LAW 463 – Securities Regulation

Table of Contents

CONTEXT AND PHILOSOPHY............................................................................................................................................................3

TYPES OF SECURITIES..............................................................................................................................................................................3TYPES OF INVESTORS...............................................................................................................................................................................4WHERE AND HOW SECURITIES ARE FIRST SOLD.....................................................................................................................................4PURPOSES OF SECURITIES REGULATION..................................................................................................................................................4TECHNIQUES OF SECURITIES REGULATION..............................................................................................................................................5BASIC STRUCTURE OF THE MODERN REGIME..........................................................................................................................................5

SCOPE........................................................................................................................................................................................................5

DEFINITION: “SECURITY”.........................................................................................................................................................................5DEFINITION: “TRADE”..............................................................................................................................................................................7

Jurisdiction..........................................................................................................................................................................................8

DISTRIBUTION........................................................................................................................................................................................8

KINDS OF DISTRIBUTION..........................................................................................................................................................................9TYPES OF SECONDARY TRADING MARKETS..........................................................................................................................................10

MATERIALITY......................................................................................................................................................................................10

MATERIAL FACT....................................................................................................................................................................................10MATERIAL CHANGE...............................................................................................................................................................................11

MACHINERY..........................................................................................................................................................................................11

BC SECURITIES COMMISSION................................................................................................................................................................12NATIONAL INSTRUMENTS & POLICIES (HAVE LEGAL FORCE UNDER BCSA SS.184, 187).....................................................................12SELF-REGULATORY ORGANIZATIONS....................................................................................................................................................13PROCEDURAL FAIRNESS.........................................................................................................................................................................13ENFORCEMENT PROCEDURE OF COMMISSIONS......................................................................................................................................13

Reviews and Appeals (Part 19 BCSA)...............................................................................................................................................13Industry Best Practice.......................................................................................................................................................................14

NATIONAL AND COORDINATED APPROACHES TO SECURITIES REGULATION............................................................14

SYSTEMATIC RISK..................................................................................................................................................................................14Options After the Reference..............................................................................................................................................................14

THE PROSPECTUS PROCESS............................................................................................................................................................15

PROSPECTUS REQUIRED AND REPORTING ISSUER..................................................................................................................................15CONTENTS OF LONG FORM PROSPECTUS (IPO).....................................................................................................................................15REGULATORY DISCRETION.....................................................................................................................................................................16MECHANICS AND STAGES OF THE PROSPECTUS.....................................................................................................................................16THE PROSPECTUS PROCESS....................................................................................................................................................................18ALTERNATIVE FORMS OF PROSPECTUS..................................................................................................................................................19PASSPORT SYSTEM [+ PROSPECTUS REVIEW] AND MULTIJURISDICTIONAL DISCLOSURE SYSTEM.......................................................20MULTIJURISDICTIONAL DISCLOSURE SYSTEM (MJDS).........................................................................................................................20

CONTINUOUS DISCLOSURE.............................................................................................................................................................21

PERIODIC DISCLOSURE...........................................................................................................................................................................21Financial Disclosure.........................................................................................................................................................................21Management’s Discussion & Analysis (MD&A) (51-102 Part 5)....................................................................................................23Annual Reports and Annual Information Forms (AIFs) (NI 51-102 Part 6)....................................................................................23Certification Requirements...............................................................................................................................................................23Proxy and Information Circular - Relates to shares with voting rights attached.............................................................................23Communications/Delivery of Periodic Disclosure............................................................................................................................25

TIMELY DISCLOSURE.............................................................................................................................................................................26Material Change Reports (NI 51-102 Part 7/85(b)).........................................................................................................................26

SELECTIVE DISCLOSURE........................................................................................................................................................................27

THE EXEMPT MARKET......................................................................................................................................................................27

TYPES OF PROSPECTUS EXEMPTIONS.....................................................................................................................................................28(A) No Need to Know: Purchaser Already Familiar With Issuer or Securities................................................................................28(B) No Need to Know: Purchaser is Sophisticated or Otherwise Able to Protect Itself...................................................................29

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(C) No Need to Know: Investment Very Safe....................................................................................................................................29(D) Redundancy or Dual Regulation: Prospectus-level info available from another source...........................................................29(E) Cost/Benefit Analysis: Ensuring Smaller Issuers and Not-for-Profits can access Capital Markets..........................................30Equity Crowdfunding Exemption (BCI 45-535)................................................................................................................................31Discretionary Exemptions.................................................................................................................................................................31Miscellaneous (Part of Div 2: Transaction Exemptions)..................................................................................................................31

RESALE OF SECURITIES EXEMPTION......................................................................................................................................................32

REGISTRANT REGULATION.............................................................................................................................................................33

REGISTRATION REQUIREMENTS.............................................................................................................................................................33Dealers and Advisers........................................................................................................................................................................33Investment Fund Managers (NI 31-103 s.7.3)..................................................................................................................................34

FIRM CATEGORIES FOR REGISTRATION..................................................................................................................................................34INDIVIDUAL CATEGORIES OF REGISTRATION.........................................................................................................................................35

Individual Registration Requirements...............................................................................................................................................35EXEMPTIONS FROM REGISTRATION........................................................................................................................................................36

International Dealers........................................................................................................................................................................36International Advisers.......................................................................................................................................................................36Client Mobility...................................................................................................................................................................................36Generic Advice..................................................................................................................................................................................36

REGISTRANT OBLIGATIONS....................................................................................................................................................................36REGISTRANT OVERSIGHT.......................................................................................................................................................................39

RECOGNIZED ENTITIES....................................................................................................................................................................39

MARKETPLACES.....................................................................................................................................................................................39CLEARING AGENCIES.............................................................................................................................................................................40SELF-REGULATORY ORGANIZATIONS....................................................................................................................................................41REGULATORY FRAMEWORK...................................................................................................................................................................41OVERSIGHT BY COMMISSIONS...............................................................................................................................................................41

CRYPTOCURRENCY (NOT ON THE EXAM)..................................................................................................................................41

VIRTUAL MARKETS INTEGRITY INITIATIVE REPORT (NY AG).............................................................................................................42CRYPTOCURRENCY OFFERINGS CSA STAFF NOTICE 46-307...........................................................................................................43SECURITIES LAW IMPLICATIONS FOR OFFERINGS OF TOKENS CSA STAFF NOTICE 46-308............................................................44

EVOLUTION OF THE REGULATION OF DERIVATIVES - GLOBAL FINANCIAL CRISIS.................................................44

RISKS OF DERIVATIVES..........................................................................................................................................................................45FINANCIAL CRISIS AND GLOBAL RESPONSE..........................................................................................................................................45TRADE REPOSITORIES AND DERIVATIVES DATA REPORTING: MI 96-101............................................................................................46CENTRAL COUNTERPARTY CLEARING HOUSES (CCP)..........................................................................................................................47

INSIDER TRADING...............................................................................................................................................................................48

LEGAL INSIDER TRADING (REPORTING ISSUER)....................................................................................................................................48ILLEGAL INSIDER TRADING/TIPPING/RECOMMENDING..........................................................................................................................51

[1]: X must be in a SPECIAL RELATIONSHIP with the reporting issuer.......................................................................................51[2] X traded based on knowledge of MATERIAL INFO...................................................................................................................52[3] The material info relied on was NOT GENERALLY DISCLOSED............................................................................................52Evidentiary Issues: Commission must prove each element of IT allegations on BofP (defense)......................................................53

DEFENSES...............................................................................................................................................................................................53CRIMINAL LIABILITY..............................................................................................................................................................................54SANCTIONS FOR ILLEGAL INSIDER TRADING/TIPPING (SEE BELOW FOR MORE DETAIL).....................................................................55

TAKE-OVER BIDS.................................................................................................................................................................................56

DEFINITION.............................................................................................................................................................................................57EXEMPTIONS FROM “FORMAL” TAKEOVER BID REQUIREMENTS (NI 62-104; PART 4 – DIV 1) (CATCH-THEN-EXCLUDE).................57TOB PROCEDURES.................................................................................................................................................................................58DEFENSES...............................................................................................................................................................................................60COMMISSION + COURT POWERS: REGULATORY RESPONSIBILITIES VS COURT POWERS......................................................................63EMERGING ISSUES..................................................................................................................................................................................63

ENFORCEMENT (NOT ON THE EXAM)..........................................................................................................................................63

ENFORCEMENT PROCEDURE...................................................................................................................................................................64INVESTIGATIVE PROVISIONS (PART 17 BCSA, SS 141-144)..................................................................................................................65OPTION 1: ADMINISTRATIVE SANCTIONS...............................................................................................................................................66

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Enforcement Orders (BCSA 160-164):.............................................................................................................................................66Option 1(b): Civil Remedies – Applications to Court.......................................................................................................................68

OPTION 2: PENAL (QUASI-CRIMINAL PROVISIONS)...............................................................................................................................69OPTION 3: CRIMINAL..............................................................................................................................................................................70

Context and Philosophy2 MAIN GOALS OF SECURITIES REGULATION: 1) Protect investors; AND 2) Foster fair and efficient capital markets [contribute to financial stability/mitigate systemic risk] – Public Interest.

Capital Markets: Broader regulatory structure of securities, banking and insurance.o Primary objective of banking regulation is credential regulation to make sure the banks are solvent capital

requirementso Insurance is separately regulated; overlap between some insurance products and mutual funds (which are securities)

Financial Markets: All of the capital markets + anything else that may go into how markets move. Security Markets: About buying and selling securities.

Capital Market Efficiency FOSTERING FAIR AND EFFICIENT CAPITAL MARKETS: Requiring issuers to disclose information about

themselves to the investing public allows price to reflect value more accurately, which contributes to the fairness and efficiency of securities markets

o Securities value = function of issuer’s actual financial prospects; Securities price = reflects investors perceptions of the financial prospects Whether price reflects value is a function of investors perceptions of the financial prospects

o In order to foster fair and efficient capital markets, regulations must strike a balance such that investor protection schemes are not so onerous as to deter corporations from using capital markets to raise funds

o Efficient Markets Hypothesis: EMH asserts that capital markets are efficient when all available info about a security is reflected in its price – controversial aspects prediction that even though info not immediately and costlessly available to all market participants, the market will act as if it were + prices fluctuate in unpredictable ways

Critiques of Disclosure Paradigm 1) Behavioral Economics (assumes investors are perfectly rational, but no they aren’t, so disclosure cant guarantee market efficiency) 2) Volume of Mandatory Disclosure (volume is counterproductive, info overload not actually reading/accurately interpreting available info) 3) Complexity (capital markets are more complex than when disclosure became a reg req – issuers finance in more complex ways, new types of secs, interconnectedness)

Securities Market Public Markets: Companies selling stocks to the public. Exempt/private: Special rules that apply to a security, the general public cannot just buy. Can only sell to people with a

unique relationship to the company. Exempt market is bigger than the public.

Types of Regulation Entity Based Regulator: In Canada, we regulate banking, securities and insurance separately. Twin-Peaks Regulator: Gives up on entity-based structure (currently in Canada) and has one side deal with consumer

protection and the other focuses on safety and soundness (e.g. seen in Australia). Unified Regulator: Banking, Insurance and Securities all regulated by one organization. Other Option: If you do not have a unified regulator, try and get coordination between the regulators.

Regulatory Methods1) Disclosure-based re issuers2) Registration requirements for registrants (dealers & advisors)3) Anti-Fraud Provisions including criminal sanctions.

Types of Securities[1] DEBT: Commercial paper (short term), bonds and debentures; governed by securities regulation

Commercial Paper: IOU, investor buys, agreed on maturity date to pay back with interest, no interest along the way, and is unsecured, and is usually short term (<270 days)

Bond/Debenture: Secured against some asset, company would need to talk to a credit rating agency since they are long term commitments, get fixed income along the way, good way of raising steady low-risk money. But won’t get a large return. Priority in event of bankruptcy.

o Bonds and debentures carry a face value, a maturity date and an interest rate (=coupon rate)o Bonds are traded over the counter and have credit ratings attached to themo In the corporate sector, bonds are secured, and debentures are unsecured.

Government bonds are not secured against any assets3

[2] EQUITY: Buying a piece of a company. Anytime equity is sold, a prospectus must be filed (except for exempt distributions). Share: Share pro-rata in any future profits and rights to some proceeds of sales of assets if the company dissolves.

o Common Share: Get to vote, right to dividends, and liquidation rights. o Preferred: Usually for money partner i.e. venture capitalist // May get better dividend or asset rights than common

shares and certain preferred rights (e.g. participation rights, information rights, ROFR, pre-emptive rights) o Restricted: Cannot vote and restrictions on dividend rights.

Rights of Offering: A right allows existing shareholders to buy more shares.o Holders of a specified number of rights will have the right to buy a share in the company for a predetermined price

within a certain period of time // Rights to buy shares are normally tradable Business Trust or Partnership Unit: Comparable to a share of a corporation

[3] DERIVATIVE SECURITIES: Instrument whose value is derived by something else – can be equity, debt or mixed. Key their value off some reference share (some underlying thing) (Swaps + Options) or from a debt security.

Used for risk management, hedging and speculating Futures: financial contract obligating the purchaser to purchase the asset at a later date at a specified price Option: contract that entitles, but does not require, its holder either to buy or sell a particular entity on a particular date

(exercise date) at a specified price (exercise price) Swap: arrangement under which two parties agree to exchange particular cash flows over a fixed period of time

o E.g. Credit Default Swaps (CDS): the writer agrees to compensate the holder in the event that a specified “credit event” occurs, for example if a certain debt security goes into default.

[4] SECURITIZED PRODUCTS: Bundle of debt that gets bundled together and sold again.

Types of Investors[1] RETAIL: Everyday people

[2] INSTITUTIONAL: Sophisticated investors with a large staff.

Where and How Securities are First Sold Any corporation or other business organization that issues securities is an “issuer” Early-stage companies usually sell securities through an exempt distribution known as a “private placement” usually to

friends, family, management, venture capitalists, accredited investors or other sophisticated investors (investing $150,000+). Offering Memorandum: shorter, more plain language than the prospectus; can sell to anyone without restrictions; has

maximum amount thresholds in certain jurisdictions (no max in BC) “Issuer” (BCSA 1(1)): Means a person who

o (a) has a security outstandingo (b) is issuing a security, or o (c) proposes to issue a security.

“Reporting issuer” (BCSA 1(1)): o Means an issuer that:

(a) has issued securities in respect of which (i) a prospectus was filed and a receipt was issued; (ii) statement of material facts was filed and accepted; or (iii) a securities exchange take-over bid circular was filed …

(b) has filed a prospectus or statement of material facts and the Exe DIR has issued a receipt for it under this Act (see: (c)-(f)).

o Reporting issuer’s key personnel become “insiders” subject to insider trading regulation They can also become liable for misrepresentations in continuous disclosure documents or the failure to

disclose relevant informationo Have to make continuous disclosure (financial statements, MD&A, annual meetings, resale of securities by control

persons) on SEDAR and insider information must be disclosed on SEDIo Once you are a reporting issuer, you can still distribute securities through exempt offerings private placement.

However, there are restrictions on the resale of those securities. This is disclosed via a news release on SEDAR

Purposes of Securities Regulation Objectives of Securities Regulation:

o Investor Protection – giving investors the information they need to make informed decisions Also, by preventing dishonest practice

o Fair and Efficient Capital Markets – market integrity Optimal financial resource allocation; mobile and transferable capital; framework for valuing investments

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Information about issuers must be given out at the same time to everyone Oversight of market intermediaries

E.g. credit rating agencies Securities regulation can require a lot of disclosure and make sure people know about risk, but they will not

stop an investor from investing in a risky business market economy Other Goals of Securities Regulation:

o Systemic Risk: aggregate of multiple smaller risks Involves “the risk of breakdown among institutions and other market participants in a chain-like fashion

that has the potential to affect the entire financial system negatively” Ideals:

Regulators should attempt to reduce the risk of failure by issuers and market intermediaries Regulators should strive to minimize disruption and losses to stakeholders in the event of failure Because events from other jurisdictions may cause instability, regulators should seek to cooperate

internationally and share information to facilitate stabilityo Public Confidence: requires trust in both the people and the institutions of the industry

Advisers and dealers must follow a strict set of rules and guidelines Regulators to prioritize and publicize enforcement Information disclosure feeds and shapes trust Individuals encouraged to participate in the securities markets People are gamblers at heart – if securities were unavailable or untrustworthy, gambling and lotteries would

absorb larger amounts of money

Techniques of Securities Regulation Registration of persons: everyone (individuals, corporations and unincorporated organizations) who acts as a dealer, adviser

or investment fund manager Registration of issuers and securities: must file a prospectus, make periodic and timely continuous disclosure, and directors

and officers must ensure proper disclosure and meet certain standards regarding personal trades in the issuer’s securities Anti-fraud measures: honor the anti-fraud rules found in corporate, securities and criminal legislation

Observations That Guide Interpretation: 1) Securities regulation is protective, not punitive; 2) Courts choose substance over form in interpreting the definition (i.e. they focus on the general economic effects of the whole transaction rather than the specific technical details) – Financial engineers use “securitization” to create new derivatives and this transforms the value of a given asset or pool into something that can be sold as a security

Basic Structure of the Modern Regime1. Legislation: Each of the 10 provinces and three territories has its own securities laws

a. High degree of cooperation between the provincesi. Each province has its own Securities Act

ii. Policies are harmonized and similarb. National Instruments are adopted by the provinces and are uniformc. Multi-Lateral Instruments – adopted by select provincesd. Local Rules – local economic developments, exemptions, grants, etc.e. Self-Regulated Investment Associations overseen by securities regulatorsf. Securities Regulators can regulate the Securities Actg. Role of the regulator is to monitor the markets, not to make sure victims are made wholeh. The CBCA regulates the conduct of federally incorporated companies (some overlap with provincial securities laws)i. Some provisions of the Criminal Code also govern securities regulationj. Takeover context: Competition Act and Investment Canada Act

2. Administration: each jurisdiction has its own administrative agencya. The Canadian Securities Administrators is an umbrella organization of all 13 Canadian securities regulatorsb. Top Tier (panel of commissioners): make orders and ruling, hear appeals from the lower tier, formulate policies and

make recommendations to the provincial government regarding legislative changesc. Lower Tier (administrative body): day-to-day aspects of the Commission

ScopeOBSERVATIONS THAT GUIDE INTERPRETATION:

1) Securities regulation is protective, not punitive2) Courts choose substance over form in interpreting the definition (i.e. they focus on the general economic effects of the whole

transaction rather than the specific technical details).

Definition: “Security” BCSA 61: One may not distribute securities without having filed a prospectus unless potentially exempt. 5

Security: Instrument issued to raise funds to capitalize an entity as a result, generate profits. Securitization: transforms the value of a given asset or pool of assets into something that can be sold as a security

o The securities created by securitizing cash flows from a set of assets are known as “asset backed securities” (ABS). Pacific emphasizes that the legislated definition is not exhaustive, and the categories are not exclusive

[1] Any document, instrument, or writing commonly known as a security (BCSA s.1(1)(a)) Common Knowledge: Need to determine the common knowledge among securities professionals (financial and legal

community), not lay persons (Gelderman). It need not be known to the man “in the street” – just must be knowledge common among members of the community (SEC v. Glen W Turner Enterprises (ponzi scheme)).

[2] A doc evidencing title to, or an interest in, the capital, assets, property, profits, earnings or royalties of a person or company (1(1)(b)).

TEST (look @ the purpose of the transaction) Does a “document” show some form of investment or speculation (e.g. looking for profit, business prospect, etc.)? (this is how courts have narrowed the broad definition under 1(b)).

o Title doc to ½ interest in breeding chinchillas to share in profits = security (Swain v. Boughner)o Scotch whiskey receipts are securities when they are bought and sold as an investment (Brigadoon)o Control can help determine whether something is a security or not (Raymond Lee – Co. got a 20% interest in

inventions where they helped with marketing and patents// Held: This is not a security, is a service. Reasons: 1) Inventors remained in control of inventions; 2) Inventors testified they did not think this was an investment; and 3) Primarily a transaction for patent processing and marketing)

[3] A document evidencing an option, subscription or other interest in or to a security (BCSA, s.1(1), “security” (c)) Option: Form of derivative. It is a contract that entitles but does not require its holder either to buy or sell a particular

security on a particular date at a specific price. Subscriptions: Sign-up forms for purchasing securities. Rights: Corps can raise capital quickly and with fewer regulatory requirements by granting existing security holders rights to

purchase a specific # of additional securities at a specific price and time. Warrants: attached to bonds, give warrant holder right to buy a specific # of corp’s equity sec at specific price & during

specific time period (referenced like an option).

[4] Debt Security: a bond, debenture, note or other evidence of indebtedness, share, stock, unit, unit certificate, etc. Other than: (i) contract of insurance and ii) evidence of deposit issued by savings institution (these are excluded as they are governed by insurance and banking) (1(1)(d))

Issue: Distinguishing a debt security from a document evidencing indebtedness that is not a security. Family Resemblance Test (BCSECCOM v Gill, BCCA citing Reves) – Rebuttable presumption that certain types of debt

instruments are securities, not banking products. Factors relevant whether presumption is rebutted:1. The Motivations that would prompt a reasonable seller and buyer to enter into the transaction: If the seller’s purpose

is to raise money and the buyer’s purpose is to profit from returns, it’s a security;2. The intended distribution of the instrument: if it is one in which there will be ‘common trading for speculation or

investment’, it’s a security;3. Reasonable expectations of the investing public: The more the public expects a security, the more likely it’s a

security;4. The existence of another regulatory scheme: If there is no other regulatory scheme that reduces the risk of the

instrument, it’s likely a security. Promissory Notes: substance over form; rebuttable presumption that promissory notes are securities; secured by assets may

just be a loan and not a security (CBM Canada's Best Mortgage Corp. (Re))BC Sec Com - 2 individuals gave large amounts of $ to Gill for his investment co., he then gave them receipts // Held: These were securities

[5] A Proportionate Interest in a Portfolio of Assets: agreement under which the interest of the purchaser is valued for purposes of conversion or surrender by reference to the value of a proportionate interest in a specified portfolio of assets

Captures “open-ended” investment funds (e.g. mutual funds): these funds sell units or shares to investors and invest the proceeds in various securities – investors can redeem their units at regular, specified intervals, in proportion to the net market value of the fund at that time

[6] Profit-Sharing Agreement or Certificate: similar to an investment contract, but as per Raymond Lee, there may be a profit-sharing arrangement that is not also an investment contract.

[7] *Investment Contract (BCSA, s.1(1)(l)) Catch-all Provision (e.g. Joiner Leasing (USSC) – Ppl bought potential oil-boom land expecting an investment return // Held: This is a security).

