for Service of Process

Form 41-501F4 Non-Issuer Form of Submission to Jurisdiction and

Appointment of Agent for Service of Process

Companion Policy 41-501CP General Prospectus Requirements

Rule 41-501 General Prospectus Requirements (the "Rule") is a proposed local rule that consolidates various provisions currently set forth in the Regulation to the Securities Act (Ontario) (the "Act") and in various policy statements and notices of the Ontario Securities Commission (the "Commission") and Commission staff concerning the preparation, certification, filing and receipting of preliminary prospectuses and prospectuses. The Rule prescribes the use of proposed Form 41-501F1 Information Required in a Prospectus (the "Prospectus Form") as the form of prospectus to be used by issuers that currently file long-form prospectuses using Forms 12, 13 or 14 of the Regulation. The Rule prescribes the use of proposed Form 41-501F2 Collection of Personal Information ("Form F2") to grant the Commission authority under the Freedom of Information and Protection of Privacy Act (Ontario) to collect personal information on promoters and the directors and executive officers of an issuer and, if a promoter is a corporation, directors and executive officers of the promoter, in certain circumstances. The Rule also prescribes the use of proposed Form 41-501F3 Issuer Form of Submission to Jurisdiction and Appointment of Agent for Service of Process ("Form F3") by an issuer that is incorporated or organized under a foreign jurisdiction or does not have an office in Canada. Similarly, proposed Form 41-501F4 Non-Issuer Form of Submission to Jurisdiction and Appointment of Agent for Service of Process ("Form F4") is prescribed for a selling securityholder, promoter or guarantor that is incorporated or organized under a foreign jurisdiction or resides outside of Canada. The Prospectus Form, Form F2, Form F3 and Form F4 (the "Forms") will be adopted as rules.

Together, the proposed Rule and the Prospectus Form prescribe a comprehensive set of requirements governing the form and content of prospectuses, including general provisions as to prospectus style, certification and filing, for all issuers of securities. The proposed Rule will be complemented by other rules that are specific to certain types of issuers (for example, mutual fund issuers) or offerings or that address specific circumstances. In some cases, these rules will supplement the proposed Rule and Prospectus Form and in other cases different provisions will apply instead of those in the proposed Rule and Prospectus Form.

The proposed Rule, Prospectus Form and Companion Policy 41-501CP General Prospectus Requirements (the "Companion Policy") are not a reformulation of National Policy Statement No. 36, entitled "Mutual Funds: Simplified Prospectus Qualification System", National Policy Statement No. 44, entitled "Rules for Shelf Prospectus Offerings and for Pricing Offerings After the Final Receipt is Issued", National Policy Statement No. 45, entitled "Multi-Jurisdictional Disclosure System" or National Policy Statement No. 47, entitled "Prompt Offering Qualification System" ("NP 47"). Separate proposed national instruments implementing the reformulated versions of each of these instruments will be published at a later date.

As a result of the implementation of the proposed Rule, Forms and Companion Policy, most of the provisions in Part III of the Regulation to the Act concerning the form, content, certification, filing and receipting of preliminary prospectuses and prospectuses will no longer be necessary and it is proposed that the Lieutenant Governor in Council be asked to revoke these provisions. Attached to this Notice is a table of concordance which indicates how each of the relevant sections in the Regulation, Ontario Securities Commission Policy 5.1 ("Policy 5.1"), Ontario Securities Commission Policy 5.7 ("Policy 5.7") and certain other existing instruments are to be treated in the proposed Rule, Forms and Companion Policy.

It is also proposed that a national instrument (National Instrument 41-101 Prospectus Disclosure Requirements) be implemented that combines existing National Policy Statements Nos. 12, 13, 32 and 35 and section 50 of the Regulation to the Act, each of which prescribes prospectus content requirements.

Substance and Purpose of Proposed Rule, Forms and Companion Policy

The Rule

The substance and purpose of the proposed Rule are to consolidate certain provisions currently set forth in the Regulation and in various policy statements and notices of the Commission and Commission staff concerning the preparation, certification, filing and receipting of preliminary prospectuses and prospectuses. The proposed Rule is intended to contain basic prospectus requirements that may be supplemented by other rules dealing with requirements that apply to particular types of issuers (for example, mutual fund issuers) or that apply in particular circumstances (for example, rules relating to restricted shares or future oriented financial information). Section 1.1 of the proposed Rule expressly provides that all prospectuses must be prepared, certified, filed and receipted in accordance with the proposed Rule and the Prospectus Form. Therefore, if it is intended that a particular provision in the proposed Rule or Prospectus Form not apply to a particular issuer or in particular circumstances or that a different prospectus form be used, it will be necessary to expressly override that provision in another rule.

Proposed Rule 41-502 Prospectus Requirements for Mutual Funds, which will be published for comment at a later date, will provide that prospectuses of mutual funds be prepared using different forms and, among other things, with different financial statement disclosure requirements that are more appropriate for mutual fund issuers. Otherwise, except as specifically identified in proposed Rule 41-502 Prospectus Requirements for Mutual Funds, the proposed Rule will apply to mutual fund issuers. Provisions of the proposed Rule that will not apply to mutual funds are identified below under Summary of Proposed Rule, Forms and Companion Policy.

