Securities Law & Instruments



COMPANION POLICY 45-501CP TO

ONTARIO SECURITIES COMMISSION RULE 45-501
EXEMPT DISTRIBUTIONS
TABLE OF CONTENTS

PART 1 PURPOSE AND DEFINITIONS
1.1 Purpose
1.2 Definitions

PART 2 EXEMPTIONS FROM THE REGISTRATION AND PROSPECTUS REQUIREMENTS OF THE ACT
2.1 Interaction of Private Placement Exemptions
2.2 Trades in Connection with Securities Exchange Take-Over Bids
2.3 Trades on an Amalgamation, Arrangement or Specified Statutory Procedure
2.4 Three-Cornered Amalgamations
2.5 Tacking

PART 3 REMOVAL OF REGISTRATION AND PROSPECTUS EXEMPTIONS
3.1 Use of Primary Purpose Entity
3.2 Satisfaction of Acquisition Cost
3.3 Vendor's Certificate
3.4 Units
3.5 Sales by Pledgees of Securities That Form Part of Control Block
3.6 Removal of Seed Capital Exemption

PART 4 OFFERING MEMORANDA
4.1 Use of Offering Memoranda in Connection with Private Placements
4.2 Contractual Right of Action

PART 5 COMMISSION REVIEW
5.2 Other Regulatory Approvals

PART 6 FILING REQUIREMENTS AND FEES

PART 1 PURPOSE AND DEFINITIONS

1.1 Purpose - This policy statement sets forth the views of the Commission as to the manner in which certain provisions of the Act and the rules relating toprivate placement exemptions are to be interpreted and applied.

1.2 Definitions - In this Policy, "private placement exemptions" means the prospectus exemptions available for

(a) sales of securities to those persons or companies identified in clause 72(1)(a) of the Act;

(b) sales of securities to exempt purchasers recognized as such by the Commission under clause 72(1)(c) of the Act;

(c) sales of securities to purchasers whose aggregate acquisition cost of securities is not less than $150,000 under clause 72(1)(d) of the Act or section 2.11 ofRule 45-501;

(d) sales of securities under clause 72(1)(p) of the Act; and

(e) sales of government incentive securities under section 2.4 of Rule 45-501.

Corresponding exemptions are provided for the registration requirements and the views set forth in this Policy apply in respect of the corresponding registrationexemptions.

PART 2 EXEMPTIONS FROM THE REGISTRATION AND PROSPECTUS REQUIREMENTS OF THE ACT

2.1 Interaction of Private Placement Exemptions

(1) The Commission recognizes that a vendor of securities can, in connection with any private placement, rely concurrently on different private placementexemptions except that concurrent reliance on clause 72(1)(p) of the Act and section 2.4 of Rule 45-501 does not appear to be possible.

(2) In this connection, the Commission notes that clause 72(1)(p) of the Act and section 2.4 of Rule 45-501 impose various upper limits on the number ofpersons to whom securities can be offered or sold in reliance on these exemptions. A trade made in reliance upon an exemption other than these two exemptionsneed not be counted for the purposes of the limitations relating to the number of purchasers in clause 72(1)(p) of the Act or section 2.4 of Rule 45-501.However, if prospective purchasers are solicited with respect to a private placement of securities and the securities are ultimately sold to some of the purchasersunder clause 72(1)(d) or section 2.11 of Rule 45-501 and other purchasers under clause 72(1)(p) or section 2.4 of Rule 45-501, all persons solicited with respectto the private placement, including those who were sold securities under the exemptions in clause 72(1)(d) or section 2.11, should, in the Commission's view becounted for the purposes of the "fifty prospective purchaser" solicitation rule in clause 72(1)(p) and the "seventy-five prospective purchaser" solicitation rule insection 2.4.

2.2 Trades in Connection with Securities Exchange Take-Over Bids

(1) Filing a securities exchange take-over bid circular under the Act has several consequences. First, the issuer becomes a "reporting issuer" within the meaningof subsection 1(1) of the Act. Second, reporting issuer status generally confers important benefits under the Act and the regulations, particularly in connectionwith the availability of certain prospectus exemptions and the running of hold periods on the resales of particular securities. The basis for conferring reportingissuer status on an issuer is that under Item 15 of Form 32 of the Regulation, a securities exchange take-over bid circular is required to contain prospectus-typedisclosure for the offeror or other issuer whose securities are being offered in exchange for the securities of the offeree issuer. This presupposes that thesecurities exchange take-over bid circular complies with the applicable requirements of the Act and regulations, including, without limitation, Item 15 of Form 32of the Regulation. The onus of ensuring that the circular contains the appropriate disclosure rests with the issuer and its advisors.

(2) Issuers are cautioned that the filing of a securities exchange take-over bid circular does not necessarily result in reporting issuer status under the Act unlessthe filing is made in connection with a bona fide securities exchange take-over bid and the securities exchange take-over bid circular filed complies with theapplicable requirements of the Act and regulations including, without limitation, Item 15 of Form 32 of the Regulation.