TEST (Pacific Coast, 1978 SCC – Bags of coins “on margin” = Investment Contract): While the Howey and Risk Capital tests are helpful, they are not necessary to determine whether an Investment Contract is a Security. What is necessary is that: ‘finding the contract in question to be an investment contract (and therefore a security) would support and advance the policy goals of securities regulation generally.’6

Policy of Securities Regulation: It is about protecting the public and “full and fair disclosure.” Substance, not form, governs the interpretation of what is a security. Look at whether people are at risk (Pacific – risk because investors dependent on PC on how to function in futures market)

Re Kustom Designs – Investments expecting negative earnings but resulting in a tax refund or lower tax bill, achieved through the efforts of others, was a financial benefit – which constitutes a profit for the purpose of investment contract.

Real Estate (Braun (Re)): not purchasing a beneficial interest in a property; ‘flipping’ scheme; profit through the increasing value of the property

What has been found to be an Investment Contract: Units in a citrus Grove Development, where investors were not from the area, not farms, stayed in guesthouse (Howey) // Retail store membership program (Hawaii) // Purchase of Silver Coins on Margin (Pacific) // Real Estate Ventures // Some franchise where the franchisor retains a huge degree of control relative to the franchisee.

Common Enterprise Test (Howey (citrus grove in Florida), cited in Pacific – criterion was met): 1. There must be a “common enterprise” (Pacific – Common enterprise found - must be commonality between investor and the

promotor (vertical), need not be commonality between investors themselves (horizontal)), in which2. Profits will come solely from the efforts of people other than the investors.

Pacific adopted a “more realistic” formulation of the second part: Holding that it was necessary only that “the efforts made by those other than the investor are the undeniably significant ones” (read out the word “solely”).

SBC Financial Group Inc. (Re): efforts of a third party and common enterprise not met; it was a real estate transaction, not a security

Risk Capital Test: Hawaii expands the Howey test for the existence of an Investment Contract (Hawaii, discussed in Pacific – criterion met):

1. An offeree furnishes initial value to the offeror [Hawaii - members required to contribute $320 or $820 > not simply a purchase of sewing machine, cookware, because these amounts far exceeded their wholesale value];

2. A portion of this initial value is subject to the risks of the enterprise [Hawaii - members’ ability to recoup initial investment and earn income inextricably bound to success of the enterprise // Pacific - Investors are subject to the risk that PC goes insolvent. Insolvency risk is that PC is incompetent or cannot buy futures contracts at a rate that makes the business work];

3. The furnishing of the initial value is induced by the offeror’s promises or representations that the offeree will gain some benefit, over and above the initial value, as a result of the enterprise’s operation [Hawaii - members were promised “commissions”/fixed returns]; and,

4. The offeree does not receive the right to exercise practical or actual control over the managerial decisions of the enterprise [Hawaii - members arguably participated in a minor way in operating the enterprise, but Court focused on the “quality” of participation, not the “quantity].

Distinguish: Pacific with Lazerman (this decision seems to “back-peddle” from Pacific and is likely a “better” decision). In Lazerman, the BCCA found that the contracts were not investment contracts (factual distinctions from Pacific: silver bars

instead of silver coins (there is a market for bars not coins) and Lazerman segregated purchasers’ funds instead of commingling with its own). The purchasers’ profits did not depend on Lazerman’s actions; they depended on the market price of silver. Segregating the funds meant that there was no sharing of each other’s profits or losses and were not engaged in a common enterprise.

[8] An interest in an Oil, Gas or Mining Claim: certificate of interest in an oil, natural gas or mining lease, claim or royalty voting trust certificate and oil or natural gas royalties or leases or fractional or other interest

Definition: “Trade” Whether or not a transaction qualifies as a “trade” determines whether that transaction is subject to securities regulation. Under s. 34 of the BCSA and NI 31-103, a “trade” triggers the requirement that a registered dealer be involved in the transaction, unless an exemption applies.

NB: BCSA 34: A person must not (a) trade in a security or exchange contract, (b) act as an adviser, (c) act as an investment fund manager, or (d) act as an UW, unless the person is registered in accordance with the regulations and in the category prescribed for the purpose of the activity.

BCSA, s.1(1)[a] a disposition (i.e. sell – a trade does not include a purchase; focus on the seller (e.g. Pacific Coast co.)) of a security for valuable consideration (no “other people’s money” issue if not) whether the terms of payment be on margin, installment or otherwise, but does not include a purchase of a security or a transfer, pledge, mortgage or other encumbrance of a security for the purpose of giving collateral for a debt ((a)).

Focus is on SELLING, it is a trade to sell a security but not a trade to buy a security (Hennig – Option exercise, from Hennig’s viewpoint, was effectively a purchase and, therefore, not a trade)

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Must be a disposition for valuable consideration (Re Anchor – Gift of common shares to EE’s is not a trade if no valuable consideration).

o Gifts are not trades because there is no consideration Does not have to be in the form of money (Meyers Estate – assignment of mineral rights as consideration) Contemplated consideration is sufficient because it is an act in furtherance of a trade

[a.1] entering into a futures contract ((a.1)) + [b] entering into an option that is an exchange contract ((b)) Any ‘entering into a derivative or making a material amendment to, terminating, assigning, selling or otherwise acquiring or

disposing of a derivative is also a trade. o This INCLUDES acquiring derivatives.o No requirement that the disposition be for valuable consideration

[c] participation as a trader in a transaction in a security or exchange contract made on or through the facilities of an exchange or reported through the facilities of a quotation and trade reporting system ((c))

Captures: Activities of an agent of a broker executing securities traders through any stock exchange, quoting and trade reporting system or alternative trading system.

[d] the receipt by a registrant (i.e. dealer) of an order to buy or sell a security or exchange contract ((d)) A registrant includes traders but also anyone else engaged in the securities industries. Trade occurs when the broker receives the order, not when it is completed.

[e] a transfer of beneficial ownership of a security to a transferee, pledgee, mortgagee or other encumbrancer under a realization on collateral given for a debt ((e))

This transfer must be done by a “control person” (individual, corporation or a group holding more than 20% of an issuer’s voting rights)

[f] any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the other branches ((f))

LIMITS of this broad branch are difficult to establish. Takes a “contextual approach” in determining whether acts were acts in furtherance of trade OR “sufficient proximate connection” as described in Re Costello.

No actual trade need ever be completed for there to be a “trade” under this branch (E.g. if there is an ad for a trade, it is deemed to be a trade. Trying to protect ppl early on).

o E.g.: Meetings are trades, unless they are informational and not promotional // Advertising a security, I intend to issue later (as an issuer), is a trade. It is a solicitation in furtherance of a trade (very broad) // Bookkeepings and administrative functions performed by a trust company for mutual fund dealers are not trades (Re: OSC and CAP Ltd.)

Activities Found to Constitute Acts in Furtherance of Trades (Re MP Global): o (1) Accepting money from investorso (2) Depositing Cheques for Share Purchaseso (3) Providing investors with subscription agreementso (4) Distributing promotional materialso (5) Issuing share certificateso (6) Organizing meetings with investors to organize the purchasing of securities

Trade Not a Trade The granting of stock options to EE or DIRs (valuable

consideration being the EE/DIRs future or current services) Transferring shares from one company that you own to

another company that you own, provided there is valuable consideration

Converting a share from one form to another Advertising or solicitation directed at investors (even

though no securities have actually been sold yet) – this qualifies as an “act in furtherance”

A gift of securities as there is no consideration The inheritance of securities – no consideration Moving assets in divorce – no consideration A trust company managing the portfolios of mutual fund

dealers (doesn’t qualify under (f) because the trade already is already completed by the time the trust company becomes involved)

MAYBE: drafting an advertisement directed at investors or sending it to the printers, but before it’s actually published (could be argued that it’s not enough under (f))

Jurisdiction The courts tend to be liberal in granting jurisdiction – more than one province could have jurisdiction over the same

transaction o Key consideration – Where is the corporation doing business? (Bennet, Durante, World Stock) o Gregory & Co: promoter in Quebec who sent out a bulletin out of province Quebec jurisdictiono R v W McKenzie Securities: broker in Ontario who contacted Manitoba residents Manitoba jurisdiction

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Locations Granting the Jurisdiction: reporting issuer (Torudag), corporation (Re Lehman), broker (Re Durante), investors (World Stock), promoter (Gregory)

More than one Commission can asset jurisdiction, which can lead to multiple proceedings over one occurrence (Bennett)

DistributionDEFINITION: “Distribution” (NB: Incorporates the word trade (defined above))

All distributions are trades in that they transfer securities for valuable consideration. Distributions only occur to the primary market.

o Primary Market: when an issuer issues securities directly to the publico Secondary Market: when the securities are subsequently traded between investors without involvement by the

issuer, including on stock exchanges, such as the TSX and TSX-V Distributions are a type of trade that triggers the prospectus process, which is why this characterization is important. The

definition set out in BCSA 1(1) is exhaustive. It is important to note that while all distributions involve trades, not all trades qualify as distributions.

o Prospectus: document that discloses a required set of information regarding the issuer and the securities being offered – information intended to benefit and protect potential investors

o The prospectus requirement is engaged when there is a trade that would be a distribution of a security While issuers have continuing disclosure obligations and potential liabilities in relation to secondary market purchasers, only

an issuance of securities from an issuer itself (primary market) constitutes a “distribution”.

BCSA S 1(1): A “Distribution” means, if used in relation to trading in securities,[a] Fresh Distributions of New Securities: a trade in securities that have not previously been issued (i.e. new to the market, primary market issuance) (BCSA, s. 1(1)(a))[b] Reissuances: a trade by the issuer in its own previously issued securities: trades by the issuer (or on its behalf) in securities that the issuer previously issued (incl. redeemed securities and securities purchased by the issuer on the market or donated to the issuer)[c] Distribution by Control Persons: a trade in a previously issued security of an issuer from the holdings of a control person (a person with more than 20% of the issuer’s outstanding voting securities is deemed a “control person”; however, a lower percentage than 20 may constitute control – each case must be evaluated on its particular circumstances) (BCSA, s. 1(1)(c))

When a control person trades securities, those securities must be qualified with a prospectus (Why: Control person has access to info where other security holders do not; Has vested interest to ensure selling at high price; etc.).

Someone can be a control person with less than 20% of the company’s shares (Re Deerhorn Mines/R v. Boyle)[d] Distributions by UW Before the Effective Date of Closed System: an underwriter’s trade in securities it acquired before the effective date of the closed system (no longer really relevant)[e] Commission Deemed Distributions: a trade deemed a distribution: i) in an order under s.76 by commission or executive DIR; OR ii) in the regulations (BCSA, s. 1(1)(e))

s.76(1) Residual discretion of Sec. Com. Senior staff to deem a distribution and force disclosure.[f] Transactions During/Incidental to Distribution: any transaction involving a purchase and sale or a repurchase and resale during distribution or incidental to distribution: this includes securities purchased by an underwriter during a distribution, where the underwriter plans to resell the securities (BCSA, s. 1(1)(f)). [g] a prescribed class of trade or transaction

Kinds of Distribution Registered Issuer (RI): If you make a distribution, you are a RI. Where a company wants to distribute to the public, do it either 1) Direct issue or 2) hire an underwriter (UW) (main route). This company is called an issuer. [1] Direct Issue: Issuer itself makes direct contact with potential purchasers without an investment dealer or broker (e.g. rights offerings, exempt offering with one or more institutional purchasers, crowdfunding)[2] UW Arrangements:

Underwriter Functions:o Advise on financial situation/how to structure the transactiono Assist in the distribution of their securities by finding investors & conducting the transaction with themo Perform risk-bearing function when they execute a firm commitment or bought deal by purchasing the issuers

security that they will then resello Give a “seal of approval” on IPO – solidifies company’s value to prospective investors.

How UWs are paid (UW Agreements):o Bought deal (full risk): company sells 100% of shares to the UW and the UW sells them out to the world (Kerr –

bought deal can be detrimental to investors because a purchaser has no remedy of L rescission against the issuer for misrepresentation in the prospectus, as it is the UW who sells the securities)

o Market Deal Offering (Medium Risk): Contract between issuer and UW and that the issuer cannot talk to other UWs, but the UW can test to see if can sell securities profitably

o Standby Offering (Med-Low Risk): UW commits only to purchase sec that are not sold to investors at a certain price – guarantees issuer, a minimum amount of total proceeds

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o Best Efforts Agency Agreement (Low Risk): UW will make their “best efforts” to sell the shares, only get paid on commission.

How UWs Limit their Risk:o 1) Termination Clauses: The UW can include a market-out clause and a disaster-out clause in the underwriting

agreement. With a market-out clause, the UW can terminate the agreement if it determines, acting reasonably, that the securities cannot be marketed profitably.

These clauses are contained in an underwriting agreement, which usually is not signed until a day or two before the distribution takes place – underwriters begin their worked based on an engagement/bid letter

o 2) Invite other UWs: may have either joint and several liability or just several liability Lead underwriter handles negotiations, signatures and documentation

o 3) Disclosure of Conflicts of Interest: A potentially non-independent UW (i.e. where the UW is a subsidiary of a bank to which the issuer owes money) should make disclosers pursuant to NI 33-105, Underwriting Conflicts, and if necessary, involve an independent UW.

Underwriter Compensation: Dealers are compensated by “spreads”

Types of Secondary Trading Markets1. First Market: registered stock exchanges (e.g. TSX, TSX-V)2. Second Market: trading in securities not listed on a recognized exchange (unlisted market/over-the-counter (OTC) market) –

many debt securities and derivatives are OTC3. Third Market (upstairs-market): “face to face” or “computer to computer” trading of listed securities between institutional

investors with the help of dealers4. Fourth Market: same as the Third Market, but without dealers5. Money Market: related to, but distinct from, the second submarket; involves trades by major or primary money market

dealers (recognized by the Bank of Canada) in short-term debt securitiesa. The securities (often called “commercial paper”) issued are debt of governments and of corporations with strong credit

ratings

“Deep” secondary market: market in which many of the issuer’s securities are being traded“Liquid” secondary market: market in which there are many ready and willing buyers and sellers of the issuer’s securities“Market makers”: post bidding and asking prices to extend buying and selling prices for securities and the difference between the two prices is the “bid-ask spread”

MaterialityDEFINITION: “Materiality” BCSA 63 – must provide “full, true and pain disclosure of all material facts.” // “Misrepresentation” – means “an untrue statement of a material fact” // BCSA 85 – “provide disclosure of material change”

Material Fact (MF): Must disclose when talking about prospectuses and misrepresentation. Material Change (MC): Part of disclosure requirements and is an issue with insider trading. DIFFERENCES:

o 1) MC is narrowero 2) MC has a timing elemento 3) MC is inherently dynamic and not static like facts (e.g. doing business in a country that suffers a coup and the

government gets changed. This would be a material fact but not a material change. The fact is ambient in the world and does not individually affect you)

o 4) MF refers to the securities issued or proposed to be issued, while MC refers to any securities or a security of the issuer

Tests for Materiality: Market Impact Test (legally binding in Canada): Info is material if it is reasonable to expect that the release of that

information would have a significant impact the market price of the security. This is an objective inquiry (Coventree). o Reasonable Investor Test (used in the US + 51-102 Forms): Material fact or change is one that would be

important to a reasonable investor in making an investment decision with respect to the relevant security. Must guard against hindsight and reliance on actual market price changes (Coventree).

o Hindsight: Important to consider what could have been reasonably expected at the time the fact came to light, now what happened after – Subsequent events alone cannot determine whether something is material at the time that it occurred, but they may support or corroborate a finding of materiality found on other grounds (Re Kapusta)

Probability/magnitude test (YBM Magnex): When determining whether a contingent (future) event is material, you must weigh the likelihood of that event happening along with its severity on the stock price of the security (YBM – Probability of a formal charge in the US and look at the magnitude of that event on their business) Contextual analysis, but likely around 10% change in bottom line or employment, etc. (NB: Use as an aid to the assessment of materiality)

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Contextual factors will be relevant to Materiality (NP 51-201, s.4.2): Consider the nature of info itself, price volatility of the issuer’s securities, the prevailing conditions in the market and the size and nature of the issuer itself.

Material Fact (BCSA s.1(1), NP 51-201 s.4.1): A fact that (when it arises) would reasonably be expected to have a significant effect on

the market price or value of the securities. Material fact is a broader idea than material change (Pezim). A change to a material fact is not necessarily a material change. It will only be if it concerns an issuer’s business, operations

or capital (i.e. Do not confuse a material change with a change in material fact) (Pezim). Letter advising of concerns by sole creditor before IPO was not a material fact, thus did not need disclosure in IPO

(Coventree) Negotiations can be a material fact – they may be material at an early stage, “well before the negotiations have reached a

point of commitment to be characterized as” a material change (AiT). Real potential for acquisition is a material fact (Re Holtby). Subsequent events alone cannot determine whether something is material at the time that it occurred, but they may

support or corroborate a finding of materiality made on other grounds (Re Kapusta)

Timing: Must consider what could have been reasonably expected at the time the fact came to light, not what happened after). External Developments (political, economic, geographic or social – such as political coup, natural disaster, etc.): may be a material fact, generally it will be a material change only if its effect on the particular issuer is both significant and uncharacteristic for the industry (NP 51-201, s.4.4)

Material Change (BCSA s.1(1)): (i) a change in the BUSINESS, OPERATIONS OR CAPITAL of the issuer that would reasonably be

expected to have a significant effect on the market price or value of a security of the issuer, or (ii) a decision to implement a change referred to in subparagraph (i) made by (A) the DIRs of the issuer, or (B) the senior

management of the issuer who believe that confirmation of the decision by the DIRs is probable … o NOT: External political, economic or social developments. o Do not engage in “super critical interpretation of the meaning of material change.” Should be willing to interpret it

broadly (Coventree). o Letter by sole crediting agency re policy change to not stop providing ratings for certain type of securities issued

= Material Change (Coventree – this was a major change in C’s biz). o Change in mineral assay results constitute material changes because it is new information about the value of an

asset (Pezim, SCC - From the point of view of investors, new information relating to a mining property (which is an asset) bears significantly on the Q of that property’s value).

o Negotiations are a material change when there is a sufficient degree of certainty that the transaction will be completed (Siddiqi – “sufficient degree of certainty” reached when parties made an informal hand shake deal).

A commitment from one party to proceed will not be sufficient to constitute material change (need both parties) (AiT).

o Intra-quarter results are not a material change as they are temporary. Only material changes needed to be disclosed b/w the prospectus receipt date and the distribution date. If it is a material change there is a legal obligation to disclose; if not a material change, it does not have to be disclosed (Kerr, SCC – Reduced jacket sales b/c warm weather).

Kerr arose out of a misrepresentation context and the analysis of materiality may be different in other contexts

Subsequent events alone cannot determine that a change is material at the time that it occurred, but they may support or corroborate a finding of materiality made on other grounds (e.g. found material based on all the evidence with increase in share price corroborating the determination (Re Kapusta – Public Oil co found oil, withheld results awaiting more tests, insiders bought shares. Share prices jump when discovery disclosed // Held: The test results had been sufficiently certain to give rise to a material change before some of the impugned trades by insiders (thus some engaged in insider trading)).

Investment Fund: A change in the business, operations or affairs of the investment fund that would be considered important by a reasonable

investor in determining whether to purchase or continue to hold a security of the investment fund Decision to implement a change by directors senior management (believe confirmation probable)

Events that may give rise to Material Change (NP 51-201 s.4.3): 1. Changes in corporate structure, such as take-overs, mergers or changes in share ownership that may affect control of the

corporation;2. Changes in capital structure (e.g. Poison Pill); 3. Changes in financial results, such as significant increase or decrease in earnings projections, changes in assets or in

accounting policies,

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4. Changes in business and operations (e.g. significant change in corporate objectives, loss or gain of significant contracts, significant resource discoveries)

5. Acquisition or disposition, and6. Changes in credit arrangements.

Machinery BCSCn – for administrative/regulatory matters including compliance and enforcement BCSC – adjudicates on criminal & quasi-criminal matters; adjudicates on civil liability (i.e. investor lawsuits) incl. under BCSA

Part 16, 16.1

Securities Commissions- INDEPENDENT: Commissions are separate and independent from the departmental chain of command – this independence

was emphasized in the Kimber Report- PURPOSE : To administer the provincial securities act and other relevant legislation

o Regulatory purposes 1. Protect investors from unfair, improper or fraudulent practices + 2. Promote efficient capital markets and confidence in those markets

o Note: The proposed national securities act would have added a third purpose – to contribute, as part of the Canadian financial regulatory framework, to the integrity and stability of the financial system

- FUNDAMENTAL PRINCIPLES OF THE COMMISSIONS o The Ontario Securities Act has explicitly identified these principles for the OSC to consider

1. The commission may need to balance the two regulatory purposes 2. The purposes are to be achieved through ensuring timely, accurate, and efficient disclosure of

information, restricting fraud and unfair practices, and requiring high standards of fitness and business conduct

3. The commission must administer and enforce its statutory remit in a timely, open and efficient manner

4. Properly supervised SROs should be used for their enforcement capability and regulatory exercise 5. Securities regimes should be harmonized and coordinated

Applied in Re BioCapital Biotechnology – it is in public interest that the rules we administer be applied in a harmonious manner with the rules of other jurisdictions, unless there is a clear public police for a contrary application

6. Regulatory costs and restrictions should be proportionate to the regulatory objectives’ significance o Ontario’s 2003 Crawford Report – 4 more principles (not legislatively incorporated)

Advancing investor education, Maintaining Ontario’s competitive position in the face of increasing internationalization, Facilitating innovation, Facilitating and promoting competition among market participants

o 2009 Hockin Report – 6 more principles (not legislatively incorporated) Reducing systemic risk, proportionality between restrictions on market participants and the benefits

realized, fostering the competitiveness of Canada’s capital markets internationally, facilitating innovation in capital markets, promoting investor participation in securities regulation, recognizing regional markets and sectors

BC Securities Commission Regulatory commission can make Rules that are very similar to government regulations, but they can be created without

going through the legislative process. 2 Tier Structure: Separates Advocate (Staff – may seek order against some) + Judge (Commission – make order)

o Level 1 – “Official Commission”: Describes the first level of the commission which consists of up to 11 staff members. Appointed. They generate policy and make decisions in administrative enforcement proceedings (incl. appeals and hearings) (BCSA s.4)

Subject to term limits set out in the Administrative Tribunals Act and may be reappointed. Powers:

Appoint experts; Investigate and examine; Supervise registrants, trading in general (including advertising), prospectuses and distributions,

continuous disclosure, proxies, takeover and issuer bids, and insider trading and self-dealing; and Enforce the legislation and impose sanctions.

o Level 2 – Staff: Commission must appoint a person to be the executive director and chief administrative officer, who runs staff. Staff employed through contract. Powers include investigation, supervising registrants, trading, prospectuses, distribution, continuous disclosure, proxies, TOBs, insider trading, self-dealing, enforcement of legislation including sanctions, and delegating responsibility to SROs (BCSA s.8).