Rule 56-501 Restricted Shares prescribes additional disclosure obligations for issuers distributing restricted shares under a prospectus.

The majority of the provisions in the proposed Rule have been derived from Part III of the Regulation and from Policy 5.1 and Policy 5.7. In many cases, these provisions have been included in the proposed Rule with some modifications but no substantive changes. In other cases, existing provisions have been amended to reflect current practice, and in still others particular provisions of the Regulation or Policy 5.1 or Policy 5.7 are not reflected in the Rule as a result of a decision by the Commission that the provisions are no longer appropriate or necessary. In the second column beside each provision in the copy of the proposed Rule that accompanies this Notice is an indication of the source of the provision. In some cases, a comment in the third column explaining why changes to the existing provision have been made is also included. Neither the second nor the third columns will form part of the final Rule.

The Form

The substance and purpose of the Prospectus Form are to consolidate existing Forms 12, 13 and 14 and restate the prospectus disclosure requirements from the Regulation, Policy 5.1 and Policy 5.7. The existing forms contain many items that are identical. In some instances, slight differences in wording exist between items but there appears to be no rationale for the differences. In other instances, no policy rationale can be discerned for additional disclosure obligations that are unique to one of the forms. The Prospectus Form attempts to rationalize existing prospectus forms by eliminating duplication, avoiding the uncertainty that currently arises due to similarly but not identically worded items. Substantively different disclosure requirements for categories of issuer are retained only if there is a sound policy basis for so doing such as the special disclosure required in respect of natural resource operations. The Prospectus Form does not include most of the unique disclosure requirements currently imposed on finance companies by Form 13, as it was concluded that these requirements are covered by the requirement in section 3.1 of the Rule to include financial statement information prepared in accordance with Canadian GAAP and are therefore no longer necessary.

The Prospectus Form attempts to parallel, as closely as possible, the substantive disclosure obligations imposed on POP-eligible issuers under existing NP 47 through a combination of the Annual Information Form and Short Form Prospectus requirements of Appendix A and Appendix B, respectively, to NP 47 except if (i) there is a sound policy basis for distinguishing between POP-eligible and non-POP eligible issuers, or (ii) an existing provision in Appendix A or Appendix B to NP 47 is itself in need of updating. The intention is that any changes resulting from a need to update existing provisions in NP 47 will also be reflected in proposed National Instrument 44-101 Prompt Offering Qualification System, which will replace NP 47.

Form F2

The substance and purpose of Form F2 are to prescribe a standard form to be completed by a promoter and, in certain circumstances, by a director or executive officer of an issuer or, if a promoter is a corporation, a director or executive officer of the promoter. Form F2 grants the Commission authority under the Freedom of Information and Protection of Privacy Act (Ontario) to collect personal information about these individuals. Form F2 is based very closely on Appendix A to Policy 5.7.

Form F3 and Form F4

The substance and purpose of Form F3 and Form F4 are to prescribe standard forms of submission to jurisdiction and appointment of agent for service of process for issuers, selling securityholders, promoters or guarantors that are incorporated or organized outside of Canada or reside outside of Canada. Form F3 and Form F4 are based very closely on Appendix A and Appendix B, respectively, to Policy 5.1.

Companion Policy 41-501CP

The substance and purpose of the Companion Policy are to consolidate and update certain provisions in Policy 5.1 and Policy 5.7 that are not mandatory, to provide interpretive guidance as to certain of the provisions in the proposed Rule and Prospectus Form and to set out the Commission's views as to how certain of these provisions ought to be administered.

Terms used in the Companion Policy that are defined or interpreted in the proposed Rule or the definition instruments in force in Ontario should be read in accordance with the proposed Rule or those definition instruments, unless the context otherwise requires.

Summary of Proposed Rule, Forms and Companion Policy

Rule 41-501

Rule 41-501 is divided into eight parts.

Part 1 of the proposed Rule deals with the application of the Rule.

Part 2 of the proposed Rule has been derived principally from provisions contained in Part III of the Regulation. These provisions include requirements as to printing and legibility of prospectuses that will in some instances be affected by National Instrument 13-101 System for Electronic Document Analysis and Retrieval ("SEDAR"). For example, section 4.7 of SEDAR provides, in part, that a requirement in securities legislation relating to the format in which a document to be filed must be printed does not apply to an electronic filing made in accordance with SEDAR.

Section 2.2 of the proposed Rule relaxes the restrictions on the use of graphs, photographs and maps currently found in section 46 of the Regulation, with the result that a graph, photograph, map or artwork will be permitted as long as it is relevant to the business of the issuer and not misleading. Section 1.3 of the Companion Policy makes it clear that there is no obligation to pre-clear the use of this material with the Commission.

Part 3 of the proposed Rule deals with financial matters and has been principally derived from sections 53 to 66 of the Regulation. A number of substantive changes to the current provisions regarding financial disclosure have been made.

