||JAMES D. L. KERR
||FROM: James D.L. Kerr ● Lawyer
17 – 151 Merton
Toronto, Ont., M4S 1A7
Tel 416 485-4254
Fax 416 485-8836
Certified Specialist Civil Litigation
|DATE: October 17, 2006
|RE: SECURITIES ACT – PROSPECTUS EXEMPTIONS
The starting point of all securities regulation is
that a business that proposes to sell securities must file a “prospectus” with
the securities regulator and provide a copy of the prospectus to any proposed
purchaser unless an exemption
exists under the governing law. The purpose of a prospectus is to provide
public access to information to permit the making of sound investment
decisions. The securities regulator in Ontario
is the Ontario
Securities Commission (“OSC”).
The OSC’s mandate is to provide protection to investors from unfair,
improper or fraudulent practices and to foster fair and efficient capital
markets and confidence in their integrity.
TERMS AND SYSTEM OF REGULATION:
A "Security" is normally understood to mean a "share" or "stock" in a company. But the definition of "security" under the Securities Act
of Ontario (the "Act") is very broad and encompasses virtually every
form of investment vehicle including stocks, bonds and other forms of
debt instruments, title documents, profit sharing agreements, natural
resources (such as mining, oil and gas) royalties or leases, and
commodities futures, to name a few.
A “Distribution” or a “Trade”
means a sale or disposition of a security for valuable consideration (such as cash).
An "Issuer" means a company or other business entity that
has issued securities.
A “Reporting Issuer” means a public company (essentially, a company
that has issued securities in respect of which a prospectus was filed with the
OSC and/or whose securities have been listed and posted for trading on a stock
Securities regulation in Ontario is governed by
Act, Regulations, Rules and Instruments. By virtue of
section 143.3(3) of the Act, the government has, effectively, delegated the
power to make regulations to the OSC. Regulations made by the OSC are
called “rules”; rules can, subject to Ministerial approval, amend or revoke
regulations made by the government.
The OSC is a member of an umbrella organization called the Canadian
Securities Administrators (the "CSA"). The CSA seeks to achieve consensus among the provinces
and territories in securities law rule making, and to reflect that consensus in
new rules and in streamlined procedures for dealing with regulators. Such rules
are embodied in National Instruments
(“NI”) which are effective in all jurisdictions in Canada.
Rules, National Instruments and
Multilateral Instruments are binding; OSC Policies are not.
History of Regulation:
Prior to November 30, 2001, “private placements”
(i.e., trades and securities exempt from prospectus requirements) were governed
primarily by the following sections of the Act: s. 1(1) definition of “private
company”; s. 35(1) exempt trades; s. 35(2) exempt securities; and s. 72(1) exemptions from
prospectus requirements. The primary exemptions relied on under s. 72(1) were:
- 72(1)(c) - private placement / sophisticated investor exemption (aggregate acquisition cost of not less than
- 72(1)(p) – seed capital (solicitations made to not more
than 50 prospective purchasers resulting in sale to not more than 25 purchasers).
On November 30, 2001, revised Rule 45-501 (Exempt Distributions) came into force and significantly amended the private placement
laws in Ontario;
primarily, the $150,000 sophisticated investor exemption was replaced with an
“accredited investor” exemption and the seed capital exemption was replaced
with a “closely held issuer” exemption.
September 14, 2005, Ontario
adopted NI 45-106 and amended and
45-106 consolidates and harmonizes the prospectus and registration exemptions
that had been previously contained in various provincial securities statutes
and other instruments into a single national instrument.
Current Prospectus Exemptions Most Commonly Relied On:
Accredited Investor - NI
45-106 s. 2.3
An "accredited investor" is a
person who purchases as principal (i.e., not as an agent for someone else) and includes:
- an individual who,
either alone or with a spouse, beneficially owns, directly or indirectly, financial assets having
an aggregate realizable value that before taxes, but net of any related
liabilities, exceeds $1,000,000,
- an individual whose net income before
taxes exceeded $200
000 in each of the 2 most recent calendar years or whose net income
before taxes combined with that of a spouse exceeded $300,000 in each of
the 2 most recent calendar years and who, in either case, reasonably
expects to exceed that net income level in the current calendar year,
- an individual who,
either alone or with a spouse, has net assets of at least $5,000,000,
- a company that has net assets of at
as shown on its most recently prepared financial statements, and
entirely owned by accredited investors.