Rule Making Authority (BCSA 184-188): BC Sec Commission given rule making authority following the Ainsley Corp decision.

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BCSA 184 – Commission can make binding law themselves (i.e. if signing onto a MI and NI) “Notice-and-comment” rule making (faster than legislation):

o Propose a rule and have to wait a certain amount of time (e.g. 60 days) for comments from people.o At the end of the comment period, they must issue another version of the rule and justify.o Publish the rule again and go through another comment period.o Then issue the rule and it becomes a binding piece of law.

BCSA 187 – Administrative powers re: Commission rules.

Organizational Bias Concerns: 1. Regulators attempt to increase their own power and influence, even if such expansion goes beyond their justifiable scope of

authority2. Agencies may over-regulate and be over-conservative to protect themselves from failure3. Policy will tend to focus on unquestioned internal rhetoric, perhaps discarding useful ideas from outside.

NB: Efforts to harmonize regulation across provinces (e.g. harmonizing definition of “insider trading”).

National Instruments & Policies (have legal force under BCSA ss.184, 187) NI: Binding law effective in all jurisdictions. MI: Binding law that not all the provinces have agreed to (anything on BC securities commission website has been agreed

to). o CP: Companion Policy – Explains the instrument (MI & NI)

NP: Not binding (policy) but provides guidance on how things are interpreted and it is national so everyone has agreed to it. MP: Multilateral Policy

Self-Regulatory OrganizationsCommissions delegate substantial “front line” regulatory responsibility to Self-Regulatory Organizations (SROs) and to the Exchanges.BCSA Part 4 – Self-regulating bodies, exchanges, Quotation and Trade Reporting systems and Clearing Agencies

s.23: Self-regulatory bodies include exchanges, self-regulating organizations, quotation and trade reporting systems, and clearing agencies // s.27: Powers of the Commission are broad, and can take actions to control SROs // s.28: Appeals from a regulatory body will go to the Executive for approval, who will in turn, have it heard by the upper level of the Commission // s.31: SROs must appoint an auditor.

Main SROs: Investment Industry Regulatory Organization of Canada (IIROC): Carries out its regulatory responsibilities through

setting and enforcing rules regarding the proficiency, business and financial conduct of dealer firms and their registered EEs and through setting and enforcing market integrity rules regarding trading activity on Canadian marketplaces.

Mutual Fund Dealers Association (MFDA): SRO for the distribution side of the Canadian mutual fund industry. The MFDA is structured as a not-for-profit corporation and its Members are mutual fund dealers that are licensed with provincial securities commissions.

Main Exchanges: TSX: Main exchange for senior issuers. Important listing requirements include: financial condition and prospects,

management, and sponsorship TSX-V: Pre-dominantly for emerging companies and their venture class securities.

Procedural FairnessThere is a presumption that administrative tribunals will operate in accordance with the principals of procedural fairness:

1. A person must have an adequate opportunity to be heard before the decision-maker reaches a conclusion2. The decision-maker must not have an interest in the outcome of the decision

Enforcement Procedure of Commissions1. Complaint2. Informal/Preliminary Investigation3. Formal Investigation

a. Reasons: due administration of securities law or regulation of capital markets in the provinceb. Must be initiated by an orderc. Investigator’s power: investigating the affairs and assets of the person being investigated, as well as past and

present assets, liabilities, financial relationships, etc., force attendance of any person, compel testimony, compel production of documents, inspect documents or other things on the business premises and search and seizure with a court order

d. Protections for those investigated: compelled testimony cannot be used against them in offence proceedings, investigators cannot compel production of materials protected by solicitor-client privilege, anyone giving evidence has the right to counsel and to other traditional privileges, private residences are not subject to search and seizure,

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reports to the Chair or Commission are privileged and confidential and no disclosure is allowed of the examinee’s name or any information revealed in the examination.

4. Orders without a Full Hearinga. Initiating an investigationb. Applying to court for a declaration of non-compliance with the province’s securities lawsc. Freezing fundsd. Temporary orders in the public interest (e.g. suspending, restricting, terminating or imposing terms on registration or

recognition, ceasing trading in or purchasing of securities, removing exemptions)5. Hearing

a. Factors to consider when deciding to hold a joint hearing with a different jurisdiction:i. The issues and arguments are substantially the same in the jurisdictions

ii. There are urgent business reasonsiii. The issue is novel, such that the public interest favours a joint hearing to promote consistency across

jurisdictions6. Appeal to Court of Appeal

Reviews and Appeals (Part 19 BCSA)OVERVIEW: Enforcement by staff Appeal to BC Sec Comm (BCSA 165) Appeal to BCCA (BCSA 167) Appeal to SCC

1. Internal Review: Commission may review a decision of the executive director (BCSA 165(2))2. Review of SRO or Exchange Decision: Executive Director or person “directly affected” by a decision or instrument of an

exchange or SRO may apply to the Commission for a hearing and review or appeal (BCSA 28)3. Judicial Review of Commissions’ Decisions: Limited use given must exhaust statutory right of appeal (below).

a. Grounds: alleged failure of procedural fairness, substantial judicial review on the merits, based ona standard of review of either reasonableness or correctness

4. Statutory Right of Appeal to BCCA* (BCSA 167(1)): A person directly affected by a decision of the commission may appeal to the Court of Appeal with leave of a justice of that court. Exception: Cannot review a decision under 165 if connection w/ review of Ex Dir decision under s.48 or 76.

6 Factors the appellate body considers whether to grant leave to appeal from securities tribunal (Walker v. BCSCn):1. Whether there is a Q of general importance as to the tribunal’s jurisdiction; 2. Whether appeal is on Qs of law involving statutory application, interpretation important to parties or interpretation of

standard statutory wording;3. Whether previous decisions show marked differences of opinion;4. Whether prospect of success;5. Whether appeal will lead to any clear benefit; and6. Whether the issue has been considered by numerous appellate bodies.

SofR: that normally apply to Judicial Reviews have been imported into the statutory appeal context: 1) Reasonableness, or 2) Correctness.

Factors to Consider when Determining whether to grant a Stay:1. Whether there is a serious issue to be tried;2. Whether irreparable harm will occur if the stay is granted or not granted (some evidence is required); and3. Where the balance of convenience lies (harm to the public interest weighed against harm to the impugned party).

Industry Best PracticeCanadian Coalition of Good Governance (CCGG): Represents the interests of institutional investors; CCGG promotes good governance practices in Canadian public companies and the improvement of the regulatory environment to best align the interests of boards and management with those of their shareholders, and to promote the efficiency and effectiveness of the Canadian capital markets.

National and Coordinated Approaches to Securities RegulationSystematic Risk

Definition (SCC): risks that occasion a “domino effect” whereby the risk of default by one market participant will impact the ability of others to fulfil their legal obligations, setting off a chain of negative economic consequences that pervade an entire financial system

Definition (Financial Stability Board): the disruption to the flow of financial services that is (i) caused by an impairment of all or parts of the financial system; and (ii) has the potential to have serious negative consequences for the real economy

Definition (International Organization of Securities Commissions): the potential that an event, action, or series of events or actions will have a widespread adverse effect on the financial system and, in consequence, on the economy

Criteria:o Size: volume of financial services provided by the individual component in the financial system

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o Substitutability: extent to which other components of the system can provide the same services in the event of a failure

o Interconnectedness: linkages with other components of the system Other important indicators of vulnerability: degree of leverage, liquidity risks and large maturity mismatches between assets

and structural complexity

Reference Re Securities Act Issue: whether the Proposed Act addresses a matter of genuine national importance and scope going to trade as a whole in a

way that is distinct and different from provincial concerns SCC held that the Proposed Act did not fall within the federal government’s general trade and commerce powers under s.

91(2) of the Constitution Act Fed gov’t can have a role in securities regulation because it has jurisdiction over managing systematic risk and national data

collection

Options After the Reference The federal government, with one or more provinces, can create a common regulator

o Wanting to create the Cooperative Capital Markets Regulator (CCMR) with a regulatory division, independent adjudicative division and a “regulatory policy forum for consultation on policy issues”

Federal government can create a scheme that does not intrude on day-to-day aspects of securities regulation, but touches on aspects relating to national concern, such as systematic risk

o If the plan of creating a common regulator fails, the federal government will allocate systematic risk responsibilities to an existing federal regulator

o Must do so with the provinces since managing systematic risk is part of the day-to-day operations of securities’ markets

Similar legislation can be introduced through the federal government’s power under the interprovincial and international trade branch of s. 91(2)

The Prospectus Process The prospectus is generally a lengthy document that sets out the details of the company, business, management, finances,

existing securities and the securities being offeredo Should be in narrative form and may include graphs, photographs, maps, artwork and other forms of illustration

PENALTIES FOR NON-DISCLOSURE: s.135 Failure to Deliver Documents: Right of action against a company that has failed to deliver or file a prospectus s.162 Administrative Penalty: if (a) Contravention and (b) in the Public Interest, the commission may order a penalty of not

more than $1million s.164 Failure of Filing Requirements: Cease trade order without hearing s.161 Enforcement Orders: Doesn’t even need a breach, just a preventative tactic s 155 Quasi-criminal for violation of s 61 s.155.1 Restitution to Securities Commission s.157 Orders of Compliance in the Public Interest Part 16 statutory civil liability: prospectus misrepresentation (s. 131) S 81: cease trade for defective PP (s 63 compliance)

Prospectus Required and Reporting IssuerProspectus Required BCSA s 61

1) Unless exempted under this Act, a person must not distribute a security unlessa) a preliminary prospectus and a [final] prospectus respecting the security have been filed with the executive director,

andb) the executive director has issued receipts for the preliminary prospectus and prospectus.

2) A preliminary prospectus and a prospectus must be in the required form

Voluntary Filing BCSA s 62 May file a preliminary prospectus and prospectus for purpose of enabling an issuer to become a reporting issuer

o Why? Legitimacy

Contents of Prospectus BCSA s 631. (1) A prospectus must provide full, true and plain disclosure of all material facts relating to the securities issued or

proposed to be distributed.o Full = fact sufficient to permit investors to make an informed decision

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o True = accurate and not misleading and does not omit a fact that is either material itself or is necessary to understand the fact that have been disclosed

o Plain = understandable to investors and in plain languageo Re Conventree

2. (2) A preliminary prospectus must substantially comply with the requirements of this Act and the regulations respecting the content of a prospectus.

3. CEASE TRADE ORDER: If the Executive Director considers that a preliminary prospectus does not substantially comply with s.63, the Executive Director may, without giving notice, order that s 78 permitted trading be ceased (BCSA 81).

Reporting Issuer BCSA s (1) “reporting issuer”a) has issued securities in respect of which (i) a prospectus was filed and a receipt was issued, (ii) a statement of material facts

was filed and accepted, or (iii) a securities exchange takeover bid circular was filed, under a former enactment,b) has filed a prospectus or statement of material facts and the executive director has issued a receipt for it

Contents of Long Form Prospectus (IPO) IPO? NI 41-101 General Prospectus Requirements s 3.1(1) must file prospectus in the form of Form 41-101F Contents: see attachment for long form prospectus (TOC of Form 41-101F1) pg 210-216

Important Content – Form 41-101F1 Item 21 Risk Factors: area for liability, recitation of risks often looks ominous, drones on so people ignore Financial Disclosure (Part 4) (pg 216): must file recent, audited financial statements, using IFRS: 41-101F1 Part 4

o 32 Financial Statement Disclosure for Issuers: annuals for past 3 financial years + comparative interim financial report for the most recent interim period

o 33 Credit Supporter Disclosureo 35 Significant Acquisitions: financial statements for any businesses the issuer has acquired since the start of the

most recently completed financial yearo 36 Probable Reverse Takeovers: progressed to state where a reasonable person would believe that the likelihood

of the reverse take-over being completed is high, must include disclosure about its potential acquirer, including description of business, MD&A, risk factors and financial statements

Information about the future: issuer must have a reasonable basis for its statements about the futureo Include reasonable basis for any information it provides, and using reasonable assumptionso Must identify information about the future as such, must set out assumptions, and must caution readers about the

limitations of that information (actual results may vary, may not be helpful for all purposes)o INCORPORATES RULES FROM 51-102 Continuous Disclosure Obligations – PAGE 25

Certificates (Part 5): preliminary and final require signature pages, filed on SEDAR within 3 business days after filingo Issuer (s 5.3): CEO, CFO and any 2 DIR certify “prospectus contains full, true and plain disclosure of all material

facts.”o Underwriter (s 5.9): same + “to the best of our knowledge, information and belief”

Lead UWs must be adversarial, do own meaningful due diligence: YBM Magnex Accompanying Documents

o Auditor’s report for financial statements: conform with NI 52-107o Credit supporter certificate in same form as issuer’s: NI 41-101, s 5.12o Expert: any expert who prepares or certifies any part of the prospectus or document related to the prospectus must

file a “consent” to that information being used: NI 51-101, s 10.1o Fees: submit fees

Regulatory Discretion BCSA ss 64-65

Executive Director’s discretion for additional filing 64: o 1) before issuing a receipt for a preliminary prospectus or for a final prospectus, executive director may impose

additional filing requirements and condition if the ED considers that it is the public interest to do soo 2) ED may accept form of preliminary prospectus or final prospectus that is in accordance with law of another

jurisdiction if contains full, true and plain disclosure of all material facts relating to the security Receipts for prospectus 65 65(1): subject to 64(1), ED must issue a receipt for a preliminary prospectus as soon as practicable (2) Executive Director “must” issue a receipt of a prospectus unless it is prejudicial to the “public interest” to do so

o Exercise with reference to twin goals: broad, not unlimited (Committee for the Equal Treatment of Asbestos Minority Shareholders v Ontario)

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Provide protection to investors from unfair, improper or fraudulent practices To foster fair and efficient capital markets and confidence in capital markets

o BOP: standard is balance of probabilities, but higher degree of certainty where there are harsh potential consequences: Re Cycomm International Inc

o Issuer has benefit of the doubt: if it meets all requirements for a receipt, only refuse where public interest clearly at risk: Re BioCapital Biotechnology, 2001 OSC

o Lack of business plan: discretion to withhold without a reasonable and specific business plan: Re Inland National Capital Ltd

(3) ED must not refuse to issue a receipt for a prospectus without giving the person an opportunity to be heard The most important conditions under which the Executive Director “shall not” issue a receipt are the following:

o The prospectus or related document does not comply in substantial respects with all the requirements, or is misleading or misrepresentative; the issuer cannot reasonably be expected to be financially responsible based on the financial condition of the issuer, officer, director, promoter or person with enough securities to materially affect control; the issuer may not conduct business “with integrity and in the best interests of its security holders”, based on past conduct; and a preparer or certifier is “not acceptable” to the Executive Director.

Mechanics and Stages of the ProspectusSEDAR: Almost all filing done by issuer is done electronically through SEDAR.

Pre-marketing [PP receipt] marketing/waiting period (s 78) [FP receipt] offering

[1] PRE-MARKETING: Generally, not allowed. Occurs when a party communicates with potential investors before a public offering and includes other promotional activity that occurs before a preliminary prospectus is filed.

o Why restrict pre-marketing and marketing? Investor protection and equal access to disclosure; deter conditioning of the market; ensure level playing field for investors; prevent selective disclosure; prevent illegal insider trading

o Prohibited: BCSA 61 must not distribute security unless satisfy prospectus requirements + “distribution” includes trade in a security not previously issued + trade, including any act/ad in furtherance of a trade (sale): s 1(1)

Exemptions (that allow for pre-marketing): [A] Short Form Prospectus and Bought Deal Exemption (NI 41-101, Part 7) - If doing a short form prospectus (already

public co.) and UW doing it on a bought deal that is strict (cannot get out) // Allows investment dealer to engage in road shows and provide standard term sheets and marketing materials after a bought deal has been announced but before the reporting issuer has obtained a receipt for the short form preliminary prospectus.

o Restrictions: no upsizing option, no market out clause, not be conditional on syndication [B] “Testing the Waters” IPO Exemption (NI 41-101, s.13.4): Permits pre-marketing of IPO deals before filing

preliminary prospectus.o Requirements: 1) Non-public issuer (i.e. not a RI), 2) confidentially “test the waters” for a proposed IPO, 3) before

incurring the associated costs, 4) Investment dealer (UW) must make the solicitation on the issuer’s behalf with written authorization

o 7 Conditions: i) Reasonable expectation of filing prelim long form prospectus in the near future, ii) Has to be an investment dealer (only UW can take advantage), iii) None of the controlling SHs can be already public companies, iv) Only solicit accredited investors, v) cautionary note on materials that do not provide full disclosure of all MF, vi) Anyone talked to has to sign a confidentiality document, vii) Have to stop testing at least 15 days before filing preliminary prospectus.

o Testing the Waters Exemption is restricted in certain ways to minimize risk (NI 41-101 CP provides guidance) To exclude subsidiaries of public companies - Not available to issuers if any of its securities are held by a

control person that is a public issuer + the IPO would constitute a material fact/change w/ respect to that control person

To protect vulnerable retail investors from inadequate disclosure – issuer may only solicit accredited investors (who confirm in writing will keep confidential + agree not to use info to assess its own interest in offering) under this exemption and the pre-marketing materials must contain cautionary legend

To ensure exemption is only used to test waters not to pre-sell – there must be a gap of 15 days b/w last solicitation of interest and the date the IPO is filed

[2] PRELIMINARY PROSPECTUS: Contains all the information that will be in a final prospectus, except price and other related manners. You will receive feedback from the Principal regulator with comments (in 10 days). You might then get a preliminary receipt.

(a) Waiting period: Time between when the issuer receives a receipt for its preliminary prospectus and when it receives its receipt for its final prospectus.

During waiting period, there will be no sale or any acceptance of an offer to buy securities: 41-101 s 13.1(1), BCSA s 61(1) BUT, may “build their book” BCSA s 78

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a) Disseminate certain information about securities if all communications include source where to get PPb) Give out a preliminary prospectus, andc) Solicit expressions of interest if prospective purchasers were provided with PPo NI 41-101: permits investment dealers to distribute during the waiting period a “PP notice”, the PP, a “standard term

sheet” or “marketing materials”, and solicit expressions of interest from prospective purchasers if they have been given a copy of the PP

Standard term sheet (s. 13.5): doesn’t have to be filed on SEDAR or incorporated into the prospectus, not subject to civil liability regime, but subject to statutory prohibitions on misleading and untrue statements

Marketing materials (s. 13.7): written communication for investors with material facts, must have same cautionary language as prospectus, must be approved in writing by the issuer and lead underwriter and then filed. Other than info on comparables, all other info must be disclosed in or derived from the prospectus.

o Issuers and their UW hold “road shows” (s. 13.89): Investment dealer conducting a road show establish and follow reasonable procedures to ascertain the identity of any investors attending the road show and to provide investors with copies of the PP

Special oral warning about not providing full disclosure of all MF where non-accredited investorso But not distribute: BCSA s 61 prospectus requiredo Lock down C-suite: Should not give interviews to the media, limited TV and radio advertising: from time of

specific conversations with investment dealer about the distribution commence, to end of distribution period: Should not make statements that would be forecasts, projections, predictions regarding future financial

performance, unless statement also contained in prospectus: 41-101CP s 6.10 UW/legal counsel responsible: for all DIR/OFF/promoter/selling securityholder know: 6.10

o Can do newspaper tombstone ado Green sheets: summaries of principal terms of the prospect offering – not for general public

Must conform with standard term sheet or marketing materials; Risks if go beyond prospectus: 41-101CP ss. 6.6(1),(2)

CEASE TRADE ORDER: If the Executive Director considers that a preliminary prospectus does not substantially comply with s.63, Executive Director may, without giving notice, order that s 78 permitted trading be ceased (BCSA 81).

Info Investment Dealers can distribute at this time: During the waiting period, road shows (presentations to potential investors) (NI 41-101, s 13.9), Green Sheets (10 pg long summaries, not intended for public but for investment dealer reps), and other marketing materials are permitted, but must correlate to NI 41-101, s 13.7: Under (b), all information distributed must be disclosed in or derived from the preliminary prospectus, (c) Cautionary language provided for in the preliminary prospectus must be highlighted in any marketing material, (g) Investment dealer must provide a copy of the preliminary prospectus.

(b) Quiet period: From time of deal with UW until the final prospectus receipt, trying to keep information locked down (not a legal term just a practical point).

(c) Amendment to Preliminary Prospectus: NI 41-101 (s.6.5) – Amendment to preliminary prospectus must be filed during waiting period if there is a material adverse change (i.e. only have to disclose “bad” facts; not good news which can be included in final prospectus). Must be filed as soon as practicable, but in any event within 10 days after the day the change occurs

[3] FINAL PROSPECTUS (Regulatory + Civil Liability Attach to this Doc) ( NI 41-101 9.2 ) Revamped and approved version of the preliminary prospectus. Sales and offers to buy are based on it. Issuers must submit a “blacklined” copy of prospectus when submitting the final prospectus (shows all the changes made).

Material given on distribution (From date of receipt for final prospectus): Person distributing security may give out (a) Prospectus, (b) any record filed with or referred to in the prospectus, (c) any materials in s.78(2)(a) [waiting period communications] (BCSA 82)

Obligation to send prospectus on order to purchase: To perspective purchaser either before entering the purchase agreement or within 2 business days (BCSA 83(1))

Cooling off period: Purchaser has 2 business days after getting prospectus to allow a cooling off period, so they can decide if they want to withdraw from buying (for 2 days get out no penalties) (BCSA 83(3)).

Commission and the ED have the ability to issue exemption [circulation of materials 78-84] (BCSA 84) Receipt should be issued if four conditions satisfied 1) Must be satisfied that all comments/issues have been resolved 2)

Dual Process: OSC must have indicated on SEDAR that it is clear to receive final material or that it has opted out 3) Filer must have filed acceptable materials 4) Filer must confirm to the best of its knowledge and belief that materials have been filed and fees paid to the PR and all non-principal regulators, no cease trade orders out there, all locally required materials filed, at least one UW has signed

(a) Amendment to Final Prospectus: NI 41-101 (s.6.6) - If between final prospectus receipt and close of distribution period, a material change occurs (good or bad) MUST file amendment, within 10 days of change.

Obligation to send amendment to perspective purchaser either before entering the purchase agreement or w/in 2 business days after entering the agreement (BCSA s. 83(1)) - Cooling off period under BCSA s. 83(3) does not start until amendment is delivered

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(b) Distribution period: Once an issuer obtains a receipt for its final prospectus, it can begin distributing securities under it. Usually the period is very short because UWs strive to have all securities issues under a prospectus subscribed for in advance.