First, the discretion granted to the Director in several of the existing sections in the Regulation to "permit or require" certain financial statement disclosure has been eliminated on the basis that open-ended discretion is inappropriate to be included in a rule. The authority to "permit" non-compliant disclosure is now contained in the general authority to grant exemptions in Part 8 of the proposed Rule. The authority to "require" additional disclosure is inherent in the Director's "blue sky" discretion under section 61 of the Act.

The Commission is proposing, in subsection 3.1(1) of the Rule, that the current requirement in subsection 53(1) of the Regulation that a prospectus of an issuer contain audited financial statements of the issuer for each of the last five financial years be amended to reduce the disclosure requirement to three years (or such shorter period as the issuer has been in existence). The Commission is of the view that three years of audited financial statement information is sufficient for the public to assess the historical financial performance of an issuer. This change is consistent with the existing requirement in section 23(d) of Policy 5.1 concerning financial statement disclosure of an acquired business. Other provincial securities commissions are considering adopting this change. The Commission considered adopting the requirement in SEC Form S-K to include three years of audited financial statements but five years of unaudited selected financial information "where trend information is relevant" to an understanding of the business of the issuer. The Commission was reluctant to impose this requirement in all instances, as the Commission was not confident that the resulting benefits would outweigh the related costs but welcomes comments concerning this matter in particular. It should be noted that in section 2.6 of the Companion Policy, the Commission encourages issuers to include five years of unaudited summary financial statement information if the information would be helpful to an understanding of trends affecting the business or financial condition of the issuer.

Consideration was given to adding a provision similar to section 6.3(7) of NP 47 that would permit an issuer to rely upon third quarter interim financial statements if the issuer files a preliminary prospectus before the directors of the issuer have approved the comparative audited financial statements for the issuer's last financial year. The Commission rejected this possibility as it was concerned that with the reduction in the requirement for five years of financial statements to three years, a further "automatic" reduction to two years of audited financial statements plus third quarter unaudited statements would not be appropriate for a non-POP issuer which lacks the size, market capitalization and market following of a POP issuer. As noted in section 2.1 of the Companion Policy, it will still be possible for an issuer to apply for relief from the requirement of subsection 3.1(1) of the Rule by applying for an exemption under Part 8 of the Rule.

Proposed Rule 41-502 Prospectus Requirements for Mutual Funds will provide that section 3.1 of the proposed Rule is inapplicable for mutual funds and will prescribe financial statement disclosure requirements for "long-form" prospectus mutual fund issuers.

Section 3.2 of the proposed Rule deals with the use of non-Canadian generally accepted accounting principles ("GAAP") in prospectuses. The current provisions governing the use of foreign GAAP by an issuer are contained in subsection 1(4) and sections 57 and 58 of the Regulation. Subsection 1(4) permits an issuer incorporated or organized in a jurisdiction outside Canada to use foreign GAAP if the notes to the issuer's financial statements so indicate. Section 57 establishes the basic requirement that all financial statements in a prospectus that are not prepared in accordance with Canadian GAAP be reconciled to Canadian GAAP. However, because a reconciliation does not require any examination of the inherent soundness of the accounting principles and standards that are being reconciled, section 58 in effect provides the Director with the ability to require a full restatement of financial statements in accordance with Canadian GAAP if, for example, an issuer's home jurisdiction GAAP is not well known to Canadian investors. Section 3.2 of the proposed Rule now permits non-Canadian issuers to use foreign GAAP and a reconciliation to Canadian GAAP without obtaining the consent of the Director, subject to an overriding obligation on the Director to refuse to issue a receipt if the resulting financial statements appear to be misleading as to the financial condition or prospects of the issuer. The effect of the reformulated provisions is intended to be the same in practice as is presently the case.

Amendments have also been made to the provisions governing the inclusion of financial statements of an acquired business currently reflected in section 56 of the Regulation and item 23 of Policy 5.1. Subsection 3.3(1) of the proposed Rule requires that financial statements of an acquired business be included in a prospectus for any completed material acquisition and for any material acquisition that is intended to be completed as disclosed in the prospectus. The financial information concerning the acquired business is not required, however, if the financial results of the acquired business have been included in the audited consolidated financial statements of the issuer for a period of at least 6 months. The subsection does not contain the alternative test, currently set forth in paragraph 23(c) of Policy 5.1, that the financial statements of an acquired business must be included if 40% or more of the proceeds of the issue are to be applied, directly or indirectly, to finance the acquisition of the business whether or not the acquisition is material. The Commission concluded that the key determination should be the materiality of the acquisition to the issuer, not the amount or percentage of the proceeds that are to be applied towards the purchase. A discussion of the meanings of "business" and "materiality" for this purpose is set out in section 2.4 of the Companion Policy.