Private Issuer - NI
45-106 s. 2.4
A “private Issuer” is an
- Is not a reporting issuer;
securities are subject to restrictions
on transfer that are contained in the issuer’s constating documents
(such as Articles of Incorporation) or security holders’ agreements (such as a
beneficially owned, directly or indirectly, by not more than 50 persons; and
- That has
distributed securities only to persons who purchase the security as principal
officers, employees, founders, control persons of the issuer (essentially, a
person who owns more than 20% of the outstanding voting securities), or
relatives, close personal friends or close business associates.
A person who purchases
the security as principal and is a founder (essentially, a promoter), an
affiliate of a founder, a spouse, parent, brother, sister, grandparent or child
of an executive officer, director or founder or a control person is exempt.
Founder, Control Person and Family - NI 45-106 s. 2.7
Minimum Amount Investment - NI 45-106 s. 2.10
The purchaser purchases as principal, the security has an acquisition cost to the purchaser of not less than $150 000 paid in cash at
the time of the trade, and the trade is in a security of a single issuer. This
is similar to the old $150,000 “sophisticated investor” exemption that was
eliminated in 2001 but has now been reinstituted.
Employee, Executive Officer, Director and
Consultant – NI 45-106 s. 2.24
A trade by an issuer in a
security of its own issue, or a trade by a control person of an issuer in a
security of the issuer or in an option to acquire a security of the issuer, with
an employee, executive officer, director or consultant of the issuer or a related
entity of the issuer, or a permitted assign of such person if participation in
the trade is voluntary.
should be made to Companion Policy 45-106CP sets out the securities regulator’s
interpretation as to the application of exemptions under NI 45-106.
memorandum" ("OM") means a document, together with any amendments, purporting to
describe the business and affairs of an issuer that has been prepared primarily
for delivery to and review by a prospective purchaser so as to assist the
prospective purchaser to make an investment decision in respect of securities
being sold pursuant to a prospectus exemption.
Memoranda are required in some provinces but are not
mandatory in Ontario. If, however, an OM is used then it must contain a right of action for damages
and right of rescission in accordance with s. 130.1 of the Act; reference should also be made to
Policy 45-501CP. If an OM
is provided to a prospective purchaser, the seller must deliver to the
Commission a copy of the OM within 10 days of
the date of the distribution. Offering memoranda are not generally reviewed or
commented on by the OSC and, subject
to Freedom of Information and Protection of Privacy Act requests, are
not made available to the public.
issued under a prospectus exemption are not “free-trading”; they are subject to
a hold period during which the security holder cannot re-sell the security. The
hold period for securities issued
pursuant to an exemption was formerly 18 months under section 72(4) of the Act.
Under Multilateral Instrument 45-102, first trade hold
periods were changed in 2001 to either 4 months (for a “qualifying issuer” -
essentially, a reporting issuer) or 12 months (for non-qualifying issuers).
Coincidental with the implementation of NI 45-106, National Instrument 45-102
(Resale of Securities) revised the hold periods
so that, essentially, there is now a single hold period of 4 months but if the issuer is not, and
does not become, a “reporting issuer”
(essentially, a public company that subjects itself to continuous disclosure requirements, including
financial statement and material change disclosure),
the securities never
become free-trading and can only be sold pursuant to a further
Typically, there are three ways to
“go public”: 1. an initial public offering (an “IPO”), 2. a reverse takeover
(an “RTO”), and, 3. the capital pool company (“CPC”) process. In some
instances, converting to an income trust will take a company public as well.
ADVERTISING AND SOLICITATION:
Policy 45-106CP states
that NI 45-106 does not prohibit the
use of registrants, finders, or advertising in any form (for example, internet,
e-mail, direct mail, newspaper or magazine) to solicit purchasers under any of
the capital raising prospectus exemptions. The policy cautions, however, that
the use of any of these means to find purchasers under the private issuer
exemption may give rise to a presumption that the precondition of a close
relationship between the purchaser and the issuer does not exist and therefore
the issuer cannot rely on the exemption.
If an issuer distributes a
security in reliance on the Accredited Investor or Minimum Amount Investment
exemptions, the issuer must file a FORM 45-106F1 report
with the OSC on or before the 10th day after the distribution.
The foregoing is not intended to be a comprehensive guide to the applicable
law. General Client Memoranda and mailings from James D.L. Kerr ● Lawyer are
intended to inform clients and acquaintances with respect to current issues
that may be of interest to them. Memos are current to the date shown on the Memo.
The law is constantly changing, however, and for that reason a Memo may not be
completely accurate after it's stated date. Where circumstances warrant, the
advice of a lawyer or other qualified professional should be obtained.
© 2006 James D.L. Kerr