(c) Lapse: A prospectus will lapse 12 months after the receipt of the final prospectus, unless issuer obtains exemption or files a new prospectus (NI 41-101, s 17.2)

The Prospectus ProcessI. SECURE UNDERWRITER

a. Underwriters are the critical link between issuers and investors, and are often referred to as the “gatekeepers” of securities law. As the Ontario Securities Commission stated in YBM Magnex: “The underwriter stands between the issuer and the public as an independent, expert party in bringing new securities to the market. In a sense the underwriter and the issuer are joint venturers, but in another more important sense they must be adversaries. The underwriter must seek out and question all relevant and material facts concerning the issuer and reasonably ensure himself that these facts are fully and truly set before the investing public.”

b. Types of Underwriting Agreements i. Agency Agreement: UW promises to use best efforts to sell securities, takes commission on securities sold,

AA signed right before P filed, pros for UW: not stuck w/ securities if they don’t sellii. Firm Commitment: UW agrees to purchase securities and resell them, receives a fee based on %, FCA

signed right before P filed, pros for UW: can test the waters after preliminary prospectus filed but CONS include that they might be stuck with the securities if they don’t sell

iii. Bought Deal: UW agrees to purchase the a block of the securities before it files prospectus, securities sold to UW and then sold from UW to investors, BDA signed before preliminary prospectus filed, pros for issuer: cash comes faster but they must qualify for short form prospectus process to allow, pros for UW: reduces risk of offering because underwriter can canvas potential purchaser or test waters before preliminary prospectus, but may be stuck w/ unsold securities

II. FILE PRELIMINARY PROSPECTUS & ISSUANCE OF RECEIPT BY REGULATORa. NI 41-101 sets out the required form and content of a long-form preliminary prospectus.

i. As per s. 63(2) of the BCSA, the preliminary prospectus must “substantially comply” with the rules governing the final prospectus; however, a preliminary prospectus need not disclose certain information including the offering price of securities.

III. WAITING PERIOD a. Once the issuer has filed the preliminary prospectus and the regulator has issued a receipt, a mandatory

waiting period begins. i. NI 41-101 defines “waiting period” as the time between the issuance of a receipt by the regulator for

a preliminary prospectus, and the issuance of a receipt by the regulator for a final prospectus. This waiting period can be <10 days for short form prospectuses, or as long as several months for smaller issuers or issuers who have no history in the market.

1. Allowing term sheets and marketing materials to be distributed during the waiting period has made the prospectus process more seamless, and the final prospectus less of a watershed in terms of timing.

ii. During waiting period – regulator engages in selective review of preliminary prospectuses to determine whether in compliance w/ regulatory requirements – then sends comments to issuer

b. Limited advertising and communication w/ investors to gauge interest: Recent amendments to NI 41-101 have loosened the restrictions on marketing during the waiting period.

i. It now permits, in the waiting period, that investment dealers acting on behalf of the issuer may distribute: preliminary prospectus, preliminary prospectus notice, standard term sheet, marketing materials, a “testing the waters” IPO exemption

c. SEE R V KERR FOR INFO ON ONGOING OBLIGATIONS TO AMEND PROSPECTUSES DURING WAITING PERIOD

IV. FILE FINAL PROSPECTUS & ISSUANCE OF RECEIPT BY REGULATORa. A final prospectus is essentially a revamped and approved preliminary prospectus. Once an issuer obtains a receipt

for its final prospectus, it can begin distributing securities under it. The final prospectus remains very important in legal terms, however, because it is the document to which regulatory and civil liability attach. A prospectus will lapse 12 months after the receipt for the final prospectus.

V. DISTRIBUTION OF SECURITIES a. Once the final prospectus has been filed and a receipt issued, securities may be lawfully sold. b. The final prospectus must be delivered before any purchase contract is entered into, or no later than midnight on the

second business day after entering into an agreement, as per s. 83(1) of the BCSA. As per NI 44-101, s. 8.2, if securities are being distributed on a best efforts basis, the distribution must cease within 90 days after the date of receipt for the final prospectus, unless an amendment to the final prospectus was filed and a receipt for the amendment received. The total period of distribution cannot exceed 180 days after the receipt for the final prospectus

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Alternative Forms of Prospectus Less time and expense improve efficiency of capital markets Available because adequate disclosure available in other ways, e.g. through continuous disclosure (CD)

[A] Short Form Prospectus (SFP) Who? Certain qualified, repeat issuers: 44-101 s 2.2 Pros: can expedite the raising of capital (saves time), lower the cost of making an offering (saves money) Rationale: Public is already protected by prior vetting – the issuers are reporting issuers who are abiding by CD obligations

already, so there is extensive information available for investors about the issuers history, business, finances etc. Requirements: 1) electronic filer on SEDAR, 2) reporting issuer in at least 1 jurisdiction of Canada, 3) must have equity

securities listed and posted for trading on an eligible exchange [TSX, TSX-V], 4) cannot have ceased operations or have cash, cash equivalents or its exchange listing as its principal asset, 5) must have filed with the securities regulators in each jurisdiction in which it is a reporting issuer all CD documents that it is required to have filed, 6) issuer must have current annual financial statements and a current Annual Information Form (AIF) in Form 51-102F2 on file as part of its CD in at least one jurisdiction in which it is a reporting issuer,

7) SFP must incorporate other information by reference (Form 44-101F1 s 11.1)o AIF, financials + MD&A, interim financials, MC reports, information circulars

SFP must incorporate continuous disclosure by reference[B] Shelf Prospectus

Who? Same as SFP Pros:

o Can expedite the raising of capital (saves time), lower the cost of making an offering (saves money)o FLEXIBILITY - Allows issuer to file a short form-style prospectus and then leave it on the shelf for up to 25

months, until they are ready to distribute. At any point in those 25 months, issuer can take the securities “off the shelf” and distribute them – this is convenient if issuer wants to prepare for a distribution, they are not ready to immediately distribute

Cons: Risk of “market overhang” (share price dropping in anticipation of forthcoming issuance of shares Rationale: Same as short form prospectus How? Files generic “base shelf” prospectus in a modified SFP format. Can use to distribute securities during the qualifying

period (lesser of 25m or until certain criteria no longer met)o As issuer distributes a block of securities (tranche), shelf prospectus supplements give price, distribution method,

etc.[C] Post-Receipt Pricing (PREP) Prospectus

Who? All issuers quality: 44-103 CP s 1.2 Pros: FLEXIBILITY: The PRPP process allows issuers to file a base prospectus (long or short form) without including price

and related information. A PREP prospectus cannot be used for a rights offering, and can be kept “on the shelf” for 90 days. This shelf life can be extended if the issuer files a supplemental PREP prospectus.

How? File a base prospectus (long or short) without including price or related information (“PREP Information”)o After base is receipted, PREP Information must be provided in a “Supplement Prep Prospectus”o 90 days to supply PREP Information, but if not supplied within 20 days, the base will expire immediately before the

issuer enters an agreement of purchase and sale: NI 44-103 s3.5o In effect: 20 days after base is receipted, issuer must update all the disclosure contained in it and obtain a new

receipt before selling any securities

Passport System [+ Prospectus Review] and Multijurisdictional Disclosure System More efficient capital markets if only deal with one regulator Doesn’t apply to enforcement, only front-end regulatory stuff NOTE: HOST REGULATOR = anywhere else you have investors, host defer to principal regulator for prospectuses

Passport System (MI 11-101 + MI 11-102 + NP 11-202) – File passport prospectus with principal regulator deemed in other jurisdictions except Ontario

1. Selecting Principal Regulatora. Head office if it’s in BC, AB, SK, MB, Ont, QB, NB, or NS: MI 11-102 s 3.1(2)b. If not, “most significant connection”: MI 11-102 s 3.1(3)

Factors: location of management, location of assets and operations, location of the Canadian trading market or quotation system on which the securities are traded or quoted; the location of the issuer’s securityholders if the issuer’s securities are not traded or quoted on a Canadian trading market or quotation system: 11-102CP, s 3.1 and NP 11-202 s 3.4(7)

2. Filing Materials

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a. Indicate in SEDAR filing its principal regulator and filing under NP 11-202 and MI 11-102b. If used connection test – indicate factorsc. Dual prospectus: both principal regulator and OSC

3. Review of Materialsa. Principal regulator reviews; issues and resolves comments – best efforts to comment within 10 daysb. Dual: OSC uses best efforts to advise principal regulator of any material concerns that would cause OSC to opt out

within 5 working days, or advise on SEDAR that OSC is clear to receive final materials OSC can opt out at any time before final receipt, provide written reasons Issuer attempt to resolve through principal regulator, OSC may opt in again Only if that fails, go outside passport system to work with OSC In that case: principal regulator’s final receipt will not evidence that OSC has issued a receipt: NP 11-202 s

6.14. Preliminary and Final Receipts

a. Preliminary Receipt Conditions Principal regulator must determine that the filer has filed acceptable materials Filer must confirm, to the best of its knowledge and belief: para 7.72 pg 240, NP 11-202 s 7.2

b. Final Receipt Conditions Principal regulator satisfied all comments have been resolved If dual, OSC indicated on SEDAR that it is clear to receive final materials, or it has opted out of dual

review Filer must have filed acceptable materials Filer must confirm, to the best of its knowledge and belief, that the materials have been filed and there are

no local cease trade orders in effect against the filer: para 7.73 pg 240, NP 11-202 s 7.35. Amendments: requirements for obtaining a receipt for an amendment are substantially the same: NP 11-202 s 10.1

a. But time period for review may be extended: s 10.3 Limits: 1) Still have to pay every regulator the same amount as before despite them doing no work if they are a host, 2)

Limited utility as ONT did not join (80% of mrkts), 3) Civil Liability is completely unaffected.

Multijurisdictional Disclosure System (MJDS) Permits US issuers to use US docs in place of CND docs, provided those issues are in compliance with US Securities

legislation. This is reciprocated for Canadian issuers in the US (71-101CP). US issuers can use US continuous disclosure documents that are compliant with US securities laws in Canada Issuers must file a preliminary prospectus in all jurisdictions of Canada Issuers can choose the principal jurisdiction in Canada to review the material filed and a receipt will be issued as long as

disclosure requirements have been met Certification requirements for the issuer and UWs are the same as usual – full, true and plain disclosure of all material facts Issuers using this system must provide a “risk disclosure statement” to all its local investors making them aware they are

conducting transactions with an entity that is not subject to domestic securities legislation or the direct oversight of the domestic regulator

Benefits: 1) increased depth and liquidity in our capital markets, and 2) cost-effective access to US capital markets provided by SEC’s reciprocal provisions

Continuous Disclosure2 CATEGORIES OF CONTINUOUS DISCLOSURE: 1) Periodic Disclosure, 2) Timely Disclosure

Rationale: Where CD functions properly, it supports both goals of securities regulation by fostering investor protection and enhancing capital market efficiency. CD advances investor protection by ensuring that all investors have sufficient info to make rational decisions. Boosts investor confidence, which leads to increased participation in capital markets. Also boosts market efficiency by providing investors with the info they need to ID the issuers most deserving of capital

(NB: May also create a positive and ethical culture within a company)/Balance protecting investors & ensuring integrity of capital markets by allowing the market to operate relatively unimpeded

Definition of “reporting issuer” (BCSA 1(1)): Means an issuer that (b) has filed a prospectus or statement of material facts and the Executive Director has issued a receipt for it under this

Act (see: (c)-(f)). “issuer” means a person who (a) has a security outstanding, (b) is issuing a security, or (c) proposes to issue a security

Continuous Disclosure (BCSA 85) - A “reporting issuer” must, in accordance with the regulations, (a) provide prescribed periodic disclosure about its business and affairs, (b) provide disclosure of a “material change,” and MATERIALITY (c) provide other prescribed disclosure.

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Periodic Disclosure BCSA 85(a) – prescribed periodic disclosure about its business and affairs A reporting issuer must, in accordance with the regulations, (a) provide prescribed periodic disclosure about its business and

affairs

OVERVIEW: Requires financial disclosure, MD&A, AIFs, certification, compensation disclosure, and proxy and information disclosure.

Within 90 days of financial year’s end, Issuer files: 1) Annual FS (audited); 2) MD&A (filed with FS); 3) Annual Information Form.

Within 45 Days of Each Quarter, files: 1) Interim Financial Statements (may voluntarily audit); 2) MD&A (filed w/ FS)

Financial Disclosure [i] Accounting Standards:

Reporting Issuer’s financial statements must be prepared according to International Financial Report Standards (IFRS) (this is principles-based accounting and less rules-based) (NI 52-107, s.3.2(1))

Basic “Formulas”:o Statement of financial position = revenues – expenseso Comprehensive income = More detailed breakdown of what’s coming ino Changes of statements in equity – Shares outstandingo Statement of Cash Flows – Money coming in and going out.

[ii] Timing, Delivery & Filing: ANNUAL Financial Statements: A non-venture RI must file audited annual financial statements within 90 days of its year-end

(NI 51-102 s.4.2)o It must compare the current year’s results to the previous yearso Info Filed: a statement of comprehensive income, statement of changes in equity and a statement of cash flows for

the financial year, statement of financial position as at the end of the financial year, and notes to the annual financial statements must be filed (NI 51-102 s.4.1) current year and preceding

o If an issuer is active in a foreign jurisdiction with tighter deadlines, it must meet those deadlines in Canada too.o NB: A “venture issuer” has 120 days “Venture Issuer” (NI 51-102 s.1(1))- RI that did not have any of its securities

listed or quoted on at of the TSX or other exchanges (Special rules for small companies not listed). INTERIM Financial Statements: Periods ending 9, 6, and 3 months before the end of its financial year (i.e. “quarterly”). Due

within 45 days for non-venture issuers (NI 51-102 ss.4.3-4.4) o Info Included: statement of financial position as at end of interim period and same for the immediately preceding

financial year: 4.3(2)(a) Statement of comprehensive income, statement of changes in equity, statement of cash flows, all for the

YTD interim period, and comparative financial info for the corresponding interim period in the immediately preceding financial year: 4.3(2)(b)

For Q2/Q3/Q4: statement of comprehensive income for that Q and comparative financial information for the corresponding period in the immediately preceding financial year: 4.3(2)(c)

o Need not include an auditor’s report, but are subject to an auditor’s review (NI 51-102 s.4.3(3))o No audit? Provide notice. If an auditor has not performed a review of an interim financial report, the interim financial

report must be accompanied by a notice indicating that the interim financial report has not been reviewed by an auditor (s.4.3(3)(a))

o NB: 60 days of the end of the interim period for “venture issuers” (NI 51-102 s.4.4).

Delivery of Financial Statements: RI must send annually a request form to the registered holders and beneficial owners of its securities, other than debt instruments, asking if they request AFS and MD&A. For interim, not required to send copies of statements past 1 year (NI 51-102 s.4.6).

Filing of Financial Statements: NI 51-102 s.4.7 sets out filing criteria: The first annual FS and interim financial reports that an RI must file are FS for the financial year and interim periods immediately following the periods for which financial statements of the issuer were included in a document filed: (a) that resulted in the issuer becoming a RI.

Date: Must file those annual statements on or before the later of the filing deadline in s.4.2 or the 20th day after becoming an RI

Exemption (s.4.7(4)): RI is not required to provide comparative interim financial info for periods that ended before the issuer became a RI if:

o a) to a reasonable person, it is impracticable to present prior-infoo b) prior-period info that is available is presented, and o c) the notes to the interim financial report disclose the fact that the prior-period info has not been prepared on a basis

consistent with the most recent interim financial info.

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[iii] Auditors’ Reports: Audited Financial Statements (i.e. all annual statements and any interim statements the issuer voluntarily chooses to have audited) must be audited in accordance with the “fair presentation framework” of the IFRS (NI 52-107 s.3.3)

Purpose: Their audits are intended to enable security holders to oversee management, not to assist SHs in personal investment decisions. No fiduciary duty to public or shareholders (Hercules Management).

Change of Auditor (NI 51-102 s. 4.11) – Extensive set of disclosure requirements re: what happens if you disagree, fire or hire a new auditor. Must disclose all of the info, auditor must provide statement of why they understand they were fired, and you must provide a statement – incl. previous auditor’s reports if swapped (NI 52-107 3.1(1)(b)).

[iv] Significant or Material Information: prospectus principle of full disclosure of all material facts

[v] Exemptions: Commission may grant an exemption from any part of NI 51-102, subject to any condition or restrictions it imposes (s.13.1(1)) – cost benefit analysis with public in mind

Explain the section you want an exemption from and why, and they may grant it Issuers that wish to use US GAAP commonly request exemptions

[vi] Forward-Looking Info (FLI); Future-Oriented Financial Info (“FOFI”); and Financial Outlook . Forward-Looking Information: broadest term and covers all disclosure regarding possible events, conditions or financial

performance that is based on assumptions about future economic conditions and courses of action.o It includes FOFI with respect to prospective financial performance, financial position or cash flows, presented

either as a forecast or a projection. FOFI & Financial Outlooks: are FLI about prospective financial performance, financial position or cash flows, based on

assumptions about future economic conditions and courses of action.o Info is FOFI when presented in the format of a historical statement of financial position, statement of comprehensive

income or statement of cash flows, when presented in any other form it is a financial outlook. – anywhere else? = financial outlook

Whether you talk about prospectus or continuous disclosure, this is how you discuss forward looking information. BCSA 131 – provides liability for misreps, with an exception for FOFI

o …A PERSON IS NOT LIABLE for a misrep in FOFI if the person proves that…a) the doc containing FOFI contained proximate to that info, REASONABLE CAUTIONARY LANGUAGE

IDENTIFYING MATERIAL FACTORS that could cause actual results to differ materially from a conclusion, forecast, or projection AND a statement of the material factors or assumptions that were applied in deawing a conclusion or making a projection set out in FOFI

b) the person had a REASONABLE BASIS FOR DRAWING THE CONCLUSION OR MAKING THE FORECAST set out in FOFI

Disclosure of Forward-looking Info (NI 51-102):1. Must not disclose unless have reasonable basis for the FLI and the assumptions underpinning it (4A.2)

(Kerr – SCC Held: FOFI implies a material fact that the forecast is objectively reasonable at the time it is made This increases the chances that FOFI may give rise to an action for misrepresentation).

2. “Safe harbour” - The Issuer must caution readers, include disclosure that Identifies FLI as such: 4A.3(a) Cautions users that actual results may vary AND identifies material risks factors that could cause actual results to

differ materially from the FLI: 4A.3(b) States the material factors or assumptions used to develop the FLI, AND: 4A.3(d) Describes the RI’s policy for updating FLI: 4A.3(d) State date management approved the FOFI or FO, if document undated: 4B.3(a) Explains purpose, cautions info may not be appropriate for other purposes: 4B.3(b) PROTECTION: protection against people who rely on it for wrong purpose or way later

Management’s Discussion & Analysis (MD&A) (51-102 Part 5)MD&A is a “narrative explanation” form of the issuer’s management of the most important aspects of the issuer’s positions. It is designed to help investors understand and assess the issuer’s financial performance and future prospects (Form 51-102F1 s.1(a)).

Must be filed with every annual AND interim financial statement (NI 51-102, s.5.1(1))o Must CONFORM to Form 51-102F1o Board of Directors or audit committee must approve MD&A before it can be filed (NI 51-102, s.5.5).o Filed on same date as financial statements: NI 51-102 s 5.1

General Provisions (Part 1): Avoid boilerplate language (51-102F1 s.1(d))o Only material information must be disclosed (see case law) (s.1(e))o Use plain language (s.1(n))

Required disclosure includes: Overall performance, operations, risks, quarterly results, liquidity, capital resources, off-balance sheet arrangements, transactions between related parties, proposed transactions and changes in accounting policies. Must send to registered or beneficial owners on request.

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Material weakness in internal control over financial reporting: a deficiency such that there is reasonable possibility that a material misstatement of the reporting issuer’s annual or interim financial statements will not be prevented or detected on a timely basis: 52-109 s 3.2, 1.1 “material weakness” – must be in the MD&A

MD&A Should (Form 51-201 F1): Help current and prospective investors understand what the financial statements show and do not show; Discuss material information that may not be fully reflected in the financial statements, such as contingent liabilities,

defaults under debt, off-balance sheet financing arrangements, or other contractual obligations; Discuss important trends and risks that have affected the financial statements or are reasonably likely to affect them in the

future; and Provide information about the quality, and potential variability, of your company’s profit or loss and cash flow, to assist

investors in determining if past performance is indicative of future performance.

Annual Reports and Annual Information Forms (AIFs) (NI 51-102 Part 6)[1] Annual Reports: NOT required by securities law. Glossy docs sent to securityholders summarizing past fiscal year.[2] Annual Information Form: provides a high-level picture discussion of everything that has gone on in the year. Must be filed within 90 days of the end of issuer’s fiscal year to file with SEDAR (NI 51-102 ss6.1, 6.2).

Includes similar info in prospectus, only material info need be disclosed (Form 51-102F2 Part 1(d)). Focus: Material info about the issuer and the business at the end of the financial year in the context of past & future

developments, risks and other external factors that may impact the issuer (Part 1(a)). 18 Items in an AIF, e.g.: Description of corporate structure, general development and description of business, description of

capital structure and dividends, info on DIRs and OFRs and their interest, if any, in material transactions or contracts. o *Executive Compensation – Per Item 18.1, Form 51-102F6

Information may be incorporated by reference into AIF: 51-102F2, s 1(f)

Certification Requirements CEO/CFO must certify: 1) annual financial statements + AIF + MD&A (NI 52-109 Part 4; Form 52-109F1) and 2) interim financial report + MD&A (52-109 Part 5; Form 52-109F2).

BOD must approve both annuals and interims: NI 51-102 s 4.5 – may delegate interims to BOD audit committee Form 52-109 F1, F2: “based on my knowledge, having exercise reasonable diligence, the annual filings do not contain any

untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made” – CEO and CFO

Also: non-venture issuers certify that they have in place adequate internal financial control compliance and reporting systems: NI 52-109

Non-venture issuers must establish internal control over financial reporting (ICFR), defined as a process designed…to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements: NI 52-109

o Must disclose in the MD&A if there is a “material weakness” in the ICFR, meaning “a deficiency such that there is a reasonable possibility that a material misstatement of the reporting issuer’s annual or interim financial statements will not be prevented or detected on a timely basis” (NI 52-109, ss. 3.2, 1.1)

DC&P and ICFR: non-venture issuer must establish and maintain disclosure controls & procedures AND internal control over financial reporting: NI 52-109 s 1.1, 3.1

LIABILITY: Makes top management accountable (and civilly liable) for the FS and other docs.