In revising the requirements for financial disclosure in connection with business acquisitions, the Commission considered SEC Release No. 33-7355; 34-37802; International Series Release No. 1021 dated October 10, 1996, which amended the existing provisions set forth in Rule 3-05(b) of Regulation S-X under the United States Securities Act of 1933 regarding inclusion of financial statements of acquired businesses (the "SEC Release"). Under SEC Rule 3-05(b), the extent of financial statement disclosure of an acquired business is determined not on the basis of whether the proceeds of the issue are to be applied to the acquisition, but instead on the basis of the significance of the acquisition to the business of the issuer determined by reference to a "sliding scale". The effect of the SEC Release is to raise the thresholds of "significance" that determine whether financial statements must be included so as to encourage issuers to offer their securities under registered offerings rather than unregistered offerings under Regulation S. The Commission chose not to adopt the "sliding scale approach" reflected in the SEC Release as the current disclosure requirement based on materiality appears to work well in practice.

In proposing the requirement to include the financial history of an acquired business unless the financial results of the acquired business have been included in the audited consolidated financial statements of the issuer for a period of at least six months, the Commission is trying to strike a balance between providing prospective investors with relevant historical financial information of an acquired business and ensuring that the disclosure requirements for issuers are not overly onerous. At a certain point in time the results of the acquired business will have formed part of the issuer's historical financial disclosure so that a separate history relating to the acquired business is not necessary. The Commission is of the view that after six months there would be sufficient history to provide an understanding of the financial results.

Although the Commission has proposed that the financial information concerning an acquired business be provided unless the "6 month test" is met, the Commission recognizes that each acquisition is to some extent fact specific and that it is difficult to set out one test that can be applied consistently to each fact situation. For that reason, the Commission would welcome any comments concerning the proposed test and any suggested alternative tests which should be considered. For example, one alternative may be to combine the "6 month test" with a provision that indicates that disclosure would not be required for acquisitions which took place longer than 12 months ago even if the there was less than 6 months of audited consolidated financial information.

Proposed Rule 41-502 Prospectus Requirements for Mutual Funds will provide that section 3.3 of the Rule is inapplicable to mutual funds.

The proposed Rule discontinues the current requirement in section 15 of Policy 5.1 to include disclosure of dilution of the securities being offered. No dilution disclosure is required under NP 47 and the Commission has concluded that disclosure of dilution is unnecessary for long form issuers as well.

Part 4 of the proposed Rule deals with matters relating to pricing and costs. Currently, NP 47 provides that POP-eligible issuers may reduce the offering price of securities from the initial public offering price fixed in a short form prospectus without the need to file a prospectus amendment. The ability to reduce the offering price is subject to certain conditions, including that the proceeds to be received by the issuer or selling securityholder remain unaffected and that disclosure is made that the underwriters' compensation will be decreased accordingly. At the time that NP 47 was amended to permit reduced price offerings, it was felt that non-POP issuers should not be permitted to avail themselves of these provisions because of concerns relating to possible market manipulation. However, based on a reconsideration of this issue and the experience arising from the introduction of the reduced price offering provisions in NP 47, the Commission is extending the reduced price offering provisions to non-POP issuers in subsection 4.1(3) of the proposed Rule. The Commission believes that this change may help to reduce the dilemma faced by an underwriter that is unable to market an offering at the stipulated offering price. In these circumstances, the underwriter may be uncertain as to when it is safe to declare the distribution to be complete so as to be able to sell the securities below the offering price without a prospectus. To permit reduced price offerings under the proposed Rule is preferable from a policy perspective as it reduces the incentive on an underwriter to find "accommodation" purchasers of the unsold portion of a distribution and increases the likelihood of all purchasers receiving a copy of the prospectus.

The Commission considered and rejected the possibility of continuing the requirement currently set forth in section 4.3 of Policy 5.7 of requiring that a selling securityholder bear its proportionate share of the expenses of a combined treasury and secondary offering. The Commission also considered that a rule mandating a pro rata sharing of expenses might be accompanied by an exemption for bona fide agreements providing otherwise, which had been negotiated by the issuer and selling securityholder in advance of the offering before the selling securityholder became an insider. The Commission ultimately concluded that sharing of expenses is a matter best left to the parties involved in an offering and that it may not always be in the best interests of an issuer and its securityholders for the Commission to mandate a pro rata sharing of expenses. Accordingly, the Commission determined that this is best dealt with as a disclosure matter. Item 1.4(6) of the Prospectus Form requires disclosure in the prospectus of who is paying the expenses of an offering and the reasons for these arrangements.

Proposed Rule 41-502 Prospectus Requirements for Mutual Funds will make all of Part 4 inapplicable to mutual fund issuers.

Part 5 of the proposed Rule deals with certification of prospectuses. Section 5.1 carries forward the requirement in section 64 of the Regulation that the approval of financial statements included in a prospectus be evidenced by the signatures of two directors on the balance sheet, but discontinues the requirement that an issuer's audit committee first consider the statements. The Commission is of the view that the proposed Rule should avoid regulating matters relating to corporate governance. Section 5.2 of the proposed Rule provides that if disclosure concerning the guarantor is required by a prospectus form, the preliminary prospectus and prospectus must contain a certificate of the guarantor in the form required by subsection 58(1) of the Act. This requirement mirrors the requirement in item 20(3) of Appendix B of NP 47. As noted below in the discussion relating to the Prospectus Form, there is an explicit requirement in the Prospectus Form that disclosure be provided concerning a guarantor of securities. This requirement parallels the requirement under paragraph 5 of Item 16 of Appendix B of NP 47.

