Notice of Rule

The Commission has made Rule 72-501 Prospectus Exemption for First Trade Over a Market Outside Ontario (the "Rule") under section 143 of the Securities Act (the "Act").

The Rule and the material required by the Act to be delivered to the Minister of Finance were delivered on April 8, 1998. If the Minister does not approve the Rule, reject the Rule or return it to the Commission for further consideration, the Rule will come into force on June 22, 1998. If the Minister approves the Rule, the Rule will come into force 15 days after it is approved.

Substance and Purpose of Rule

The purpose of the Rule is to provide relief from the prospectus requirements of the Act for the first trade in securities of an issuer that is not a reporting issuer in Ontario that is carried out through the facilities of a stock exchange outside Ontario or on certain regulated markets outside Ontario.

The Rule is derived from the Blanket Ruling (1994), 17 OSCB 1978 In the Matter of the First Trade in Securities Acquired Pursuant to Certain Exemptions. The Blanket Ruling became a deemed rule of the same name, which was revoked on March 1, 1997 and replaced by a Rule In the Matter of First Trade in Securities Acquired Pursuant to Certain Exemptions (the "Replacement Rule"), which was published at (1997), 20 OSCB 1220. The Replacement Rule expires on the earlier of the date on which the proposed Rule comes into force and July 1, 1998.

Summary of Rule

Section 2.1 of the Rule provides relief from the prospectus requirements of the Act for the first trade of a "restricted security". A "restricted security" is (i) a security acquired in a distribution exempt under the Act or the regulations from section 53 of the Act, or (ii) a security acquired under a provision in a rule that prohibits a trade of the security except on certain conditions.

The relief is subject to certain conditions. These conditions limit the relief to situations where (i) at the time of acquisition of the restricted security, the issuer of the restricted security was not a reporting issuer in Ontario and either no more than 10 percent of the securities by number of securities and holders was held by persons or companies whose last address as shown on the books of the issuer was in Ontario or no more than 10 percent of the securities by number of securities and holders was beneficially owned by persons or companies in Ontario, and (ii) the first trade is executed through the facilities of a stock exchange outside Ontario, on Nasdaq, the Stock Exchange Automated Quotation System of The London Stock Exchange Limited ("SEAQ") or in the Eurobond Market. The conditions have been modified from those contained in the Replacement Rule principally to eliminate certain conditions to the use of the exemption that the Commission considers unduly restrictive or unnecessary.

Clause (e) of the provisos to the Replacement Rule imposes a condition that the "first trade is made in accordance with all laws applicable in the jurisdiction in which the trade is made as if the seller had acquired the Restricted Securities in that jurisdiction in the same manner as the seller acquired the Restricted Securities in Ontario". The purpose of this proviso was to make sure that Ontario investors would not be given preferential treatment to investors in other jurisdictions who have acquired the securities in the same manner as the Ontario investor. On the advice of staff, the Commission did not carry forward this condition into Rule 72-501. The rationale for this is that Ontario residents should only be subject to resale restrictions on sales outside Ontario if the laws of the jurisdiction from which the securities are issued or the laws of the jurisdiction into which the first trade is made impose restrictions on resale by Ontario securityholders. Whether there will be resale restrictions would likely turn on whether those jurisdictions consider the sale into Ontario or the first trade outside Ontario to be a distribution under their laws.

When advising securityholders on the ability to resell securities acquired in the circumstances contemplated by the Rule, market participants and their advisors should have regard to whether the laws of other applicable jurisdictions impose resale restrictions on Ontario residents.

Section 2.2 of the Rule clarifies the application of the Rule where a restricted security is issued or transferred in accordance with the terms of a convertible restricted security issued to a securityholder in Ontario. This section makes it clear that if the conditions in paragraphs 2.1(a) and (b) are satisfied at the time of the issuance of the security carrying the right and the condition in paragraph 2.1(c) is satisfied at the time of the first trade, the securityholder will be able to take advantage of the Rule even if subsequently one of the former conditions is no longer satisfied.

Summary of Written Comments Received by the Commission

A proposed version of the Rule was published by the Commission for comment on May 31, 1996 ((1996), 19 OSCB 2952) (the "May 1996 Version"). The Commission received one comment letter on the May 1996 Version.

As a result of staff's consideration of that comment letter, its recommendations to the Commission and the deliberations of the Commission, the Commission published an amended version of the Rule on April 18, 1997 ((1997), 20 OSCB 2053) (the "April 1997 Version") for comment in accordance with the requirements of section 143.2(7) of the Act. The changes made to the April 1997 Version from the May 1996 Version, together with a summary of the comments made on the May 1996 Version were described in a Commission Notice published with the April 1997 Version.

The Commission received a comment on the April 1997 Version from Ogilvy Renault, London, England.

The commenter suggested adding as an alternative to the 10 percent test in paragraph 2.1(b), a test that the issuer of the securities is a "foreign issuer" as defined in the rule In the Matter of Certain International Offerings by Private Placement in Ontario (1997), 20 OSCB 1219 (the "International Offerings Rule"). The commenter felt that this was appropriate as many of the circumstances contemplated by Rule 72-501 will arise where the original distribution was made in accordance with the International Offerings Rule. The commenter also felt that this would allow one test to be applied at the time of initial offering thus facilitating disclosure to Ontario residents of the applicability of Rule 72-501.

The Commission has not implemented the commenter's suggestion, as Commission staff intends to review this Rule in the context of the initiative of the Canadian Securities Administrators to review resale restrictions, described more fully below.

The commenter also referenced the fact that paragraph 2.1(c) refers to stock exchanges outside Ontario and then particularly refers to Nasdaq, SEAQ and the Eurobond Market separately. The commenter believes that Commission staff in the past has provided assurance that for the purposes of the rule International Offerings Made by Way of Private Placement in Ontario (1997) 20 OSCB 1219 (the "Permission Rule"), SEAQ is considered part of The London Stock Exchange. The commenter believes that the formulation of paragraph 2.1(c) may put this interpretation in jeopardy.

Rule 72-501 refers to SEAQ separately to avoid any doubt as to whether trades over SEAQ are included within the relief. The Commission can deal with the commenter's concern about the International Offerings rule in any future reformulation of that rule.

Initiative of the Canadian Securities Administrators to Review Resale Restrictions

Together with other representatives of the Canadian Securities Administrators, Commission staff is currently reviewing certain developments in other jurisdictions such as the decreased "hold period" recently adopted in certain provinces and developments in the United States regarding jurisdiction in relation to the sale of securities, to determine whether any changes to the existing regime of resale restrictions under the Act should be made. This Rule will be evaluated as part of this review, and the conclusions arising out of this review may lead in the future to further refinement of this Rule.

Regulations to be Amended

The May 1996 Version indicated that the Commission wanted to amend subsection 69(3) of the Regulation to remove the reference in that subsection to the deemed rule replacing the Blanket Ruling. As it is the Commission's intention in connection with other proposed rules that will contain provisions similar to subsection 69(3) to revoke subsection 69(3), the Commission proposes to adopt Rule 72-501 without the amendment to subsection 69(3) first being made. In that regard, the Commission notes that Rule 72-501 does not conflict with subsection 69(3) of the Regulation.

Text of Rule

The text of the Rule follows. Apart from a minor change in wording in paragraph 2.1(b), the Rule is unchanged from the April 1997 Version.

DATED: April 10, 1998.