Proxy and Information Circular - Relates to shares with voting rights attached“Proxy”: means a completed and executed form of proxy by which a security holder has appointed a person as the security holder's nominee to attend and act for [i.e. vote] and on the security holder's behalf at a meeting of security holders [i.e. AGM of the Corp] (BCSA 116; NI 51-102 s.1.1)

[1] Proxies: Management must mail a form of proxy to each securityholder (registered and beneficial), either before or at the time as the notice of the meeting to which the proxy applies. Management must solicit proxies for annual & special meetings, at which at least one DIR will be elected (NI 51-102 Part 9)

NB: Because DIRs can be elected for terms of 3 years, there may be shareholder meetings where no DIR will be elected; thus, management is not required to solicit proxies

Important to know which system incorporated under (e.g. CBCA or BC BCA) with regards to shareholder voting rules. Mail: must mail proxy before or at same time as notice of meeting: NI 51-102 s 9.1 Exemption from Proxy Solicitation Rules: If a RI is incorporated, organized or continued under a jurisdiction with

“substantially similar” proxy requirements, the issuer may comply with those requirements instead (NI 51-102 s.9.5) Purpose of Proxies: SHs can be geographically very dispersed, proxies evolved to allow investors to participate without

attending in person; Proxy process is essential for effective corporate governance given that widely held companies are and were so numerous

Purpose of Proxy Rules: Prevents management or activist investors from avoiding the application of proxy rules simply by refraining from soliciting proxies. Benefits of increased dissemination of info among SHs outweighs costs of preparing and distributing proxies and info circulars.

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Pros of Strict Proxy Ruleso Proxy solicitation process serves useful signaling function for retail investors o Strict proxy rules ensure that investors provide an info circular whenever attempting to influence fellow investors -

addresses informational asymmetry between retail and institutional investors o Retail investors – don’t have time to investigate every aspect of management – so not in position to assess validity

of claims made by institutional dissidents Cons of Strict Proxy Rules

o Decreases informal communication among SHs – because such communication can be interpreted as a solicitation and would attract proxy regulations – including info circular (expensive)

[2] Form of Proxy: Means a written or printed form that, when completed and executed, appoints a proxy (BCSA 116; 51-102 s.1.1) States that any person can be a nominee for proxy + how // Must allow the securityholder to vote separately on each matter or

group of related matters // Can revoke your proxy up to the last minute (and vote another way). Must state in bold type whether or not solicited by management // designed to ensure it does not mislead about nature of

proxy process (51-102 s 9.4) Proxy may also grant discretionary authority for amendment or variations to matters set out in the meeting’s notice, and for

any other matters arising at the meetingo As long as proxy solicitor was not aware of any such amendments before making the solicitation, and so long as the

form of proxy explicitly confers discretionary authority on the nominee

How to Vote Proxies at Meeting: DEFAULT: The chair at a meeting has the right not to conduct a vote by way of ballot (BCSA 118(1))

o Methods: Voice vote, by acclamation, etc. EXEMPTION: Default does not apply if: (a) a poll is demanded by a security holder… OR (b) more than 5% of all voting

rights attached to all the securities, that are entitled to be voted and to be represented at the meeting, are represented by proxies who are required to vote against what would otherwise be the meeting's decision on the matters referred to in (1) (NB: since choices of dissident proxy are to vote for or withhold, (b) will never apply to a DIR as you cannot vote against a DIR) (BCSA 118(2))

[3] Information Circular: Must contain information to enable securityholders to make informed decisions on proxy votes. MANDATORY TO SEND WHEN THERE IS A “SOLICITATION” (NI 51-102 s.1.1) (Broad term that captures most

activities directed at influencing a SH vote): Means o (a) Requesting a proxy whether or not the request is accompanied by or included in a form of proxy o (b) Requesting a securityholder to execute or not to execute a form of proxy or to revoke a proxy o (c) Sending a form of proxy or other communication to a securityholder under circumstances that to a reasonable

person will likely result in the giving, withholding, or revocation of a proxy OR o (d) Sending a form of proxy to a securityholder by the management of a RI.

AUTOMATIC EXEMPTIONS FROM SENDING INFORMATION CIRCULAR (incl Dissent Proxy Circular) (NI 51-102 9.2):

o (1) Does not apply to a solicitation by a person or company in respect of securities of which the person or company is the beneficial owner,

o (2) If total # of securityholders who proxies are solicited is not more than 15 (cheaper and easier to talk to 15 people personally) – Dissent Proxies can rely on this as well.

o (4) Public Broadcast Exemption for Dissident Proxies (applies in most cases): Person or company, other than the management of the RI, may solicit proxies from registered securityholder without an info circular by public broadcast, speech or publication about dissident proxy that is going out (e.g. by press release, statement on radio or TV, public available website). Prescribed materials and disclosure must be filed on SEDAR

But (4) does not apply to person or co. that is proposing, at the time of solicitation, a significant acquisition or restructuring transaction, under which securities of the person or company are to be changed, exchanged, issued or distributed, unless they file either an information circular (for acquisitions/restructuring) or a “other document”, which would be a takeover bid circular (9.2(5)) + it’s on SEDAR

But (4) does not a apply to a person or co that is nominating or proposing to nominate, at the time of the solicitation, an individual, including himself, for election as DIR of the RI, unless SAME FILING REQS as above (s.9.2(6))

Excluded from the definition of “solicit”: (NI 51-102 s. 1(1) (e) – (k))o Securityholder has requested a form of proxy, without being solicitedo Actions of intermediaries or professional services acting on behalf of the person or company actually soliciting the

proxyo “Solicitations” of securities of which the person or company soliciting is already the securities’ beneficial ownero Generally-disseminated public announcements by a securityholder concerning how that securityholder intends to

voteo Communications directed toward obtaining enough securities to effect a securityholder proposal under corporate law

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o Communications, not by or on behalf of reporting issuer’s management, to securityholders concerning the business and affairs of the reporting issuer, where the communicating securityholder does not have a vested interest in the outcome of the vote

o Communications, not by the reporting issuer’s management, concerning the organization of a dissident’s proxy solicitation

o Communications to clients, not by or on behalf of the reporting issuer’s management, by a person or company that gives financial, corporate governance or proxy voting advice in the ordinary course of business

o Communications, not by or on behalf of the reporting issuer’s management, by a person or company that is not seeking to act as a proxyholder

Form of Information Circular (Form 51-102F5): Must include sufficient info so that investors are aware of their rights. Info in the circular must be given as of a specified date not more than 30 days before the info circular is sent out.

There are 16 requirements for an info circular (51-102F5): E.g. Must be dated, state whether person or company giving proxy has power to revoke it; persons making solicitation must be identified; if taken by management, and if any DIR intends to oppose management; state right to appoint any person as their proxy (+ how); if proxy solicitor and each nominee for election as DIR have any material interests in the matters to be acted upon at the meeting

Other Info: number of securities held by persons seeking board election, executive compensation, equity compensation plans, personal indebtedness of directors and executive officers

Must include info about issuer’s outstanding securitieso 1) record date as of which the securityholders entitled to vote at the meeting will be determinedo 2) if any securityholders have the right to elect a specified number of directors or have cumulative or similar voting

rightso 3) if, to the knowledge of the issuer’s directors or exec officers, any person or company owns or controls 10 percent

or more of the issuer’s voting securities Board Independence: Only form where you get detailed info on whether the board is independent, have independent audit

committee, how the board is structured (corporate governance). Informed person interest: must disclose whether any informed person (direct or exec officer of a reporting issuer, owns

>10% of voting rights), proposed director, or associate or affiliate of any informed person or proposed director has any material interest in any transaction that has or may materially affect the issuer

Form of Executive Compensation must be attached (Form 51-102F6): This is the only other place other than AIF about detail of executive compensation information. Disclose certain “Named Executive Officers” (NEOs): CEO, CFO, and the next three highest paid people as long as they make more than $150,000.

Must include any compensation paid, awarded, granted, given, directly or indirectly, etc. (Form 51-102F6 s.1.3(1)) Must also include any compensation-related risks that are reasonably likely to have a material adverse effect on the issuer Broadly defined throughout // Contains a compensation discussion and analysis section.

[4] Dissident Proxy: SHs have tended to rely on proxy contests as an effective means to replace DIRs, challenge the implementation of SH rights

plans and to speak out against fundamental transactions approved by management and/or the board of DIRs. A proxy contest occurs when a dissident solicits SH proxies and the right to vote those shareholder shares in favour of the

dissident group’s objective. Typical Issues: Pay and executive compensation; board diversity; ethical business practices; board independence; majority

voting for DIRs (either have to vote “yes” or “withhold”, no way to express opposition).

[5] Costs of Proxy Solicitation: Issuer pays the proxy costs as long as it’s a bona fide issue of corporate policy (Peel v London)

o If not, the solicitor pays the associated expenseso Solicitation solely to maintain the directors in office – paid by directors (Peel v London & North Western Ry Co)o Need a majority of securityholders to agree the actions were in the issuer’s best interests

When are proxy expenses covered?o Directors have no duty to disseminate proposals of opposing SHs, where they are making a legitimate appeal for

support (Campbell v Australian Mutual Society)o Should successful activist shareholders who solicit proxies be reimbursed? – Typically, this would be put to a

vote, in principle could be justified on bona fide basis required of solicitation by managemento BUT because management has the primary responsibility for policy - insurgent SHs should have to show they

acted bona fide in the issuers best interest – may be appropriate for them to meet a higher standard of proof than management

When can directors be reimbursed by corp for legal costs incurred in defending their actions from allegations that they were not in best interest of corp?

o Blair v Consolidated Enfield Corp, SCC – Reimbursement allowed for reasonable, good faith behavior thereby discouraging hindsight application of perfection – indemnification is geared to encourage responsible behavior yet still permit enough leeway to attract strong candidates

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o Indemnification should only be denied in cases of mala fide

[6] Consequences of Proxy Irregularities ( Form 51-102F5 ) : If proxy procedures are not followed properly, SHs could legally challenge it later to undo the decision reached by the proxy votes.

Norcan Oils Ltd v Fogler 1964: two companies amalgamated after proxy votes, appeal judge ruled proxy statement had insufficient information, but SCC held that the court had no power to set aside a consummated amalgamation

o Now: must challenge before certificate of amalgamation issued Garvie v Axmith OHC: securityholders have the right to receive information sufficient to enable them to reach an “intelligent

conclusion” about which way to vote on a proposalo Needed to say how valuation of takeover company was reached

Murphy v Lindzon 1969: court will not declare a securityholder vote invalid if the violated provision was not intended to protect the party seeking to invalidate the transaction

Communications/Delivery of Periodic DisclosureRI must send securityholders: a form each year allowing those holders to request copies of annual or interim financial statements, along with an MD&A for each + All proxy-related materials BUT AIFs need not be delivered (filed on SEDAR).

Communication with Beneficial Owners of Securities ( NI 54-101 ) : Registered SH = Broker // Beneficial SH = “You” RI has to ask the registered SHs about info about who the beneficial SHs are. Registered SHs have 3 days from receipt of

request to give the issuer that information. o NOBO: Non-objecting beneficial owner (SH) Beneficial owners who do not object to having their identity

revealed to the issuer. ID of NOBO’s disclosed to the issuer, who sends docs directly to the beneficial owner. o OBO: Objecting beneficial owner Do not want the issuer knowing who you are (can stay secret). Issuer sends

docs to intermediary, which forwards them to the beneficial owner. NB: Now all docs must be filed on SEDAR. Docs that must be delivered can be done electronically (with certain

requirements see: NP 11-201) or via mail. – even proxies: NI 54-101 ss. 2.7.1-2.7.8

Delivery of Documents: Securityholders are entitled to have periodic disclosure delivered to them on request. NP 11-201 Electronic Delivery of Documents – should be same functionality and protections as trad’n 4 Components:

o 1. Notice: The recipient should receive notice that the document has been or will be electronically “delivered.” Email doesn’t need an extra one, but website post will. Recom advance consent: s 2.2

o 2. Access: The recipient should have “easy access to the document.” 2.1(1)2, 2.4 1) sufficient power and capability to ensure appropriate downloading, formatting, and availability 2) documents should be available for the appropriate length of time (nature of doc) 3) recipient should able to retain a permanent record, if desired

o 3. Delivery of an Unaltered Document: Recipient should receive an unaltered and uncorrupted document.o 4. Evidence of Delivery: Should be evidence that the document was delivered.

Timely DisclosureContinuous Disclosure (BCSA 85) - A “reporting issuer” must, in accordance with the regulations,

(a) provide prescribed periodic disclosure about its business and affairs, (b) provide disclosure of a “material change,” and MATERIALITY (c) provide other prescribed disclosure.

Timely disclosure of “material change” (not material fact though) in a Material Change Report (MCR) - defined in BCSA s. 1 and in NI 51-102 (slightly differently)

MCR informs commissions, market participants and public about important changes in issuer’s affairs (good and bad).

DEFINITION OF “MATERIAL CHANGE”: SEE MATERIALITY (E.g. Pezim; YBM Magnex): Only changes in business, operations or capital can be material changes. Also note that a change to a material fact is not necessarily a material change. It will only be if it concerns an issuer’s business, operations or capital.

Official Definition: (NI 51-102, s. 1.1)o (a) a change in the business, operations or capital of the reporting issuer that would reasonably be expected to have a

significant effect on the market price or value of any of the securities of the reporting issuer; or o (b) a decision to implement a change referred to in paragraph (a) made by the board of directors or other persons

acting in a similar capacity or by senior management of the reporting issuer who believe that confirmation of the decision by the board of directors or any other persons acting in a similar capacity is probable

Disclosing the risk of Material Change does not exempt the issuer from disclosing when the actual material change occurs (Coventree)

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Material Change Reports (NI 51-102 Part 7/85(b))SEE NP 51-201 PART 6 BEST PRACTICES IN DISCLOSURE

If a Material Change Occurs Must file material change report in the necessary form (51-102 Part 7) A) NEWS REPORT/FILE MCR: (a) Immediately file a news release that is signed by an exec officer (CFO, CEO, COO)

describing the nature and substance of change, (b) file MCR as soon as practicable (within 10 days) (c) include info contained in Form 51-102F3: 7.1

o In practice, news release and MCR are combined because of TSX & TSX-V requirementso (10 days is a long time, cannot sit on it for 10 days should really be issuing form alongside news release)o Best Disclosure Practices (4 steps) (NP 51-201, Part 6)

Issue news release through widely circulated news or wire service Advance public notice before conference call to discuss info Hold conference call in open manner, e.g. web casting Provide dial-in and/or web replay or make transcripts of the call available for a reasonable period of time.

o Encouraged: adopt written disclosure policy (6.2), committee or senior officer responsible for monitoring disclosure (6.3, 6.5), “no comment” to avoid rumors (6.13)

o Committee: good practice to have committee or senior officer responsible for monitoring disclosure: ss. 6.3, 6.5 B) CONFIDENTIAL MCR (“Exception to Public Report” – MCR release is delayed, still confidentially file within 10

days): 2 ways to file confidentially. Must provide written reasons for non-disclosure and convince Commission every 10 days that info should remain confidential. Cannot sell securities until info disclosed and disseminated (51-102 s.7.1(5))

o [1] Detriment: When, in the issuer’s reasonable opinion, immediate disclosure “would unduly detriment” its interests (e.g. pursuing a specific strategy, continuing ongoing negotiations) (7.1(2)(a)).

o [2] Management: When decision made by senior management amounts to a material change and is awaiting probable board approval. Must have no reason to believe persons with knowledge of decision are buying or selling the issuer’s securities (7.1(2)(b)).

o Disclosure trigger: if reason to believe persons with knowledge of the confidential info are buying/selling, must promptly generally disclose the MC: NI 51-102 s 7.1(7)

[B] Business Acquisition Reports (BAR) When a significant acquisition is completed, file a BAR which describes the acquisition and its effect on the issuer: 51-

102CP s 8.2o Must be filed within 75 days, include certain financial statements: 51-102 s8.4o MCR filed if acquisition is also a material change: 51-102CP s8.1

Significant acquisition tests – must satisfy any oneo 1) Asset test: if the acquired assets exceed 20% of the issuer’s total assets after the acquisition – for venture issuers,

it’s 40%o 2) Investment test: the acquisition is significant if the issuer’s investments in and advances to the acquired business,

as of the date of acquisition, exceed 20% of the issuer’s assets as of the last day of its most recently completed financial year (VI 40%)

o 3) Profit or loss test: the acquisition is significant if the profit or loss over the last complete financial year of the acquired businesses exceeds 20% of the profit or loss of the issuer over the last completed financial year (VI 20%)

[C] Insider Trading Report (ITR) See insider trading

Selective Disclosure Definition: Accidental or intentional dissemination to a select group of individuals of information about an issuer that is not

yet publicly available If a RI discloses some material information, it should make an immediate public announcement and request exchanges to

halt trading until that announcement is disseminated (NP 51-201 s.3.6) CSA views it unfavorably due to need for level playing field. Concerns with regulating SD

o 1) Chilling effects between analysts (who play important role, improve efficiency of capital markets by directing capital) and issuers

o 2) Materiality – difficult to determine materiality, may depend on audienceo 3) Balance – combatting unfairness of selective disclosure and insider trading vs encouraging communication

between issuers and investors CSA strikes to maintain balance build investor confidence and protection w/o unduly undermining

market efficiencyo 4) Necessity of Regulation – maybe investors price in SD, maybe they don’t

But to leave unregulated would impede price accuracy and efficient capital markets

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The Exempt Market3 ways to sell securities: 1) Issue prospectus; 2) Legislative/Regulatory prospectus exemption; 3) Discretionary Prospectus Exemption.Exempt Market: If selling within a closed system, you can issue securities without filing a prospectus (NI 45-106).

Less protection for investors // Markets are also less fair // More room to “game” the market. Why needed – i) Allows small companies to raise capital; ii) People who invest in these markets are different (they may be

safer, or we care about them less).

CLOSED SYSTEM CONCEPT (replaces “to the public” idea): Model ensures that securities cannot be traded without either a prospectus or an exemption from the prospectus requirement. Securityholders wishing to trade an exempt market security can:

1. Continue to trade the security within the closed exempt market by relying on further exemptions;2. The issuer may file a prospectus to qualify the securities already distributed (transforms securities from exempt market to

freely traded securities);3. Under the resale rules in NI 45-102, the securityholder may hold the exempt securities until a specified ‘hold period’

expires.

RATIONALE (5 Main Reasons Exemptions): 1. Prospectus takes time and money: Costs:

o Direct: underwriter commission, legal, accounting and audit, registrar and transfer fees, printing, translation, filing, exchange listing fees

o Indirect: promotional “road shows”, delay and distraction, increased dilution, decreased control and flexibility, restrictions on debt, change in management style, disclosure

o Intangible: difference in IPO price and future trading price2. Exemption may be more appropriate if the issuer is offering securities only to a narrow range of investors; 3. The Commissions not willing to approve a prospectus or the issuer may be unable to satisfy the prospectus disclosure

requirements; 4. Not able to find a registered dealer willing to sell securities through prospectus; 5. The Issuer may prefer not to become a RI subject to continuous disclosure requirements.

WHO NEEDS A PROSPECTUS: Members of the Public (not people intimate with the issuer) (Ralson Purina)

COMMON BONDS TEST: They know each other well enough that the investor would not be defrauded.

Types of Prospectus ExemptionsNB: Discretionary Exemption (BCSA 76): An issuer can request a discretionary exemption. Commission may allow exemption in certain circumstances where it is not prejudicial to the public interest.

Re Uranium: Exemptions can be tailor-made to the situations of the company. Re Teck: Exemptions often granted where issuer meets most but not all requirements for one of the other exemptions MI 11-102 Passport System

o A person applying for a discretionary exemption applies to its principal regulator. The principal regulator reviews the application. If the principal regulator grants the exemption, the person automatically receives the same exemption in every other jurisdiction for which an exemption is sought, except Ontario.

o The OSC also reviews each application because it does not participate in the Passport System. It will decide to opt in or out of the principal regulator’s determination.

Policy Objectives for Legislative ExemptionsPolicy Objectives of exempt market transactions involve balancing investor protection (full and true disclosure) and public interest in market efficiency (the high cost and delay of preparing a prospectus):

1. Need to provide flexibility to address specific problems faced by startup, small, and medium-sized issuers in generating initial amounts of capital. [private issuer; family, friends and business associates; accredited investor]

2. Acknowledgement that some wealthy or sophisticated investors are able to make investment decisions without the information provided in a prospectus, and so prospectus requirements can be relaxed to promote market efficiency. Based on assumption that investors capable of acting rationally in their own economic self-interest, and will seek out any information that they deem relevant to their decision-making. [accredited investor; minimum amount exemption]

3. Desire to reduce costs for issuers where there is no countervailing concern about investor protection b/c issuer is issuing securities to those with whom they have a pre-existing relationship. Based on assumption that investors in a pre-existing relationship have access to adequate current info re: issuer. [family, friends and business associates]

4. Acknowledgement that some safe securities (e.g. government bonds) do not require a prospectus [govt incentive]

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(A) No Need to Know: Purchaser Already Familiar With Issuer or Securities[1] Rights Offering (NI 45-106 s.2.1): A distribution to an issuer’s existing security holders to purchase more shares of the issuer on a pro rata basis. Fast way to raise capital. Issuer must provide written notice of details of offering to regulator in advance of offering. Regulator has 10 days to raise any objections.

Prospectus requirements do not apply to rights offering if (s.2.1(3)): o a) Issuer is a RI in a Canadian jurisdiction; o b) Filed all periodic and timely disclosure requirements (not behind on their filings), o c) File the rights offering and give people advanced warning; o d) Concurrently with filing the rights offering notice, issuer files a rights offering circular; o e) The Subscription price you will pay for rights offering is:

i) If there is a published market (e.g. TSX) = Price of rights are lower than market price OR ii) If no published market = Price is lower than the fair value of the security.

On closing date of issue, must issue a news release (s.2.1(5)) Must comply with NI 45-101 – Rights Offerings

[2] Dividend Distribution (s 2.31) and Reinvestment Plan (NI 45-106 s.2.2): Company may issue dividends in the form of securities or provide the option to securityholders to have their cash dividends automatically rolled into buying more shares in the company (Must meet requirements of s.2.2(1)-(5))

Don’t need prospectus as: Securityholders already hold securities and have access to relevant info; and since automatic there is no choice being made, so does not require disclosure to make an informed choice.