Part 6 of the proposed Rule deals with matters relating to filing of preliminary prospectuses and prospectuses. Sections 6.1, 6.2 and 6.3 are based on the relevant provisions in Part III of the Regulation, Policy 5.7 and National Policy Statement No. 1 (which is expected to be reformulated as a National Policy and published for comment at a later date). Where possible, the filing requirements have been simplified. For example, the requirement to file certified copies of directors resolutions has been eliminated, as the Commission concluded that this is a matter of corporate governance that need not be subject to review by Commission staff.

The current requirement to pre-clear green sheets set forth in the Commission notice of July 7, 1989 Use of "Green Sheets" and Other Marketing Material During the Waiting Period (1989) 12 O.S.C.B. 2641 has also been discontinued. Section 65(2) of the Act is clear concerning what advertising and other material may be distributed during the waiting period. Accordingly, the Commission is of the view that it is up to issuers and their legal advisors to determine what it is permissible to distribute, and that pre-clearance should not be necessary. However, section 6.5 of the proposed Rule provides that an issuer may be required, at the request of the Director, to file all advertising and sales literature used in connection with the distribution. The requirement is based upon a similar requirement which the Commission may impose upon registered dealers under section 50 of the Act.

Part 6 of the proposed Rule does not deal with the "mechanics" of filing or delivering documents to the Commission, as this is covered in SEDAR.

Currently, section 80 of the Regulation provides that if more than three underwriters have signed the certificate contained in a prospectus, a separate certificate must be filed with the final prospectus indicating the total public offering price represented by the portion of the distribution underwritten by each underwriter that has signed the certificate. The certificate need not be filed if the required information is disclosed in the prospectus. The original rationale for section 80 seems to relate to the fact that underwriters' liability under the Act is limited to the amount actually sold by each underwriter in the distribution to which the prospectus relates. The section imposes additional costs with no apparent benefit, and is not required to be filed by a number of other Canadian securities regulatory authorities. Accordingly, this requirement is not included in the proposed Rule.

Section 59 of the Act provides that where there is an underwriter, a prospectus shall contain a certificate of the underwriter in the required form. Section 12 of Policy 5.1 expands upon section 59 of the Act by indicating that, subject to exceptions, a receipt for a prospectus will not be issued unless the prospectus contains an underwriter's certificate. The Commission is of the view that section 12 of Policy 5.1 may be inappropriate in certain instances. The requirement to include an underwriter's certificate can be very costly for an issuer and does not necessarily enhance the quality of the prospectus disclosure, particularly if an underwriter is asked to sign a certificate in the final stages of a proposed financing solely in order to satisfy the regulatory requirements. Accordingly, section 12 of Policy 5.1 is not included in the proposed Rule, although section 1.5 of the Companion Policy states that the due diligence investigation that the underwriter and its advisers undertake in relation to the business of the issuer should result in enhanced quality of disclosure in the prospectus. For that reason the Commission encourages underwriter participation in the prospectus process, particularly in the case of initial public offerings. In addition, the Companion Policy reminds issuers that the Director has discretion under section 61(1) of the Act to refuse to issue a receipt for a prospectus if it is in the public interest to do so, including in the case of a prospectus that contains disclosure that is considered deficient. The Prospectus Form also includes a requirement, where there is no underwriter, to make a statement, in bold type, on the front page of the prospectus alerting readers that no underwriter has been involved in the preparation of the prospectus.

Currently, item 15 of Policy 5.1 requires that an issuer file copies of the underwriting or agency agreement and any other material contract requested by Commission staff. The current forms require that every material contract be made available for inspection at a reasonable time and place during distribution of the securities being offered. These requirements are continued in section 6.4 of the proposed Rule and Item 27 of the Prospectus Form. The Commission considered limiting these requirements so that only those material contracts that govern the terms of, or that affect the rights and obligations of the holders of the offered securities would be required to be made available. The Commission determined however that all material contracts should be available for inspection for a reasonable period of time in the interests of transparency and full disclosure. Section 4.2 of the Companion Policy indicates that the Commission will consider applications for relief from this requirement in circumstances where requiring access to the material contracts or portions thereof for public inspection purposes would be unduly detrimental to the company and would not be necessary in the public interest.

The requirements of section 25 of Policy 5.1 concerning international offerings have been changed to include a selling securityholder, promoter and guarantor in the list of parties required to file a submission to jurisdiction and to remove general partners of limited partnerships and certain others from the scope of the provisions. Section 6.8 of the proposed Rule requires that an issuer, selling securityholder, promoter or guarantor incorporated or organized outside Canada or residing outside of Canada file a submission to jurisdiction and appointment of agent for service using either Form F3 or F4, as appropriate. Item 1.10 of the Prospectus Form prescribes language to be included in the prospectus in these circumstances.