(3) Issuers should be aware that if the securities exchange take-over bid circular, as filed, does not substantially comply with applicable requirements and, if theadequacy of the disclosure is subsequently challenged and found to be substantively deficient, appropriate regulatory action will be taken by staff and theCommission, including the possibility of cease trading the securities of the issuer. As well, the resale exemption in section 2.14 of Rule 45-501 which turns on theuse of a securities exchange take-over bid circular, would not be available.

(4) The Commission is concerned about the increased number of securities exchange take-over bid circulars being filed by shell as opposed to substantialcompanies for the purpose of attaining reporting issuer status in situations where the bid did not proceed and the circular did not contain prospectus leveldisclosure. For that reason, the first trade relief in section 2.14 of Rule 45-501 is conditioned upon the issuer being a reporting issuer before the filing of thesecurities exchange take-over bid circular. The Commission recognizes that the requirements of section 2.14 may be unduly onerous in certain situations and on acase by case basis may consider granting relief. If a securities exchange bid is made by a shell offeror, the Commission may take appropriate regulatory action.

(5) The Commission is also aware that in certain cases issuers are making take-over bids by way of circular where an exemption from the circular requirements isotherwise available. While this is permitted under the Act, staff will monitor these transactions to see if they give rise to the concerns set out in this section.

2.3 Trades on an Amalgamation, Arrangement or Specified Statutory Procedure - Clause 72(1)(i) of the Act provides an exemption for trades in securitiesin connection with a statutory amalgamation or arrangement or other statutory procedure. The Commission is of the view that the reference to statute in thatclause refers to any statute of a jurisdiction or foreign jurisdiction under which the amalgamating entities have been incorporated or created and exist and underwhich the transaction is taking place.

2.4 Three-Cornered Amalgamations - Certain corporate statutes permit a so-called "three-cornered merger or amalgamation" under which two companies willamalgamate and the amalgamating entities will receive shares of a third party affiliate of one amalgamating entity. Section 2.8 of Rule 45-501 exempts thesetrades as the exemption applies to any trade made in the context of an amalgamation.

2.5 Tacking - The Commission is aware that conflicting views exist as to whether a subsequent exempt purchaser can "tack" on the period of time during whichshares have been held by a previous exempt purchaser in order to reduce its "hold" period. The Act provides in subsection 72(4) that the hold period commencesfrom the date of the "initial exempt trade". The Commission is of the view that the phrase "initial exempt trade" in subsection 72(4) of the Act and sections 2.13,6.2 and 6.4 of the Rule refers to the first trade made in reliance upon an exemption from the prospectus requirements of the Act and that therefore tacking ispermitted.

PART 3 REMOVAL OF REGISTRATION AND PROSPECTUS EXEMPTIONS

3.1 Use of Primary Purpose Entity - The restrictions in sections 3.3 and 3.4 of Rule 45-501 on the use of the exemptions contained in clause 72(1)(d) of theAct and section 2.11 of Rule 45-501 relate to entities that have been created, or used, to permit purchases of securities without a prospectus and investmentclubs, respectively, if the share or portion of the aggregate acquisition cost of the securities of each member or partner of the partnership, syndicate orunincorporated organization, each beneficiary of the trust or each shareholder of the company is less than $150,000. The exemptions contained in clause 72(1)(d)of the Act and section 2.11 of Rule 45-501 are available to an entity that is created, or is used, primarily for the purchase of securities without a prospectus ifeach member, partner, beneficiary or shareholder, of the entity, as the case may be, contributes, at least $150,000 for the securities purchased under theexemption.

3.2 Satisfaction of Acquisition Cost

(1) The Commission is of the view that the following do not constitute liabilities that satisfy the requirements of paragraph 3.2(2)(a) of Rule 45-501:

1. Commitments assumed under various tax-oriented arrangements if the promoter or distributor has held out to the purchaser a hope or expectation thatpayment of the obligation will be waived.

2. Mortgages under which the purchaser does not have a direct and real obligation to make payments under the mortgage.

(2) In determining the fair value of liabilities assumed or incurred in satisfaction of the acquisition cost for the purposes of paragraph 3.2(2)(b) of Rule 45-501, itis appropriate to take into account the current interest rates, and the maturity date of the liability, including any representations made by the promoter ordistributor as to the probable payment date.

3.3 Vendor's Certificate - The Commission will normally be satisfied that a vendor has exercised reasonable diligence for the purposes of the certificate requiredin Form 45-501F1 if the vendor relies, if appropriate, on statutory declarations or representations from the purchasers, unless the vendor has knowledge that anyfacts set out in the declarations or representations are incorrect.

3.4 Units

(1) Section 2.11 creates a new exemption for purchases of blocks or units of securities of more than one issuer if the issuers are engaged in related businesses.One example of related types of businesses for the purposes of section 2.11 of Rule 45-501 would be the developer and operator, respectively, of a real estateproject. The Commission does not consider that one issuer engaged in mining and another issuer engaged in oil and gas are engaged in related types of businessfor purposes of section 2.11 of Rule 45-501.