2.2(3): must be available to every securityholder in Canada to whom the dividend or distribution is available

[3] Conversion, Exchange or Exercise (NI 45-106 s 2.42): a distribution by an issuer of a security of its own issue or of a RI in distributing a security previously issued by the issuer

Designed to facilitate transactions such as conversion of convertible securities or the exercise of securities such as warrants If the new securities are of a RI, the RI must provide the Commissions 10-day written notice Rationale: already know enough about the issuer to make an informed decision; where receive securities of a reporting issuer

then can access CD

[4] Friends, Family and Business Associates (NI 45-106 s.2.5) A distribution to “family,” “close personal friends” or “close business associates” of the issuer’s DIRs/Exe OFRs/Control

Person is exempt. Not available in ONT. No restriction on the number of investors to whom securities may be sold There is an exhaustive list of who qualifies (s.2.5(1)(a-i)) (2 degrees up and down (parents, grandparents, children and

grandchildren); 1 degree side-ways (siblings, spouse) in relationship to people in the company). Determination of “close personal friend” and “close business associate” requires a subjective analysis:

o “Close Personal Friend” is one who has known the person in question (e.g. DIR) long enough to be in a position to assess that person’s capabilities and trustworthiness. Must be a direct relationship. Not simply because they are related, belong to same org, or used to work together. Must look at the length and nature of relationship, and the number of friends that have been distributed to (45-106CP s.2.7).

o “Close Business Associate” sufficient prior business dealings with a DIR, OFR, founder or control person of issuer to be in a position to assess that person’s capabilities and trustworthiness. Look at the length of time the associate knew the DIR (etc.), when business contracts between the two started, and the amount of contracts done, and the number of business associates the registrant relied on (45-106CP s.2.8)

Insufficient: to rely on statement signed by a purchaser that they are a “close personal friend” or “business associate”

Other requirements: No commission or finder’s fee can apply (e.g. Issuer cannot locate long-lost grandchild and try and sell securities as it defeats the reasoning behind this).

[5] Affiliate Exemption (NI 45-106 s.2.8): Distribution to an “affiliate” of an issuer is an exempt distribution. “Affiliate” (s.1.3): Company is an affiliate of an issuer if one is a subsidiary of the other, or if each is controlled by the same

person Rationale: Issuer is unlikely to take advantage of its affiliate, and affiliates share so much info that prospectus-level

disclosure is unnecessary. There are remedies if an affiliate is taken advantage of as well (e.g. majority-owned subsidiary pays too much for its parent corp’s securities, minority SHs in the subsidiary can bring an oppression remedy).

[6] Employee, Exe OFR, DIR and Consultant (NI 45-106 s.2.22 – 2.29): Distribution by issuer or by a control person in securities of issuer to an EE, executive officer, director or consultant of issuer is an exempt distribution. EE stock options etc. must be voluntary participation.

Permits employee stock option plans; must be voluntary; cannot pay in securities Rationale: 1) EEs, Exe OFRs, and DIRs likely already know much about the issuer, 2) EE and MGT investment in an issuer

is seen to be in the interest of the issuer and its securityholders as a whole.

[7] Investment Fund Exemptions (NI 45-106 2.18-2.21): Facilitate reinvestment, additional investment or pooled investment

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Reinvestment (comparable to the dividend distribution and reinvestment exemptions) and Additional Investment (when the securityholder’s initial acquisition was for $150,000 cash and other conditions are met) are based on the premise that the investors already have the relevant information about the issuer

Private Investment Club: allows a small number of retail investors to pool their investments in a fund, under conditions, to maintain an exemption

Private Investment Fund (loan and trust pools): provides exemptions where the investment fund is administered by a trust company and other requirements are met

[8] Private Issuer (NI 45-106 2.4) – Private issuer is a) Not a RI or investment fund, b) has 50 or fewer securityholders, and c) constating document restricts the right of securityholders to transfer its securities (s.2.4(1)) Defined around the small # of securityholders.

There is a list of people who can get: EEs/OFR’s/DIRs as well as their family/close personal friends/close business associates (2.4(2)(a-l)).

o NOTE: can issue securities under this exemption to persons not enumerated if you can satisfy the requirement that they are not members of the public re: 2.4(2)(l)

o Policy rationale: These persons are in a position to know the issuer or to find out about it without requiring a prospectus to provide the info. The test for who constitutes “the public” has been set out in various cases but is largely contextual.

Other requirements: No commission or finder’s fee can apply.

[9] Distributions to Existing Securityholders (NI 45-313): TSX-V, TSX and CSE issuers may raise money by distributing securities to their existing securityholders through the exempt market

Offering must be made to all existing shareholders with the same type of listed security Investor may only invest max $15,000 per issuer in a 12-month period with this exemption, unless they have suitable advice

from a registered investment dealer Issuer must be current with its continuous disclosure requirement; the investor must be provided with certain rights of action

and an exempt distribution report must be filed

(B) No Need to Know: Purchaser is Sophisticated or Otherwise Able to Protect Itself[1] Accredited Investor (NI 45-106 2.3): Institutional Investors are accredited as they have a level of expertise required to take care of themselves.

Financial institutions such as banks, loans or trust corporations, insurance companies, credit unions, appropriately regulated pension and mutual funds, and governments are designated as accredited investors (defined in s 1)

Individuals can qualify for this status by way of 1 of 3 different tests:1. “Financial assets test” requires aggregate realizable value exceeding $1M before taxes, but net of any related

liabilities2. “Net asset test” individual who (alone or with spouse) has net assets of at least $5 million. (total liabilities

subtracted from total assets (including residence). 3. “Income test” net income before taxes exceeding $200K in 2 most recent calendar years OR whose combined

spousal income exceeded $300K over that time, and who “reasonably expects” to exceed that level in the current year.

TRIGGER: Prospectus requirement does not apply to a dist of a security if the purchaser purchases the security as principal and is an accredited investor (2.3(1))

Cannot create an organization (e.g. a Charity) solely for the purpose of falling in the accredited investor definition (s.2.3(5)). Where accredited investor is an individual, purchaser is required to submit risk acknowledgment form (Form 45-106F4). Issuer must report the distribution within 10 days of the distribution to commission in FORM 45-106F1, or in BC, the more

extensive FORM 45-106F6. Policy rationale: these market participants have the investment expertise and/or financial resources that they don’t need a

prospectus before making an investment decision

[2] Minimum Amount Investment (NI 45-106 2.10) No prospectus if: a) person is not an individual (corp or trust), b) person purchasing as principle, c) Investing more than

$150K in cash, d) the distribution is of a security of a single issuer (s.2.10)o Rationale: If willing to put 150K in, likely will do research on the investment.

Issuer must report distribution within 10 days to commission in FORM 45-106F1 or in BC FORM 45-106F6.

(C) No Need to Know: Investment Very Safe Canada Savings Bond, provincial equivalents, municipal bonds, bank bonds etc. Also includes short term debt, as long as not convertible, company has approved credit rating from DRO, e.g. commercial paper, IOU, maturing not more than one year from date of issue.

Short Term Debt (NI 45-106 s.2.35) – only historical significance

(D) Redundancy or Dual Regulation: Prospectus-level info available from another source[1] Business Combination (NI 45-106 s.2.11)

To be exempt, an amalgamation, merger, reorganization, or arrangement must be: (1) made under statutory procedure; (2)

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described in an information circular pursuant to NI 51-102 CD Obligations and then approved by securityholders, or (3) a dissolution/winding-up of an issuer

When a company offers its shares in exchange for the shares of a target in a takeover bid, this is technically a distribution Policy rationale : Takeover bid or amalgamation will be accompanied by the same sort of disclosure that would be contained

in a prospectus (bid circular)o Regulators do not want to add to the difficulties of an issuer in financial distress, and creditors may have access to

other avenues of information through the terms of their debt agreements

[2] Take-over Bid and Issuer Bid (NI 45-106 s.2.16): A distribution made “in connection with” (could be interpreted broadly) a take-over bid or an issuer bid is an exempt distribution. Bid is already accompanied by a bid circular so prospectus is not required.

[3] Acting as an UW (NI 45-106 s.2.33): E.g. If doing a bought deal, and selling securities from issuer to UW, that transaction between issuer and UW does not require a prospectus to the UW. Main prospectus requirements are from the UW to the public.

(E) Cost/Benefit Analysis: Ensuring Smaller Issuers and Not-for-Profits can access Capital Markets[1] Offering Memorandum (OM) Exemption (NI 45-106 s.2.9)

Often used by junior start-ups. OM as substitute for prospectus level type of disclosure. OM discloses info in writing details about its business and securities offered. OM not reviewed or receipted by commission. OM misrepresentation attracts liability. In BC, anyone can buy pursuant to the OM, no restriction on value of transactions, need not be an eligible investor. Not fully harmonized across Canada.

Two prescribed forms of an OM. One for qualifying issuers and one for all others. o A qualifying issuer is a reporting issuer that files its CD documents on SEDAR, has never been in default of its CD

obligations and has filed an annual information form for its most recent financial year // main difference – qualifying issuers may incorporate by reference into their OM much of the info from their AIF, MD&A, annual fin statements, CD docs.

o For Other Issuers (non-Reporting Issuers)- main difference between forms is that qualifying issuers can reference into their OM essentially any documents/information they have already disclosed by being qualified issuers

“Eligible investor” – similar to “accredited investor” but with significantly lower income and asset thresholds // “family, friends and business associates”

OM must contain risk acknowledgment in FORM 45-106F4, contractual right for rescission or damages available, they can cancel the agreement 2 days after signing. Must contain certificate that is signed by CEO/CFO (+2 other directors), and each promoter that there are no misrep.

When you distribute through this exemption, you must report within 10 days to the commissiono Form 45-106F1, or in BC, Form 45-106F6

2.9(6/16) OM must contain statement of purchasers’ rights, incl can cancel order by end of second business day after signing agreement

2.9(7) if no statutory rights to misrep, then here it is 2.9(8) must contain cert: “This offering memorandum does not contain a misrepresentation.” 2.9(9) certificate signed by CEO, CFO, 2 or all directors, and by each promoter – “this offering memorandum does not

contain a misrepresentation”o See also 2.9(13), (14)

2.9(15) risk acknowledgment in form 45-106F4 2.9(17), (15) – must file with commission a copy of OM within 10 days, retain signed risk acknowledgement for 8 years after

distribution Rationale: prohibitive costs for early-stage company; outweigh risk of abuse

[2] Isolated Distribution by Issuer (NI 45-106 s.2.30): An isolated distribution (e.g. a small issue to a trade creditor that is unable to use another exemption) by an issuer in its own securities is exempt if two conditions met:

o 1) Distribution not part of similar continued and successive transactions; ando 2) Distribution must not be by a person whose usual business is trading in securities.

Must report it within 10 days in Form 45-106F6. Rationale: cost of preparing a prospectus outweigh the benefits to its limited audience

[3] Asset Acquisition (NI 45-106 s.2.12): A distribution made as consideration for the acquisition of assets owned by the purchaser, if those assets have a fair value of

at least $150K. Must report it within 10 days in Form 45-106F6. Rationale: early stage companies may have little cash E.g. Startup needs a new IT system, will pay IT services company in your own shares. Buying an asset from them (but must

not be less than $150K, thus do not have to give them a prospectus). IT company would have to figure out for themselves if your shares are worth enough.

[4] Not-for-Profit Issuers (2.28)

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Prospectus does not apply to distribution of its own securities by an issuer that is organized “exclusively for educational, benevolent, fraternal, charitable, religious or recreational purposes and not for profit”

o No securityholder may benefit from the distribution, and no commission or remuneration be paid associated with the distribution

Equity Crowdfunding Exemption (BCI 45-535) Crowdfunding: A method of funding a project or venture through small amounts of money raised from a large number of people over the internet via an Internet portal intermediary (e.g. Kickstarter). BCSCn used BCSA 48 & 76 to provide discretionary crowdfunding exemptions from the registration and prospectus requirements (used these rules to promulgate the instrument as opposed to BCSA 184 (which is usually used)).

Equity Crowdfunding: Under an Equity Securities Model, people receive securities for their monetary contributions. Dealer Registration Exemption (BCI 45-535, s.7): Funding portals must either be registered or may rely on this registration

exemption. Registered funding portals are subject to registrant regulation Exemption from Prospectus (BCI 45-535, s.8): Provides exemption for crowdfunding of capital.

o Requirements: (b) Distribution and payment facilitated through a funding portal, (e) aggregate funds raised by any person must not exceed $250,000, (f) the issuer group is restricted to no more than 2 crowdfunding distributions in a calendar year; (h) The issuer uses an offering document to conduct the distribution and provides the offering document to the funding portal for the purpose of making it available to a purchaser through the funding portal’s website; (i) Issuer amends the offering document in the event the offering document is no longer true … ; (j) the issuer provides a purchaser with a contractual right to withdraw an offer to purchase an eligible security that may be exercised by the purchaser delivering a notice to the funding portal within 48 hours of (i) the purchaser’s subscription or (ii) the funding portal notifying the purchaser that the offering document has been amended; (p) No persons invests more than $1,500.

Discretionary Exemptions Canada Business Corporations Act, s. 241 Commission may allow an exemption in certain circumstances where it is not prejudicial to the public interest (BCSA s.

76(1)). Their decision cannot be appealed. Often granted where an issuer meets almost all the requirements of a mandatory exemption. If they receive exemption, it is

operable across Canada, except in ON as per MI 11-102 Passport System.

Miscellaneous (Part of Div 2: Transaction Exemptions) [1] Petroleum, natural gas and mining properties (NI 45-106 s.2.13): The prospectus requirement does not apply to a distribution by an issuer of a security of its own issue as consideration for the acquisition, directly or indirectly, of petroleum, natural gas or mining properties or any interest in them.

[2] Securities for Debt (NI 45-106 s.2.14): Here, we are talking about an RI (whereas before was just an issuer) who has a creditor and settles their debt by issuing them securities.

Just for reporting issuer: As you don’t want to put a burden on a lender to do piles of due diligence before they will give a company a loan. Creditor can look at disclosure and have an idea if shares are worth anything.

[3] Issuer Acquisition or redemption (NI 45-106 s.2.15): Issuer creating more of its own securities to hold itself. Does not have to write a prospectus for itself. They are both the issuer and the purchaser.

[4] Security-holders outside the local jurisdiction (“province”) (NI 45-106 s.2.17): Don’t have to file documents in the local jurisdiction (BC) if the transaction is one that the securityholder is outside the jurisdiction and the distribution would be in connection with a take-over bid or issuer bid. There would be other requirements for disclosure for a takeover bid (e.g. US takeover bid provisions). Thus, if you get one of those don’t need to file a prospectus (equivalent of 2.16 but works for security holders outside BC).

[5] Control Block Distributions: 45-106 Part 4 Prospectus requirement does not apply to a control block distribution by an eligible institutional investor of a reporting

issuer’s securities if – 4.1o Control block distribution = BCSA 1(1) “distribution” (c): a trade in a previously issued security of an issuer from

the holdings of a control person, Control person = affect materially the control of the issuer, or >20% voting rights Subject to the seasoning period below and the control person must provide advance notice of its intention to

sell one week before the trade is executed (45-102 2.8(3))o a) have i) filed early warning reports under Part 4 62-103, ii) no knowledge of MF or MC not generally disclosed,

iii) does not receive in the ordinary course of its business and investment activities knowledge of any MF or MC not generally disclosed, and iv) alone or together w/ joint actors, does not possess control of the reporting issuer

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o b) there are no directors or officers of the reporting issuer who were, or could reasonably be seen to have been, selected, nominated or designated by the eligible institutional investor or any joint actor,

o (c) the control block distribution is made in the ordinary course of business or investment activity of the eligible institutional investor,

o (d) securities legislation would not require the securities to be held for a specified period of time if the trade were not a control block distribution,

o (e) no unusual effort is made to prepare the market or to create a demand for the securities, ando (f) no extraordinary commission or consideration is paid in respect of the control block distribution.

An eligible institutional investor that makes a distribution in reliance on subsection (3) must file a letter within 10 days after the distribution that describes the date and size of the distribution, the market on which it was made and the price at which the securities being distributed were sold.

After Take-Over Bid (TOB) – 4.2o Prospectus requirement does not apply to a distribution in a security from the holdings of a control person acquired

under a TOB for which a TOB circular was issued and filed if a) issuer whose securities are being acquired under TOB has been a RI for at least 4m at date of TOB b) intention to make the distribution is disclosed in the TOB circular issued in respect of the TOB

not required if CP sells to competing TOB c) the distribution is made within the period beginning on the date of the expiry of the bid and ending 20

days after that date d) notice of intention to distributed Form 45-102F1 e) insider report 55-102F2 f) no unusual effort is made to prepare the market or to create a demand for the security, and g) no extraordinary commission or consideration is paid

Resale of Securities Exemption3 WAYS TO RE-SELL SECURITY ISSUED UNDER NI 41-106 PROSPECTUS EXEMPTION:

[1] Trade within the closed system of the exempt market only, by relying on further exemptions. [2] A Prospectus is created and qualified for the securities, transforming them into freely trading securities. [3] Under NI 45-102 Resale Rules, hold exempt market securities until “hold period” expires, then sell*

Under (3) - Resale RulesHold Period: Keeps securities distributed under NI 45-106 Prospectus exemption from being freely trades for a time period.

2 main categories: 1) Restricted Period; 2) Seasoning PeriodRestricted Period: Applies to exemptions granted under NI 45-106 that are listed in NI 45-102, Appendix D.

Appendix D covers these NI 45-106 Exemptions (s.2.3) - “Common Bonds” Related: Accredited Investors (s.2.3), Family, friends and business associates (s.2.5), Affiliates (s.2.8), Offering Memorandum (s.2.9), Minimum Amount Investment (s.2.10), Asset Acquisition (s.2.12), Petroleum (2.13); Additional Investment in Investment Funds (s.2.19), Isolated Distribution by Issuer (s.2.30)

7 Conditions to Satisfy Restricted Period ( NI 45-102 s.2.5 ): 1) Issuer must have been RI in Canadian jurisdiction for minimum 4 months prior (must already have periodic disclosure and prospectus);2) Minimum 4 months must have passed since original distribution (prevent “backdoor underwriting”)3) Security Certificate must have legend denoting the original 4-month trading restriction or written notice must be given to original purchaser;4) Trade can’t be a control distribution5) No unusual effort to prepare the market or create demand6) No extraordinary commissions or consideration can have been paid

Seasoning Period: Applies to exemptions granted under NI 45-106 that are listed in NI 45-102, Appendix E.

Appendix E covers these NI 45-106 Exemptions (s.2.4) - More In relation to the nature of the security: Rights Offering (s 2.1), Reinvestment Plan (s 2.2), Private Issuer (s 2.4), Business Combination and Reorganization (s 2.11), Take-over Bid and Issuer Bid (s 2.16), Offer to Acquire to security holder outside local juris (2.17); Investment Fund Reinvestment (s 2.18), Private Investment Club (s 2.20), Private Investment Fund – Loan & Trust Pools (s 2.21), EE, Exe OFR, DIR and Consultant (s 2.24)

5 Conditions to Satisfy Seasoning Period: (NI 45-102 s 2.6) 1) Issuer must have been RI in Canadian jurisdiction for minimum 4 months prior2) Trade can’t be a control distribution3) No unusual effort to prepare the market or create demand4) No extraordinary commissions or consideration can have been paid5) If seller is insider or officer, they can’t have reasonable grounds to believe that issuer is in default of securities legislation

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7) If seller is insider or officer, they can’t have reasonable grounds to believe that issuer is in default of securities legislation

Once restricted period observed: securities can be traded freely on public capital markets.

What’s Missing (compared to 2.5): Does not include no “backdoor UW”; no legending requirements; don’t have to hold securities for 4 months as well Less of a risk of that behaviour under those particular exemptions.

Once seasoning period observed: securities can be traded freely on public capital markets.

Different resale rules for different exemptions: “Restricted Period” exemptions must satisfy two additional conditions: 1) A minimum of 4 months must have passed

since the original distribution and 2) the security certificate must include a legend denoting the original 4-month trading restriction.

For exemptions subject to “Restricted Period”, indication that Securities Commissions are more cautious about these securities entering public capital markets, so they have created a more onerous process.

Control Distribution – control distribution – similar to seasoning period + provide advance notice of its intention to sell 1w before the trade is executed – 45-102 2.8(3)

Registrant RegulationRegistrants: Can be individuals or corporations: BCSA 1(1) + 31-103 s 8.4

[1] “Dealers”: A person (which includes a corp) engages in (or hold themselves out as engaging in) the business of trading in securities or acting as underwriters (BCSA s.1(1)) – a dealer can be investing on its own account or be acting as an agent for other people;

o “Salesperson”: Individual employed by a dealer to make trades on a dealer’s behalf (dealer here = corp entity; salesperson = individual working for corp) (s.1(1)).

[2] “Adviser”: Person (incl. corp) engages in (or holds themselves out as engaging in) the business of advising in securities (i.e. person gives advice of where to put money) (s.1(1))

[3] "Investment fund managers": Person who directs business, operations or affairs investment funds (s.1(1))o “Investment fund”: a mutual fund or a non-redeemable investment fund (s.1(1))

“Fairly, honestly and in good faith”

Firms and individuals must be registered (e.g. advisor firm and individuals must be registered). Cannot be registered advisor or dealer without a corporate entity you are connected with.

Individuals act on behalf of a registered firm must register in one or more individual categories: 31-103CP s 2.1

Objective of Registration Requirements: Intended to protect investors from unfair, improper or fraudulent practices and enhance capital markets integrity and efficiency. Make sure those involved in this industry are competent, have an understanding of the issues and their roles in the industry.