The provisions in the proposed Rule dealing with amendments and amended prospectuses reflect substantial changes (see sections 6.9, 6.10 and 6.11). In the past, a distinction has at times been made between an "amendment" to a preliminary prospectus or a prospectus and an "amended preliminary prospectus" or "amended prospectus" . The proposed Rule makes it clear that a change to a preliminary prospectus or a prospectus is in all cases effected by means of an "amendment" and that an amendment can be in the form of either a separate amending document or a restatement of the entire preliminary prospectus or prospectus. The proposed Rule also provides that all amendments shall be certified and receipted.

Section 6.12 of the proposed Rule provides that if the amendment has been filed as a result of the occurrence of a material adverse change after the date of the preliminary prospectus or to add a class or series of security in addition to the class or series of security for which the preliminary prospectus was filed there will be a ten day waiting period between the issuance of a receipt for the amendment and a receipt for the prospectus. This is consistent with the rationale underlying section 65 of the Act.

Part 7 of the proposed Rule concerns procedures and requirements for granting receipts. The general rules are set forth in section 7.1 and have been derived from section 38 of the Regulation. Subsection 7.1(5) of the proposed Rule extends the current 60 day maximum distribution period for best efforts offerings to 90 days to match the time period currently provided for in the securities laws of certain other provinces. Section 4 of Policy 5.1 provides that during the distribution period, funds must be held by a trust company or other acceptable depository. Subsection 7.1(5) of the proposed Rule now provides that only trust companies and Canadian chartered banks are acceptable depositories for this purpose. The Commission also considered permitting brokers or lawyers to act as depositories for this purpose. However, the Commission is of the view is that the purpose behind the requirement is to ensure that investors subscriptions are protected in the hands of an arm's length third party institution which is in the business of safeguarding assets in its custody until the minimum offering is either attained or the subscription monies returned to investors. Accordingly, the Commission determined that only trust companies and banks should be identified as acceptable depositories under the proposed Rule.

Part 8 of the proposed Rule deals with exempting powers. Section 8.1 contains the general exempting power contained in all local rules. Section 8.2 provides that if an issuer proposing to file a prospectus anticipates not being in a position to comply with one or more of the provisions of the proposed Rule, the issuer will be required to notify the Director in writing prior to or contemporaneously with the filing of the preliminary prospectus and, as regards the matters so notified, relief shall be deemed to have been granted if a receipt in respect of the prospectus is issued. This provision is modelled on section 7.3 of NP 47 and is designed to minimize paperwork associated with the granting of exemptive relief for prospectus-related matters.

Form 41-501F1

The Prospectus Form was prepared with a view to establishing one form of prospectus for use by all types of issuers, other than issuers for which a different form of prospectus is prescribed. The Prospectus Form includes all of the disclosure requirements currently found in the Regulations, the forms, Policy 5.1 and Policy 5.7. In this regard the Prospectus Form (i) eliminates unnecessary differences in wording between Forms 12, 13 and 14, as well as differing substantive requirements that are not justified on a policy basis, (ii) parallels the substantive disclosure obligations imposed on POP eligible issuers in the short form prospectus and documents incorporated by reference, (iii) re-orders the items to more closely reflect the order in which they generally appear in long-form prospectuses (without actually requiring that any particular order be followed), and (iv) provides more extensive instructions, including General Instructions at the beginning of the Prospectus Form, to provide greater assistance in the preparation of prospectuses. As a result, the Prospectus Form contains a large number of changes to the wording that currently exists in Forms 12, 13 and 14. The draft of the Prospectus Form accompanying this Notice contains footnotes that identify the more significant of these changes and, where appropriate, provides an explanation of the reasons for the changes. In certain instances, changes have been made to conform the Prospectus Form with disclosure requirements in other provinces of Canada.

Proposed Rule 41-502 Prospectus Requirements for Mutual Funds will provide that mutual funds may use either the "long-form" mutual fund prospectus, presently set out as Form 15 to the Regulation to the Act or the simplified prospectus system set out in National Policy Statement No. 36 ("NP 36"). Mutual funds that are labour sponsored investment funds must use the prospectus form presently set out as Form 45 to the Regulation to the Act. Mutual funds that are commodity pools must use Form 15; NP 36 does not permit such issuers to use the simplified prospectus system.

The Prospectus Form includes General Instructions for preparation of a prospectus and sets out 32 items for disclosure. Item 1 - Front Page Disclosure - of the Prospectus Form sets forth in one item the various matters that are required, under the current prospectus forms and related provisions in the Regulation and national and local policy statements, to be included on the front page of prospectuses. With regard to Item 1.4 Distribution, the Commission considered whether the requirement currently in Item 1, Instruction 5 of Form 14 (natural resource companies) that the securities of the selling securityholder not be sold until the distribution of the issuer's securities is complete, should be a requirement for all types of issuers. The Commission decided not to extend this requirement to all types of issuers. It further determined that there was no compelling justification for mandating, in the case of natural resource issuers, that the distribution of the issuer's securities should be completed before any of the selling securityholders securities are sold.