(2) If the exemption in section 2.11 of Rule 45-501 is relied upon, varying resale provisions for different securities that comprise the block or unit may result. Forexample, one of the securities may be listed and posted for trading on a recognized stock exchange and meet the requirements of clauses 433(1)(m) or (n) of theInsurance Act and thus have a six month "hold period", while another security, while also listed and posted for trading on a recognized stock exchange, may notmeet these Insurance Act requirements and thus have a one year "hold period".

3.5 Sales by Pledgees of Securities That Form Part of Control Block - Pledgees selling securities that form part of a control block should refer to NationalInstrument 62-101 Control Block Distribution Issues which clarifies the application of section 3.11 to sales by a pledgee.

3.6 Removal of Seed Capital Exemption - Section 3.6 provides that the exemption in clause 72(1)(p) of the Act is not available in certain circumstances. Thesection removes the registration and prospectus exemptions for trades to a parent, brother or sister of any director or senior officer of the issuer or any affiliatedentity of the issuer unless those persons are otherwise permitted purchasers under clause 72(1)(p). In addition, section 3.6 removes the exemption if the promoteris a registered dealer and has acted as a promoter of any other issuer which has traded in securities of its own issue under the exemption in clause 72(1)(p) of theAct. The restrictions have been added as the Commission is of the view that clause 72(1)(p) of the Act is overly broad.

PART 4 OFFERING MEMORANDA

4.1 Use of Offering Memoranda in Connection with Private Placements

(1) Part 4 of Rule 45-501 provides for the use of an offering memorandum in certain private placement situations. There is an obligation under section 4.1 ofRule 45-501 to deliver an offering memorandum describing a contractual right of rescission or damages in respect of a proposed private placement under clause72(1)(d) of the Act or section 2.11 of Rule 45-501 if there has been any advertisement of the securities in printed public media, radio, television ortelecommunications, including electronic display such as the Internet. An offering memorandum describing the contractual right of action must also be deliveredto purchasers of "government incentive securities" in connection with sales of securities made in reliance on section 2.4 of Rule 45-501. Though the obligation toprepare an offering memorandum is quite limited in its reach, business practice may dictate the preparation of offering material, which constitutes an "offeringmemorandum" under Rule 45-501, which is delivered voluntarily to purchasers in connection with exempt trades under clauses 72(1)(c), (d) and (p) of the Actand section 2.11 of Rule 45-501. The obligation to provide a contractual right of rescission or damages applies both when the offering memorandum is requiredto be provided under section 2.4 or 4.1 and when it is provided voluntarily in connection with the specified exempt trades under clauses 72(1)(c),(d) or (p) andsection 2.11 of Rule 45-501. However, a document delivered in connection with a sale of securities made otherwise than in reliance on the above-notedexemptions does not attract the obligations of Part 4.

(2) The Commission does not prescribe what an offering memorandum should contain apart from the contractual right of action and the requirements relating tofuture oriented financial information as contemplated by National Instrument 52-101 Future Oriented Financial Information. The use of the exemptions containedin each of clause 72(1)(p) of the Act and section 2.4 of Rule 45-501 requires that each investor have access to substantially the same information concerning theissuer that a prospectus filed under the Act would provide.

(3) The Commission cautions against the practice of providing preliminary offering material to certain prospective investors before furnishing a "final" offeringmemorandum unless the material contains a description of the contractual right of action to be made available to purchasers in situations when such a right ofaction and description is required. The only material prepared in connection with the private placement other than a "term sheet" (representing a skeletal outlineof the features of an issue without dealing extensively with the business and affairs of the issuer) made available to investors should consist of an offeringmemorandum containing the contractual right of action and satisfying in all other respects the Act and the regulation.

4.2 Contractual Right of Action - The definition of contractual right of action stipulates that the right of action must reasonably correspond to the rightsprovided in section 130 of the Act. The Commission notes that the rights provided in section 130 of the Act include the right of an investor to hold the partiesagainst whom it has a right of action jointly and severally liable for recovery of damages.

PART 5 COMMISSION REVIEW

5.1 Review of Offering Material - Though vendors of securities who rely on private placement exemptions are obliged under subsection 72(3) of the Act andsubsection 7.5(1) of Rule 45-501 to notify the Commission, by way of the filing of a Form 45-501F1, of certain details of their trades, the offering material theyuse in connection with those trades is not generally reviewed and commented upon by Commission staff.

5.2 Other Regulatory Approvals - Given the self-policing nature of private placements and the fact that offering memoranda are not routinely reviewed byCommission staff, the decision relating to the appropriate disclosure in an offering memorandum rests with the issuer, the selling securityholder and theiradvisors. If Commission staff becomes aware of an offering memorandum that fails to disclose material information pertaining to parties involved in thetransaction, staff may seek to intervene to effect remedial action.

PART 6 FILING REQUIREMENTS AND FEES - Section 7.6 of Rule 45-501 outlines a number of ways in which the disclosure contemplated by clause72(5)(b) of the Act and sections 6.3, 6.5 and 6.6 of the Rule may be made. The list of possible disclosure is not exhaustive and issuers may choose to make therequired disclosure in other ways.