Registration Requirements BCSA 34 - Persons must be registered under the applicable securities legislation, if they: (a) trade in a security or exchange contract; (b) act as an adviser; (c) act as an investment fund manager, or; (d) act as an UW (i.e. investment banker)

“Person” s 1(1) includes an individual, corp…personal or other legal rep of a person If you meet the requirements, the commission cannot refuse to register you (BCSA 35)

o Unless considered not suitable in the capacity applied for, or did not pay fee The executive director may restrict a registration or a renewal or reinstatement of registration and may impose conditions of

registration on the registrant (BCSA 36)

FIRM APPLICATIONS (Form 33-109F6): Firms are required to provide the following: Registration details (name, categories, provinces) Contact information (incl. UDP and CCO info) Business history and structure (incl. proposed business activities), business plan and policies, org chart Registration history in and out of Canada, membership with IIROC or MFDA Financial condition, incl. working capital, sources of capital, insurance, solvency and financial reporting Client relationships Regulatory actions Legal actions

Dealers and Advisers EXEMPTION FROM REGISTRATION: a person or company is exempt from registration if the person or company (a) is not engaged in the business of trading in securities or exchange contracts as a principal or agent, and (b) does not hold himself, herself or it (NI 31-103 s.8.4(1))

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BUSINESS TRIGGER: The requirement to register with the Commissions as a dealer or adviser is triggered if the person or company holds themselves out as engaging in the business of trading or advising in securities (BCSA s.1(1))

FACTORS - One factor alone may not be determinate (Re Empire Consulting) (look @ quantity + quality of services provided):

o Engaging in activities similar to a registrant (e.g. promoting securities or stating in any way that the individual or firm will buy or sell securities – CP 31-103 s.1.3);

o Intermediating trades or acting as a market maker (e.g. typically takes the form of the business commonly referred to as a broker. Making a market in securities is also generally considered to be trading for a business purpose - CP 31-103 s.1.3);

o Directly or indirectly carrying on the activity with repetition, regularity or continuity (e.g. The activity does not have to be their sole or even primary endeavour. Regularly trading or advising in any way that produces, or is intended to produce, profits is considered to be for a business purpose - CP 31-103 s.1.3);

o Being, or expecting to be, remunerated or compensated; ando Directly or indirectly soliciting (e.g. Contacting anyone to solicit securities transactions or to offer advice may

reflect a business purpose - CP 31-103 s.1.3). Generally: One-time trading or advising activities are not considered to be in the business of trading or advising (i.e.

lawyers) Advice must have an effect on markets or investors: (Re Morrison)

o 1) Reciting Facts is not advising, but talking about merits iso 2) Business purpose may not be found if the trading or advising activities are incidental to a primary business

Disclaimer has no effect on whether a business trigger is affected (Re First Federal Capital) Do not have to be registered if performing an act in furtherance of a trade if the trade is done through a registered dealer, but

you cannot solicit that trade EXAMPLES – SECURITIES ISSUERS – a securities issuers (an entity that issues or trades in its own securities) which

have “an active non-securities business” need not register if they:o “do not hold themselves out as being in the business of trading in securities”o Infrequently trade in securitieso receive and expect no compensation for trading in securitieso are not acting as intermediaries; ando “do not produce, or intend to produce, a profit from trading in securities”: CP 31-103 s 1.3

EXAMPLES – ONE-TIME ACTIVITIES – in general, do not require reg: CP 31-103 s 1.3 EXAMPLES – INCIDENTAL ACTIVITIES – eg lawyers may provide advice on securities in normal course of job

Investment Fund Managers (NI 31-103 s.7.3)Overview: There is no “in the business” registration trigger for investment fund managers. If a person or company directs – or has the power to direct – the business, operation or affairs of an investment fund, it will be subject to registration (BCSA 1(1)).

“Investment fund”: “a mutual fund or a non-redeemable investment fund”. Functions of investment fund managers: establishing a distribution channel for the fund; marketing the fund; overseeing

the fund’s compliance and risk management programs; overseeing day-to-day administration, etc.

Firm Categories for Registration Dealers – Firm Registration ( NI 31-103 s.7.1 ):

1) Investment Dealer – Full service category, may act as dealers or underwriters in respect of any security (s.7.1(2)(a));o Investment dealers must be members of IIROC (s.9.1), which has its own rules for the members as well as the rules

of the Commissions.o Primary market: Investment dealer may act as an underwriter, intermediary between an underwriter and investors, or

issuer’s agent (in a private placement)o Secondary market: may trade securities as principal or agent; execute trades on behalf of both institutional and retail

clients 2) Mutual Fund Dealers – May act as dealers regarding securities issued by a (i) mutual fund, or (ii) an event fund that is a

labour-sponsored investment fund or labour-sponsored venture capital corporation under legislation of jurisdiction of Canada (s.7.1(2)(b)):

o Except in Quebec, mutual fund dealers must be a part of MFDA (s.9.2), which has its own rules for the members as well as the rules of the Commissions;

3) Scholarship Plan Dealers – May act as dealers only in respect of securities issued by a scholarship plan, education plan, or educational trust (7.1(2)(c))

4) Exempt Market Dealer – allowed to trade only in exempt market securities (still have to register, just are dealing with securities in the exempt market) (7.1(2)(d))

o Directly oversight by the Commissions 5) Restricted Dealer – may act as a dealer or an underwriter in accordance with the terms, conditions, restrictions or

requirements applied to its registration (7.1(2)(e))

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o As long as you register in most full-service category (bigger), don’t have to register in the others (smaller) but that does not work vice-versa.

Adviser – Firm Registration ( NI 31-103 s.7.2 ): 1) Portfolio Managers – May act and advise in respect of any security (NI 31-103 s.7.2(2)(a)) – full service

o Directly oversight by the Commissions 2) Restricted Portfolio Managers - May act as advisers regarding any security in accordance to terms of registration (7.2(2)

(b)) (e.g. restricted to a specific type of security, such as oil and gas securities or real estate and mortgage securities)o Directly oversight by the Commissions

Investment Fund Manager Category – see above

Individual Categories of RegistrationAn individual who acts on behalf of a registered firm must register in 1+ ind categories. An ind may need to register in both firm and individual categories (e.g. sole proprietor registers as a portfolio manager (firm category) and as an advising representative (individual category)) 31-103CP 2.1

Generally, cannot act for more than 1 firm at a time. 31-103CP s 4.1

(i) Dealing Representative (for firms in dealer category): May act as a dealer or UW in respect of a security that the individual’s sponsoring firm is permitted to trade or underwrite (NI 31-103 s.2.1(2)(a)) (NB: Can be a dealer representative for exempt market dealer as well)

To be a dealing representative for an Investment Dealer: must be an approved person under IIROC rules (NI 31-103 s. 3.15(1).

o = A partner, DIR, OFR, EE, or agent of an approved member firm who is approved by IIROC or another Canadian SRO (Dealer Member Rules R. 1.1)

To be a dealing representative for a Mutual Fund Dealer: must be an approved person under MFDA rules (NI 31-103 s. 3.15(2))

o = A partner, DIR, OFR, compliance officer, branch manager, alternate branch manager, EE or agent of the MFDA member (MFDA By-law 1.1 s.1)

(ii) Advising Representative (for firms in advising category): May act as an adviser in respect of a security that the individual’s sponsoring firm is permitted to advise on (NI 31-103 s. 2.1(2)(b)) – i.e. may be advising rep for a portfolio manager.

All of the advising activates of associate advising reps must be supervised by an advising rep at the firm (NI 31-103 s.4.2)

(iii) Associate Advising Representative (for firms in advising category): May act as an advisor in respect of a security that the individual’s sponsoring firm is permitted to advise on if the advice has been approved under s. 4.2(1) (NI 31-103 s. 2.1(2)(c)) – i.e. may be an advising rep or assoc advising rep for a portfolio manager (NB: Associate is “an apprentice category” for those yet to meet education + experience requirements)

Must not advise on securities unless, before giving the advice, the advice has been approved by an individual designated by the registered firm under subsection (2) (s. 4.2(1))

Must designate, for an associate advising representative, an advising representative to review the advice of the associate advising representative (s. 4.2(2))

No later than 7 days following the date of a designation under (2), a registered adviser must provide the regulator with the names of the advising representative and the associate advising representative who are the subject of the designation (s. 4.2(3))

COMPLIANCE POSITIONS: Every registered firm is required to have a UDP and a COO.

(i) Ultimate Designated Person (UDP): Must do all of the following (NI 31-103 s.5.1): (a) supervise the activities of the firm that are directed towards ensuring compliance with securities legislation by

the firm and each individual acting on the firm’s behalf; (b) promote compliance by the firm, and individuals acting on its behalf, with securities legislation.

Who is the UDP? – The CEO (or someone acting in that capacity) or sole proprietor of the firm (s.11.2)

For IIROC-member firms: UDP must be CEO or sole proprietor of the dealer member firm, or an officer in charge of the firm division involved in dealing: IIROC, Dealer Member Rules, R 38.5

(ii) Chief Compliance Officer (CCO): Must do all of the following (effectively keep policy and compliance) (NI 31-103 s.5.2) (a) Establish and maintain policies for assessing compliance (b) Monitor and assess compliance by the firm (c) Report to the UDP as soon as possible if they become aware of any circulations indicating that the firm may be in non-

compliance. The non-compliance must involve:o 1. Risk of harm to cliento 2. Risk of harm to capital marketso 3. Part of a pattern of non-compliance.

(d) Submit an annual report.

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PERMITTED INDIVIDUALS ( NI 33-109 ): Reviewed by Exe DIR as part of assessing a firm’s overall fitness for registration. ‘Permitted Individual’ - means (a) a DIR, CEO, CFO, or COO or who performs the functional equivalent (b) an individual

with beneficial ownership or control 10% or more of the voting securities, or (c) A trustee, executor or administrator, legal rep of (b) above (s.1.1) – can be a registered individual

Individual Registration RequirementsGeneral: Individuals must be “fit for registration”, based on criteria in NI 31-103 Part 3 and Form 33-109F4.

3 Criteria for assessing an applicant suitability: o (1) Proficiency (Have education, training, and experience a reasonable person would consider necessary to perform

the activity competently, including understand understanding the structure, features and risks of each security) s 3.4o (2) Integrity (Have an honest character, lack of conflict of interest and do not have regulatory or legal actions

against them)o (3) Solvency (An individual who is insolvent or bankrupt may not be suitable)

Form 33-109F4: Fitness for registration assessed through the form’s contents. Must provide: name, address, personal info; jurisdiction registration is sought; proficiency; location of employment; current employment; previous employ/activities for 10 yrs, resignations/terminations; regulatory disclosure; crim and civil disclosure, specific financial disclosures, ownership of securities and derivatives

See above for specific requirements to be a dealer rep, advising rep, UDP or COO.

Exemptions from RegistrationInternational Dealers

Allows international dealers to trade a “foreign security” (issued by a foreign government or issuer) with a “Canadian permitted client” without having to register as a dealer in Canada

o Permitted client: institutional investors, governments, persons acting on behalf of a managed account, registered charity, person with $5M, company with $25M, person who distributes securities

Requirements: (NI 31-103, s. 8.18(2))o The person or company’s head office or principal place of business is in a foreign jurisdictiono The person or company is properly registered in the foreign jurisdiction in a category of registration that permits

activities in that foreign jurisdiction comparable to those it would be permitted to engage in if registered as a dealer in the local jurisdiction

o The person or company has completed Form 31-103F2 Must notify its clients Why? Pressure from American and other dealers to come in and access Canadian clients but – flip side – Arguments for

protectionism protecting the client base of Canadian dealers

International Advisers Allows international advisers to advise in a “foreign security” with a “Canadian permitted client” without having to register

as a dealer in Canada Requirements: (NI 31-103, s. 8.26(3))

o The adviser is located in a foreign jurisdiction (its head office or principal place of business)o The adviser is properly registered (or exempted from registration) in the foreign jurisdiction in a category of

registration that permits activities in that foreign jurisdiction comparable to those it would be permitted to engage in if registered as an adviser in the local jurisdiction

o The adviser engages in the business of an adviser in that foreign jurisdictiono At the end of its most recently completed financial year, the adviser’s portfolio management activities in Canada

contributed not more than 10% of its aggregate consolidated gross revenueo The person or company has completed Form 31-103F2

Must notify its clients

Client Mobility A person or company who is registered as a dealer or adviser can provide services to 10 or fewer clients in another Canadian

jurisdiction without registration (NI 31-103, s. 8.30) Individual who is registered as a dealing, advising or associate advising representative can provide services to 5 or fewer

clients in another Canadian jurisdiction without registration (NI 31-103, s. 2.2(1))

Generic Advice Registration not required if providing generic advice that is not tailored to the needs of the recipient (NI 31-103, s. 8.25(2)) Must disclose if there is an interest in the security being recommended (NI 31-103, s. 8.25(3))

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Registrant ObligationsRegistrants are required to submit regulatory filings under NI 31-103 only to their principal regulator (w/ few exceptions) (NI 31-103 s.1.3(2))

Investment dealers are subject to additional requirements of IIROC Mutual fund dealers are subject to additional requirements of MFDA Firms registered with IIROC/MFDA are exempt from certain requirements of NI 31-103 as long as they oblige with IIROC

or MFDA rules

Compliance (NI 31-103 s. 11.1): A registered firm must establish, maintain and apply policies and procedures that establish a system of controls and supervision sufficient to

(a) provide reasonable assurance that the firm and each individual acting on its behalf complies with securities legislation, and (b) manage the risks associated with its business in accordance with prudent business practices.

CCO: establishes and maintains policies for compliance, monitors and assess compliance, reports to the UDP if there are instances of non-compliance that create a risk of harm to clients or the capital markets (or shows a pattern of non-compliance) (NI 31-103 s. 5.2)

CCO must also produce an annual report to the firm’s BOD, or individuals acting in similar capacity for the purpose of assessing compliance (NI 31-103 s.5.2)

Books and Records: Firm required to maintain records to accurately record its business activities, financial affairs, and client transactions for 7 years (NI 31-103 s.11.5(1)). Types of records? NI 31-103 s 11.5(2)

11.6(1): 7 years from date record created; in a safe location and in a durable form; in a manner that permits it to be provided to the regulator (book: Executive Director) in a reasonable period of time

Financial Condition: firm must comply with financial condition requirements relating to working capital, insurance, and financial statements

Must keep "working capital" to ensure they can meet their financial obligations when they become due (NI 31-103 s.12.1).o Form 31-103F1 Calculation of Excess Working Capital, delivered to Executive Director

Maintain a min amount of insurance coverage to protect against property loss (s.12.3-12.5). Must also provide financial statements to the Exe DIR. Audited annual ones for all registrants, and unaudited quarterly

ones for all registrants except exempt market dealers and advisers (See NI 31-103 12.12-12.14)

Know Your Client, Know Your Product + Suitability: dealers and advisers Dealers generally have to collect “know your client” info and make a suitability determination for each of their clients This section does not apply to investment fund managers KYC: Know Your Client

o A registrant must: establish certain information about the client – the client’s ID, whether the client is an insider of any reporting issuer, and the client’s creditworthiness if the registered firm will be financing the client’s acquisition of a security (NI 31-103 s.13.2(a)(b)(d))

o Registrants must take reasonable steps to ensure they have “Sufficient Information” regarding the following to fulfill suitability (s.13.2(c)):

i) Client’s investment needs and objectives; ii) Client’s financial circumstances; iii) Client’s risk tolerance.

o Must take reasonable steps to keep the information current (s.13.2(4))o For Corporate Client: KYC rule entails understanding the company’s business and identifying whether any SHs

own or control more than 25% of the company’s voting security (s.13.2(3)) KYP : Know Your Product

o Individual must understand “the structure, features and risks of each security the individual recommends” (NI 31-103 s.3.4)

o “Suitability”: Before they make a recommendation to a client, or accept instructions to buy or sell a security, take

reasonable steps to ensure that the purchase or sale is suitable for the client (13.3(1); Re Veerbeek 2005 OSC - the compliance standard is reasonableness or higher)

Advise their client that the security is not suitable, and cannot buy or sell in that security unless client insists (s.13.3(2))

Suitability obligations cannot be delegated to another party and cannot be satisfied by simply disclosing the risks involved with a trade – 31-103CP s 13.3

except sophisticated clients (registered firm) 31-103 13.3(3) s. 3.16 exempts dealer representatives from IIROC and MFDA from this section if they follow

SRO rules Permitted client can waive suitability requirement in writing

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Policy: Alternative to Suitability – “best interest of the client”. Reforms would include a statutory duty for dealers and their individual registrants or financial advisors to act in their client’s best interest. Advice should be objective, proficient, free from conflicts and focused on what’s best for the investor, and not the advisor

b/c suitability can just mean a good one, not best one

Conflicts of Interest: Registered firms must take reasonable steps to ID and respond to material conflicts of interest between the firm (including individual acting on its behalf) and clients. Such conflicts may be existing or reasonably expect to arise (NI 31-103 s.13.4(1)(2))

Responses to conflict: avoidance, control or disclosure (31-103CP)o Primarily dealt with through disclosure. Tell people about the conflict and sometimes respond by mitigating the

conflict. Registered firms should ensure that their clients are adequately informed about any conflicts of interest that

may affect the services the firm provides to them. Including whether it involves any connected or related issuers (s.13.4 CP)

Disclosure may not be appropriate if a conflict of interest involves confidential or commercially sensitive information, or the information amounts to “inside information” under insider trading provisions in securities legislation. In these situations, registered firms will need to assess whether there are other methods to adequately respond to the conflict of interest. If not, the firm may have to decline to provide the service to avoid the conflict of interest (s.13.4 CP)

o Test: If reasonable investor would expect to be informed of a conflict, the registered firm is required to do so (NI 31-103 s.13.4(3))

Timeliness: Registered firms and their representatives should disclose conflicts of interest to their clients before or at the time they recommend the transaction or provide the service that gives rise to the conflict (13.4 CP)

“Related Issuer”: A person or company is a ‘related issuer of another person or company if o (a) the person or company is an influential securityholder of the other person or company o (b) The other person or company is an influential securityholder of the person or company, or o (c) each of them is a related issuer of the same third person or company.

“Connected Issuer”: Issuer distributing securities if the issuer or a related issuer of the issuer has a relationship with any of the following persons:

o (a) Specified firm registrant o (b) A related issuer of the specified firm registrant o (c) A director, officer, or partner of the specified firm registrant, o (d) a director, officer, or partner of a related issuer of the specified firm registrant.

Registered firms should design their organizational structures, lines of reporting and physical locations to control conflicts of interest effectively. E.g. of Situations: advisory staff reporting to marketing staff; compliance or internal audit staff reporting to a business unit, and registered representatives and investment banking staff in the same physical location (31-103CP 13.4)

Referral Arrangements: means any arrangement in which a registrant agrees to pay or receive a referral fee (any form of compensation, direct or indirect, paid for the referral of a client to or from a registrant) (NI 31-103 s.13.7)

Permitted referral arrangements: Registrants can accept or pay a referral fee, if the referral agreement is in writing, fees are recorded, and the client receives disclosure of details of the referral arrangement before the registrant opens an account for the client OR provides services to the client (s. 13.8)

Must take reasonable steps to ensure that a person or company referred has the appropriate qualifications to provide the services, and if applicable, is registered to provide those services - appropriately qualified and registered (s. 13.9)

Complaints: Dealers and Advisers must document and respond to every complaint made to a registered firm about any product or service offered by the firm or its representative (s.13.15); response must be what a reasonable investor would consider fair and effective

Account Activity Reporting: Registered firms are required to provide clients with certain transaction reporting (s.14.12) and account reporting (s.14.14).

Relationship and Cost Disclosure (NI 31-103 s.14.2(1)) Dealers and advisers are required to provide clients with info about client’s relationship with the registrant that a reasonable investor would consider important (Churning, front running and other concerns are dealt with here) (s.14.2(2)):

Disclose type or nature of client’s accounts // general description of registered firm’s products // Relationship w/ investment // Fair allocation of investment opportunities // transaction charges the client my face // Reports to clients // book pg 499

Dealer or adviser required to ensure that the relationship disclosure is kept current and that clients are notified of any significant changes – NI 31-103 s 14.2(4)

Account Activity Reporting registered firms are required to provide clients with certain transaction reporting and account reporting (NI 31-103 14.12 & 14.14, 14.14.1)

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Subject to certain transaction periods, registered firms are also required to provide clients with certain information with respect to pre-trade disclosure of charges (14.2.1), cost disclosure reporting (14.17), and investment performance reporting (14.18)

Change of Registration Information (NI 33-109 s.3.1 firm, 4.1 individual): Must notify Executive Director of any changes to info previously submitted for review: (1) Changes must be submitted within 30 days, (2) Notice of change must be made using Form 33-109F5, (4) Regarding name of agent for service: Changes must take 10 days, (6) Notice

Submit Form 33-109F Change of Registration Information to the Executive Director – reviews on an ongoing basis, may revoke registration

If revoked, requires new registration

Transfers a registered individual or a permitted individual that leaves a registered firm to join another registered firm is able to transfer his registration automatically, provided that a completed Form 33-109F7 Reinstatement of Registered Individuals and Permitted Individuals is filed by an authorized firm representative within 90 days of the individual leaving the first firm

Must have been no changes to reg, crim, civil, or financial disclosure; can’t have left after allegation of breaching securities laws, breaching SRO rules or engaging in criminal activity

Can be no change in the individual’s category of registration and the new firm must be registered in the same category as the prev firm

Cross-Over with IIROC and MFDA IIROC member firms: KYC, suitability and disclosure when recommending the use of borrowed money do not apply Dealing representatives of MFDA member firms: suitability and disclosure when recommending the use of borrowed money

do not apply Exemption only applies if the dealer representative follows IIROC or MFDA’s rules in those areas: 31-103CP s 3.16

Registrant Oversight The Executive Director may impose consequences (suspending or revoking a registration) if the Executive Director considers

it to be in the public interest to do so; those actions cannot be taken without the registrant having an opportunity to be heard (BCSA s. 40.1(1))

Individual registration may be suspended or revoked due to change in employment, revocation or suspension by IIROC or MDA or suspension of the sponsoring firm (NI 31-103, s. 29)

Firm registration may be suspended or revoked due to not paying fees or revocation or suspension by IIROC or MFDA (NI 31-103)

o Can no longer act as a dealer, UW, adviser or investment fund manager under that category

Recognized Entities The responsibility for regulating some segments of the securities industry has been delegated by the Commissions to certain

“recognized entities” (REs), including “self-regulatory organizations” (SROs), marketplaces and clearing agencies.o REs derive their self-regulatory authority from statutes and are closely overseen by the Commissionso Factors leading to a self-regulatory framework:

Regulations created by REs may more closely reflect industry standards and expertise because they are more directly linked with their membership

Funded by their members and not the government lowers government expenses May serve as a useful source of information between government and industry Where an RE is perceived by its members to be a more dominant regulator than government, it may be able

to set and enforce higher ethical and educational standards Private sector may establish an RE to avoid more onerous government regulation or enforcement

Marketplaces Definition: a venue in which participants conduct trades in securities. Participants place “bids” (offers to buy) and “asks”

(offers to sell). Function of the marketplace is to match bids and asks. o The securities and money change hands through a clearing agency.

Types of Marketplaces:o Exchanges (TSX, TSX-V, MX, CSE)

Many regulatory functions delegated to the Investment Industry Regulatory Organization of Canada (IIROC)

Subject to close supervision by the Commissions and cannot amend their rules or regulations without prior approval

o Quotation and Trade Reporting Systems (QTRSs) Issuers file enhanced disclosure documents with the QTRS, after which their shares are made available in a

“disclosure hall” None existing today

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o Alternative Trading Systems (ATSs) “Member”: a person or company that holds a seat on an exchange or has been granted direct trading access

rights by an exchange and is subject to its regulatory oversight “Subscriber”: person or company that has entered into a contractual agreement with the ATS to access the

ATS for the purpose of effecting trades or submitting, disseminating or displaying orders on the ATS “Marketplace Participant”: members and subscribers

Comparison of Exchanges and ATSsExchange ATS

Recognition: must file Form 21-101F1 and required attached exhibits with the relevant Commission and be recognized as an exchange before beginning operations (s. 3.1(1)).

The form requires information about the exchange’s corporate governance, ownership, organization, affiliates, operations, systems and contingency planning, types of securities to be listed, marketplace participants (members of the exchange), access to services to be provided, and fees to be charged. This information is kept confidential (s. 6.1(2)-(3)), as it would be valuable to the exchange’s commercial competitors.