Section 39 of the Regulation under the Act provides that a receipt shall not be issued for a prospectus of a finance company relating to a debt security not issued under a trust indenture unless the outside front cover of the prospectus states that the debt security has not been issued under a trust indenture. The reason for this provision and the policy basis for distinguishing finance company debt securities from those of other types of issuers in unclear. As a result, the provision is not included in the proposed Rule or the Prospectus Form.

Subsection 38(3) of the Act prohibits any representation that any security will be listed on any stock exchange or that application has been or will be made to list the security upon any stock exchange except with the written permission of the Director. Currently, item 7 of Policy 5.1 prohibits a listing representation from appearing in a preliminary prospectus in any circumstance, and permits a representation in a prospectus only if conditional listing approval from the applicable exchange has been obtained. This prohibition was made in part to respond to concerns of the Canadian exchanges that representations may be made by issuers in situations where there is no reasonable likelihood of such issuers obtaining a listing. Item 1.7 of the Prospectus Form sets out listing representations which may be made in preliminary prospectuses and prospectuses in certain circumstances. This item provides that if application has been made to list the securities and if any securities of the issuer are currently listed on a stock exchange then a statement may be included in the preliminary prospectus that application has been made to list the securities distributed under the prospectus. The reason for this approach is that issuers who have securities listed would have a reasonable possibility of obtaining a listing and listing representations in such circumstances raise no regulatory concerns. Although item 1.7 of the Prospectus Form only applies to the prospectus context, it is proposed that similar provisions be incorporated into other rules dealing with other types of disclosure documents to obviate the need for issuers to apply for listing representation approval in many circumstances.

One alternative approach that could be adopted would be to permit a statement to be included in the preliminary prospectus that application has been made to list the securities even in situations where the issuer does not have any securities currently listed. This alternative would be similar to the approach taken in the United States where prior SEC approval is not required before making listing representations. Instead such representations are regulated and subject to the SEC's general disclosure requirements. Listing representations are subject to Rule 10b-5 which imposes statutory civil liability for fraud or deceit, including misleading disclosure.

Item 5 - Business of the Issuer - contains significantly more detailed provisions concerning disclosure of the business of the issuer. These parallel the requirements for disclosure concerning a business in the Annual Information Form for a POP issuer. Item 5.3 sets out the prospectus disclosure requirements concerning any material acquisitions or dispositions in the three financial years prior to the prospectus. The current two year requirement was extended to three years to match the financial statement disclosure requirements.

Item 6 - Description of Property - provides for different disclosure for industrial companies, mining companies and oil and gas companies. The requirements have been changed to conform to the disclosure requirements in NP47 and have been updated.

A substantive change in the Prospectus Form is found in Item 8 - Summary Financial Information and Management's Discussion and Analysis. While there is not currently any requirement to include summary financial information in a prospectus it has become common practice to include the information immediately before Management's Discussion of Operating Results. For that reason the Prospectus Form includes a requirement to provide summary financial information consistent with the similar requirements in NP 47. Item 8.3 of the Prospectus Form requires the issuer to include Management's Discussion and Analysis in the form required in proposed Rule 51-501 Management's Discussion and Analysis that will replace existing Policy 5.10.. This item replaces Item 13 of Form 12 - Variations in Operating Results by expressly requiring the disclosure.

Item 9 - Earnings Coverage - requires that a prospectus relating to an issue of debt securities having a term to maturity of longer than one year or to an issue of preferred shares contain a statement of earnings coverage for a specified period. The requirement to provide asset coverage currently set forth in section 59 of the Regulation has not been included in the Prospectus Form as the Commission has concluded that asset coverage is not an accurate measurement of risk. In the Commission's view, asset coverage is based on book values and therefore does not reflect the true value of an issuer's assets. The SEC does not require asset coverage information to be included in a registration statement. A further difficulty with the relevance of asset coverage information is that it is not possible to include the value of intangible property in the asset coverage calculation.

Item 10 - Description of Securities sets out the requirement for a description of the attributes of the securities being distributed. The requirements are consistent with the requirements in NP 47. Item 10.4 is a new requirement that any ratings received from one or more approved rating organizations be disclosed whether or not it is an approved rating. This is consistent with paragraph (4) of Item 8 of Appendix B of NP 47.

Item 25 - Guaranteed Securities has been added. This item requires disclosure concerning a guarantor of securities and parallels the requirement under paragraph 5 of Item 16 of Appendix B of NP 47. Subsection 53(4) of the Regulation to the Act currently requires financial statement disclosure for the guarantor only for an offering of guaranteed debt securities.

Form 41-501F2

As noted above, Form F2 is based very closely on Appendix A to Policy 5.7. The information provided in the form enables the Commission to conduct investigations of promoters and of the directors and executive officers of an issuer or, if a promoter is a corporation, the directors and executive officers of a promoter, so that the Director can fulfil his or her obligations under clause 62(1)(e) of the Act.

