JAMES D. L. KERR
CLIENT MEMO
TO:           Clients FROM:   James D.L. Kerr Lawyer
            17 – 151 Merton St.
            Toronto
, Ont., M4S 1A7
            Tel 416 485-4254
            Fax 416 485-8836
           
E-mail: jkerr@kerrlaw.ca
            www.kerrlaw.ca

            Certified Specialist Civil Litigation
DATE:      October 17, 2006
RE:           SECURITIES ACT – PROSPECTUS EXEMPTIONS

GENERAL PRINCIPLE:

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 exchange).

Securities regulation in Ontario is governed by the Securities 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.

PROSPECTUS EXEMPTIONS:

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:

 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.

 Effective September 14, 2005, Ontario adopted NI 45-106 and amended and restated Rule 45-501. NI 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: 

 Private Issuer - NI 45-106 s. 2.4

 A “private Issuer” is an issuer  that: 

 Founder, Control Person and Family - NI 45-106 s. 2.7

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.

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 ConsultantNI 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.

 
Reference 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.

 
OFFERING MEMORANDUM:

An "offering 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.

Offering 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 Companion 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.

 
HOLD PERIOD:

Securities 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 prospectus exemption.

 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:

 Companion 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.

 
REPORTING REQUIREMENT:

 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.


.DISCLAIMER: 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