Form 41-501F3 and Form 41-501F4

As noted above, Form F3 and Form F4 are based very closely on Appendix A and Appendix B, respectively, of Policy 5.1. The Commission is of the view that an issuer, selling securityholder, promoter or guarantor that is incorporated, organized or otherwise governed under the laws of a foreign jurisdiction or resides outside of Canada should be required to submit to the jurisdictions of the courts and administrative tribunals of Ontario and to appoint an agent for service in Ontario. Forms F3 and F4 provide a standard form to accomplish these purposes.

Companion Policy 41-501CP

As noted above, the Companion Policy relates to the proposed Rule and has been derived principally from OSC Policies 5.1 and 5.7. A footnote to each section in the Companion Policy indicates the source of the section.

Authority for the Proposed Rule and Forms

The following sections of the Act provide the Commission with authority to adopt the proposed Rule and Forms. Paragraph 143(1)13 authorizes the Commission to make rules regulating trading or advising in securities to prevent trading or advising that is fraudulent, manipulative, deceptive or unfairly detrimental to investors. Paragraph 143(1)16 authorizes the Commission to make rules varying the application of the Act to establish procedures for or requirements in respect of the preparation and filing of preliminary prospectuses and prospectuses and the issuing of receipts therefor that facilitate or expedite the distribution of securities or the issuing of the receipts, including requirements in respect of pricing of distributions of securities after the issuance of a receipt for the prospectus filed in relation thereto. Paragraph 143(1)39 authorizes the Commission to make rules requiring or respecting the media, format, preparation, form, content, execution, certification, dissemination and other use, filing and review of all documents required under or governed by this Act, the regulations or the rules and all documents determined by the regulations or the rules to be ancillary to the documents, including preliminary prospectuses and prospectuses.

Alternatives Considered

No alternatives to the proposed Rule or the Forms were considered, as both the proposed Rule and the Forms carry forward the basic prospectus form, content and filing requirements currently in effect, requirements that the Commission feels have generally worked well. However, as noted above, both the proposed Rule and the Prospectus Form contain a large number of changes to the provisions currently in Part III of the Regulation, the prospectus forms and Policy 5.1 and Policy 5.7 to update these requirements and make the prospectus rules more user friendly and reflective of current practice.

Related Instruments

The proposed Rule, Forms and Companion Policy are all related to each other. The Companion Policy is also related to sections 56, 58, 59, 61, 62 and 63 of the Act.

Unpublished Materials

In proposing the Rule, the Forms and the Companion Policy, the Commission has not relied on any significant unpublished study, report, decision or other written material.

Anticipated Costs and Benefits

Purchasers of securities and issuers and selling securityholders and their advisors should benefit from the proposed Rule and Forms. The effect of the proposed Rule is to (i) consolidate the existing provisions currently set forth in the Regulation and various policy statements that relate to the preparation, certification, filing and receipting of prospectuses, and (ii) update these provisions to reflect current administrative practice and the views of the Commission. Together, the proposed Rule and Prospectus Form consolidate existing Forms 12, 13 and 14 and similarly update the disclosure provisions in those forms to reflect current practice. The resulting prospectus regime should be more concise and easier to use than the current system. Although some of the discretion granted to the Director in Part III of the Regulation to permit deviations from the financial statement requirements is not replicated in Part 3 of the proposed Rule, the provisions in Part 8 of the proposed Rule concerning exemptions should result in the same degree of flexibility in applying the proposed Rule as currently exists. Accordingly, the proposed Rule and Prospectus Form should not result in greater delays or in obtaining exemptive relief, if necessary. The investing public should benefit from the modernization of the prospectus rules and from any reduction in the costs incurred by issuers and selling securityholders in complying with those rules.

Regulations to be Revoked

The Commission will request the Lieutenant Governor in Council to revoke the following provisions in the Regulation:

Comments

Interested parties are invited to make written submissions with respect to the proposed Rule, the Forms and the Companion Policy. Submissions received by September 2, 1997 will be considered.

Submissions should be sent in duplicate to:

A diskette containing an electronic copy of the submissions (in DOS or Windows format, preferably WordPerfect) should also be submitted. As securities legislation in certain provinces requires that a summary of written comments received during the comment period be published, confidentiality of submissions received cannot be maintained.

Questions may be referred to:

Proposed Rules, Forms and Companion Policy

The text of each of the proposed Rule, Forms and Companion Policy follows, together with footnotes that are not part of the proposed Rule, Forms or Companion Policy, but which have been included to provide background and explanation.

Rescission of Policies

The proposed Rule and Forms will result in the rescission of the following Commission Policies: Policy 5.1 except Part A of section 10, section 19, section 24 and section 26 and Policy 5.7. The proposed Rule and Forms will also result in the rescission of the following Uniform Act Policies: Uniform Act Policy 2-03 and Uniform Act Policy 2-04. The text of the proposed rescission will be as follows:

"Policy 5.1, except Part A of section 10, section 19, section 24 and section 26, Policy 5.7, Uniform Act Policy 2-03 and Uniform Act Policy 2-04 are hereby rescinded."

DATED: May 2, 1997.