Registration: must register with the relevant Commission as a dealer before beginning operations (s. 6.1(a)). The Commission has broad discretion to deny registration and once, registered, the ATS is subject to a variety of ongoing obligations.

Must become a member of a recognized SRO (only IIROC at this time – 21-101CP, s. 3.4(5)) before beginning operations (s. 6.1(b)). The ATS must abide by the SRO’s rules.

Must file Form 21-101F2 at least 45 days before beginning operations (s. 3.1(2)). The form requires substantially the same information as Form 21-101F1 and is also confidential (s. 6.1(1-3)).

Listing Agreement: requires issuer to enter a listing agreement with the exchange before issuer’s securities are listed on the marketplace (CP s. 3.1(2)(a)). A listing agreement can, e.g., require an issuer to obtain the exchange’s consent before undergoing any material changes to its business or empower the exchange to halt trading in an issuer’s securities for any reason.

No Listing Agreement: cannot require issuer to enter into a listing agreement (CP s. 3.3(1)(a)).

Two-Sided Market: guarantee both a bid and an ask will be posted for all listed securities on a continuous or reasonably continuous basis (CP s. 3.1(2)(b)). For example, traders may act as principals, such as registered traders or market makers.

No Two-Sided Market: cannot guarantee a two-sided market or provide liquidity guarantees (CP s. 3.3(1)(b)).

Regulation Services Provider: may monitor and enforce directly or through a regulation services provider (RSP). In practice, the stock exchanges are currently required as a condition of their recognition orders to maintain an RSP, specifically IIROC. MX, Ice Futures Canada, and Natural Gas Exchange (NGX) do not retain an RSP.

Regulation Services Provider: requirements governing ATS and its subscribers are to be set by a regulation services provider. ATS must enter a written agreement with an RSP. IIROC is, at present, the only RSP in Canada.

Discipline: disciplines members by levying fines or taking enforcement action (CP s. 3.1(2)(d)).

Discipline: may not discipline subscribers beyond excluding them from trading (CP s. 3.3(1)(d)).

Exchanges The three major exchanges in Canada (TSX, TSX-V and MX) are owned by TMX Group Ltd. Toronto Stock Exchange (TSX):

o Main exchange for senior issuerso Listing requirement categories: financial condition and prospects, management and sponsorshipo Company categories: Industrial (general), Mining, or Oil and Gas

For industrial companies, the general rule for an issuer that has gone through an IPO is that at least one million freely tradeable shares, with an aggregate market value of four million dollars, must be held by at least 300 public shareholders

o Non-exempt companies must be sponsored by a TSX “participating organization”, defined as a person granted access to TSX’s trading system under its trading rules (in practice, usually an underwriter).

TSX Venture Exchange (TSX-V):o Predominantly for emerging companies and venture class securitieso Two-tier system: Tier 1 for later-stage companies, Tier 2 for earlier-stage (where most TSX-V issuers are found)o Company categories: Mining, Oil and Gas (exploration or producing), Industrial or Technology or Life Sciences,

Real Estate or Investmento Program for “capital pool companies” (CPCs): for newly-generated companies that have not yet begun business

operations and have no assets other than cash; must have a preliminary CPC prospectus from one or more of the Commissions

Raises money on the strength of its management Uses the money in a “qualifying transaction”, through which it acquires “significant assets” so that the CPC

meets the TSX-V’s initial listing requirements

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Montreal Exchange (MX):o Issuers do not list their securities on MX, and MX does not have listing requirements per seo MX lists exchange-traded derivatives: equity options, options on exchange-traded funds, currency options, index

derivatives and interest rate derivativeso Exchange-Traded Derivatives: standard-form contracts between two counterparties

Canadian Securities Exchange (CSE):o Recognized as an exchange by the OSCo Targets junior issuers through reduced listing requirements and lower fees

Alpha Exchange:o Exchange that is a wholly-owned subsidiary of TMX Group Ltd.

ICE Futures Canada:o Offers futures and options contracts in canola, wheat and barley

Natural Gas Exchange (NGX):o Lists physical spot and futures contracts for natural gas and natural gas and electricity derivativeso Wholly owned by TMX Group Ltd.

ATSs Various ATSs including: Chi-X Canada (CHIX), Bloomberg Tradebook Canada Liquidnet Canada (LQNT), Instinet Canada

(ICXA), SIGMA X Canada (SGMC), Omega ATS (OMEG), Pure Trading (PURE) and TMX Select (TMXS) Benefits: lower transaction costs, faster trade execution, greater price information, total anonymity and longer trading hours ATSs also tend to cater more specifically to particular markets

Clearing Agencies Clearing agencies (CAs) are not SROs; they must be recognized by the Commission before commencing operations, so they

are REs Functions:

o By acting as a central counterparty, they guarantee that every trade in a marketplace will be completed. The CA bears the risk that one party will fail to perform its obligation (to tender payment or deliver securities).

o CAs act as the intermediaries through which funds are exchanged after a trade. o CAs often act as a depository of securities – they maintain digital ownership records.

CDS Clearing and Depository Services Inc. (CDS Clearing) is the main CA in Canada.o Provides clearing and settlement services for every marketplace in Canada except MX.o Wholly-owned subsidiary of the Canadian Depository for Securities (CDS).

Only other CA in Canada is the Canadian Derivatives Clearing Corporation (CDCC), which acts as a central clearing counterparty for derivatives traded on MX and in certain bilateral over-the-counter (OTC) derivates markets.

Self-Regulatory OrganizationsIIROC

Most prominent SRO in the Canadian securities industry Two Classes of Members: Dealer Members and Marketplace Members All investment dealers and mutual fund dealers are required by securities laws to be members of an appropriate SRO

o IIROC for investment dealers and MFDA for mutual fund dealerso Marketplaces and ATSs are required to register as dealers and retain regulatory services providers (RSPs), such as

the IIROC ATSs must join the IIROC as both dealer members and marketplace members

MFDA Specialized SRO whose members are mutual fund dealers

Regulatory FrameworkREs’ Regulatory Power

The stock exchanges regulate the issuers that list their securities and the trading in those securities by the exchanges’ members

o Continuous Disclosure (CD) requirements: periodic disclosure and timely disclosure of “material information” Material Information: any information relating to the business and affairs of a company that results in or

would reasonably be expected to result in a significant change in the market price or value of any of the company’s listed securities

o Members must identify whether they are acting on their own or on behalf of someoneo Members are prohibited from trading against their clientso Each exchange must retain IIROC as an RSP, which administers and enforces most of the exchanges’ rules

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The derivatives exchange (MX) and commodity-based exchanges (ICE and NGX) regulate the types of derivatives that may trade on the exchanges and regulate trading in those derivatives by the exchanges’ members

o Not required to retain an RSP ATSs have no regulatory power, they may not set requirements governing subscriber conduct and they may not discipline

subscribers beyond excluding them from tradingo Must register with the Commission as a dealero Must require its subscribers to comply with an RSP’s requirements

All ATSs must belong to IIROC as a Dealer Member and a Marketplace Member CAs can set rules regarding their clearing and settlement services, such as who is eligible to be a participant in the CA, when

payments are due, how much collateral is required and what sort of data and records must be kept SROs have broader regulatory powers

o IIROC and MFDA set regulations regarding ethics, proficiency, standards of practice, business conduct and financial condition of their Dealer Members

o Members require to provide monthly financial reports and annual audited financial statements, maintain min level of risk-adjusted capital, enforce min margin requirements for client accounts and abide by other financial requirements

o IIROC acts as an RSP to all ATSs (required by NI 23-101) and all stock exchanges (TSX, TSX-V, CSE and Alpha) and regulates them as Marketplace Members

They must follow IIROC’s UMIR

Oversight by Commissions All REs subject to oversight by the Commissions and no RE may pass regulations that conflict with securities laws The Commissions supervise IIROC, which is the RSP for all ATSs CAs subject to oversight by the Commissions pursuant to the CAs’ recognition orders IIROC and MFDA subject to oversight by the Commissions. IIROC required to provide financial information and regular

reports of the disciplinary proceedings it conducts

Cryptocurrency (NOT ON THE EXAM) Blockchain – a ledger of transactions from one used to another, must be public

o Stored across a public network – reliability of blockchain rests on this entire networko “Distributed Ledger Technology”: decentralized and distributed amongst many userso Mining blockchain – looking for transactions in bitcoin, and verifying them on blockchaino “Coins” are really just entries on blockchaino Can do ICO on existing blockchain, or make your own new blockchain

To have value, people must have expectation of future value – need blockchain to be reliable Similar to needing to have faith in country’s central bank to have faith in fiat currency

Coins/tokens can:o Can put equity rights into it (e.g. holders will eventually have rights to “something”)o Makes them look like securitieso E.g. could have an ICO, where capital is being raised to build a project – looks like same thing as raising money

through equity rather than currency Virtual currency is not tied to a tangible asset or performance of a particular company (unlike traditional stocks and

commodities) primary driver of its value is simply other people’s willingness to use/trade ito Is it just a speculative bubble with no underlying value?

Key element of definition of “security”o (l) an investment contracto Could also maybe be included under “futures contract”

Secondary trading of crypto assetso Issue – if exchange facilitates trading of cryptoassets that aren’t securities, whose responsibility is this to regulate?o There are marketplaces that want to be regulated, so that they legitimize themselveso “Marketplace” definition includes person/company that maintains a market for bringing together buyers and sellers,

and brings together their orders for securities, using established, non-discriminatory measures Could use this to fit within definition, could only accommodate exchange of cryptos meeting def of

“security” They have features of exchanges, ATSs, dealers

Ways crypto exchanges are different from a traditional exchange:o Offer direct access to investors – no dealer/broker between exchange and investor

Requires more understanding from investors – no professional help Financial Stability Board

o Looks at overall global financial system – macroeconomic issueso Will only get concerned about crypto if it becomes so large/volatile that it could affect global financial systemso Finally reaching levels where the FSB is taking notice

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Signaling to govts / SCns that they need to get on top of these areas If not adequately regulated, it could affect peoples’ trust in the overall financial system

o Different markets need to define cryptoassets/currency in the same ways competition amongst regulators to see who can be most responsive and attract investors/issuers/platforms

Virtual Markets Integrity Initiative Report (NY AG) Significant risks

o Hackers can infiltrate platforms and steal cryptocurrency, with no recourseo Delays and outages are common, leaving investments temporarily illiquid in a volatile marketo Deceptive and predatory practices, market manipulation, insider abuse

The Initiativeo Inquiry into the policies and practices of virtual trading platformso Most platforms participated – want to be seen as legit

3 broad areas of concern for virtual markets as a wholeo Various business lines and operational roles of platforms create potential COIs

Often serve in multiple roles, which would be restricted/monitored in traditional environment Employees who may have inside information (e.g. customer orders) often hold virtual currency themselves

o Platforms have yet to implement serious efforts to impede abusive trading activities Lack market surveillance capabilities to ID and stop suspicious trading patterns High concentration of virtual currency in hands of a relatively small # of traders – easy for them to abuse

the systemo Protections for customer funds are often limited or illusory

1 – Jurisdiction, acceptance of currencies, and fees How customers sign up with trading platforms, access controls in place Difficult for traders to find info about platforms, and compare them

o E.g. jurisdiction/location, fess structureo Some do not accept fiat currency

2 – Trading policies and market fairness Trading rules in place at platforms, and fairness for retail investors

o Order types, availability of credit (margin trading)o Measures taken to address market manipulation and abusive practices

Customers access platforms directly, as opposed to through registered brokers – requires customers to understand how each platform works, and monitor performance without professional guidance

May encourage/advantage certain types of sophisticated, professional trading activity All allow automated trading – enhanced ability to manipulate markets Industry has yet to implement market surveillance or halt-trade capabilities

3 – Managing conflicts of interest Potential conflicts may arise between interests of platforms, employees, and customers Platforms may take cut from currencies they list; owners/investors/employees in a trading platform may trade in virtual

currency themselves, using non-public info to inform tradeso Should adopt policies prohibiting employees from trading on inside information

Platforms engage in proprietary trading – if there is no counterparty to fulfill an order, the trading desk of the platform may act as market maker

o Trying to promote liquidity on the platform – increase chances that an order will get corresponding buy/sello In traditional markets, broker-dealers that do this are subject to heavy regulation to ensure people aren’t taking

advantage of clients – AG is concerned about lack of transparency in this area

4 – Security, Insurance, and protecting consumer funds Use of independent auditing and security testing by platforms How to safeguard funds through insurance and other means

5 – Access to customer funds, suspensions, and outages Policies for suspending trading activity, including customer notification in event of outages or maintenance

Cryptocurrency Offerings CSA Staff Notice 46-307 Not an investor protection notice trying to educate issuers on what the issues may be if they use crypto for an asset raise Investor protection concerns due to issues around volatility, transparency, valuation, custody, and liquidity

o Other concerns: the use of unregulated crypto exchanges, unethical practices or illegal schemes – consumers may not understand products

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Securities laws apply if person selling is within Canada, or there are Canadian investors

Rules: Securities may only be sold after a receipt has been received from a securities regulation authority for a comprehensive

disclosure document called a “prospectus”, or pursuant to a private placement in reliance on a prospectus exemption Businesses and individuals in the business of trading in or advising on securities must be properly registered or rely on an

exemption from registration A platform that facilitates trades in coins/tokens that are securities may be a marketplace and need to comply with

marketplace requirements or obtain an exemption from such requirements

Crypto Exchanges: Online, allow investors to buy/sell crypto using fiat money, or another crypto Prices may differ significantly among exchanges – enable arbitrage that does not occur in efficient markets Exchange must determine whether it is a marketplace In Canada, there are no crypto-trading platforms recognized as an exchange, or authorized to act as a marketplace

dealer

ICOs Generally used by start-ups to raise money through the internet Businesses often market these as “software products”, but in reality, they should be considered securities – substance over

form Every ICO is unique

o E.g. purchasing credits/coins to play video games on a platform vs coins whose value is tied to future profits/success of a business

Investment Contract Test (Pacific Coast Coin Exchange v OSC):o Is there an investment of money with an expectation of profit?o Is there a common enterprise?

Between the investor and the promoter, not necessary to have commonality between the investors themselves

Common enterprise: one in which the fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment of third parties

o Are the profits to come solely from the efforts of others? The efforts of others upon which the investor relies to realize profits must be the undeniably significant

ones, those essential managerial efforts which affect the failure or success of the enterprise.  Must meet prospectus/OM/exemption requirements

o Whitepapers do not meet the prospectus requirements Must meet registration requirements if they are trading in securities for business purpose (business trigger)

o Soliciting broad base of investors, incl. retail investorso Using the internet to reach large # of peopleo Attending public events to actively advertise coins/tokenso Raising significant amount of capital

Securities Law Implications for Offerings of Tokens CSA Staff Notice 46-308 “Utility token” – has one or more specific functions, such as allowing holder to purchase services or assets based on

blockchain technologyo Often involve securities, even if the tokens have utility functionso Must look at overall purpose of the coin

When an offering of tokens may or may not involve an offering of securitieso Could involve distribution of investment contract

See def above – focus on economic realitieso or tokens are issued under another enumerated branch of the def of security

see ch 3.03 Offerings of tokens that are structured in multiple steps

o First step – distribute rights to future tokens (similar to a SAFE, called a SAFT)o Second step – token is delivered

This is a security, despite possible utility

Evolution of the Regulation of Derivatives - Global Financial CrisisDerivatives: an agreement where the price, value, delivery or payment obligation is derived from an underlying interest.

Derivatives are used to transfer the financial risk that an underlying interest poses to a company, an institution or an individual to another entity that is willing to accept the risk

o Used as speculation to profit or to hedge risk 46

Derivatives Regulated as Securities in BC In other places, they are regulated differently In BC they fall into the definition of securities under security definition (n) futures contract or option but is not an investment

contract OR they fall under investment contracts (Over the counter derivatives (OTC)) Distinction between derivatives that are offered on an exchange (performance is guaranteed by a clearing agency)

exchanges have rules (access requirements). Trading on exchanges did not cause problems during the financial crisis, as there is more transparency here. Exchange contracts under BC act are subject to registration requirements Prospectus requirements only apply to securities not to exchange contracts when entering into the exchange contract, you

know all the terms of the contract (ex: interest rate options, foreign exchange options, provides all the info about that contract, don’t need the prospectus)

Derivatives that are Securities: 1. Options: Contract that entitles (but doesn’t oblige) you to buy a specific security at a specific future date at a specific future

price. decision buy depends on how well that security is doing (if price goes up, then you’ll want to exercise the option, or sell it because the value has gone up)

2. Swap: parties agree to exchange obligations. Ex: credit default swap = one-time payment for the other party to assume an obligation of yours. You owe money and you pay a third-party money so that if you ever default on the loan, the 3rd party will pay off your loan. It acts like insurance (you could pay it out and never use it, but you buy it to hedge your risk). One party is managing risk, the other is assessing that risk- Different from insurance b/c you don’t have to have an asset to insure and it isn’t limited to the price of the asset. - Agreement between parties each assessing risk in a different way. Functions b/c enough parties in the system willing to

take on risk for a benefit and people looking to unload their risk.

Derivative trades are executed: 1. On an exchange

o Contracts are standardized and traded anonymously through an electronic trade‐matching engine. The trading of derivatives on regulated exchanges did not experience any significant failures during the recent financial crisis

o Once a trade is executed on an exchange, the information relating to that trade is sent to a clearinghouse so that the trade can be cleared

o On an exchange, the trading is anonymous, but you have the Central Counterparty Clearing House (CCP) Members of exchange have to post collateral to the CCP so that they can cover any defaults. This is

intended to neutralize the loss among all the parties. o Process of novation = clearinghouse then inserts itself between the buyer and the seller, becoming the counterparty

to each o Central counterparty mitigates counterparty credit risk between both original counterparties o Should a clearing member nonetheless fail in meeting its obligations, the use of margin reduces the exposure of a

particular position in the CCP, and the capital committed by clearing members provides additional insurance. 2. OTC: through bilateral negotiation

o Negotiated bilaterally between two counterparties who each take on the credit risk associated with financial exposure to the other

o All aspects of the contract are negotiable, but it is highly standardized, but it is still subject to modification by the parties

o Each party is assuming the risk of default by the other o Agreements are tailored to assume each parties’ needs o No transparency, nobody was overseeing this o Subject to exemptions to registration and prospectus exemptions o OTC was seen as commercial contract for commercial purposes only OR entered into by sophisticated parties that

didn’t need sec reg protections trades by qualified parties were exempt o Hedging business risks: foreign exchange derivative, which would even out your risk of operating business in

multiple countries with different currencies Also farmers: growing wheat, lock in price of wheat at X and then you know how much money you’ll

make at the end of the season Used to manage risk in regular business affairs, don’t function the same way as other securities so they had

been carved out of regulations o Exemption for futures contracts that are not exchanged that contain a requirement for physical delivery (make or

take) with no possibility of settling with cash. o Exemption for foreign exchange contract, buying foreign currency that would be resolved in less than 3 days (short

order).

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Risks of DerivativesRisk

The derivatives markets allow entities to manage risk exposure by divesting risks that they did not want to retain or accepting risks that they can tolerate

Counterparty Risk OTC derivatives contracts are predominantly bilateral by nature; each party is subject to the terms of its contract which

typically only provides recourse against the other party for performance of the contract Counterparties build up claims against one another based on the changing value of the underlying asset This results in counterparty risk (also referred to as counterparty credit risk): the risk that a party to a contract may fail to

fulfil its obligations under the contract, such as its payment and delivery obligations. o Exacerbated by the opaque nature of OTC derivatives markets

Most common risk management tool for institutional derivatives trades is the posting of collateral, to cover amounts owing after bilateral netting has taken place

Transparency Risk Exchange‐traded derivatives provide transparency in terms of price discovery and publicizing trades, whereas OTC

derivatives markets are more opaque Hard to properly price positions and value the associated risk, and the ability of regulators to identify build‐up of risk in the

system Lack of market transparency can lead to the drying up of liquidity, with market participants unwilling to trade with each other Makes price discovery very difficult and affects the efficiency of establishing fair pricing, particularly where certain parties

do have an information advantage May also facilitate market abuse, including price manipulation, insider trading, and cornering, Also prevents regulators from being able to monitor and identify the potential build‐up of risk in the market and address

potential systemic risk issues before such risks can have a destabilizing effect on the overall market. Lack of information on who is participating in OTC derivatives trading and their positions and exposures, and lack of

information on the types of instruments traded and the underlying or reference entity, limits the ability of regulators to identify built‐up risk in the system and take appropriate steps to manage such risk.

Systemic Risk Counterparty risk and transparency risk, illustrate the large potential for systemic risk in the OTC derivatives market Default or even downgrade of one significant party can have consequences for the creditworthiness of its counterparties The lack of transparency in derivatives markets contributes to systemic risk because:

o (i)  market participants cannot accurately measure their counterparties’ exposures; and o (ii)  regulators cannot identify areas or markets of concentrated risk, or systemically important entities before it is

too late to prevent a shock in the capital markets.

Other Risks Operational risk in OTC derivatives trading arises from the potential losses that can result from human error or from the

failure of trading systems and controls Market risk, which is the risk of the fluctuation in value of an investment due to market pressures.

Financial Crisis and Global Response No transparency so it was impossible to tell that there was a buildup of interest in these derivatives OTC derivatives played a role in the exacerbation and in the difficulty that regulators faced in understanding the scope of the

crisis as well as the interactions b/w market participants (although not a primary cause) Complexity of OTC derivatives contracts was compounded by lack of transparency within OTC derivatives market – making

it challenging for regulators to identify risk before and during crisis B/c of the credit default swaps between a bank and an insurance company, they could not allow all the institutions to fail as

there would be contagion to endless other institutions All parties are now looking at their counterparties and don’t know how to evaluate the risk in entering into agreements with

them. Cannot evaluate their counterparties or their agreements with other parties. This caused a halt on these agreements and other agreements as well (short term loans for example). Businesses were hesitant to enter into agreements as they could not determine the risk, this caused a halt in business

All of these resulted in G20 agreement between countries on how to deal with this

CSA Options and Recommendations Geared Towardi) strengthening our financial markets and managing specific risks relating to OTC derivativesii) implementing the G20 commitments made at the Pittsburgh Summit in 2009 and reaffirmed at the Toronto Summit in

June 2010 in a manner that is appropriate for our markets;iii) harmonizing regulatory oversight to the extent possible with international jurisdictions in order to facilitate global

markets and limit the potential for regulatory arbitrage (profiting from imbalance in price) and a flight of capital; and48

iv) avoiding causing undue harm to our markets.

Why do we need to improve derivatives market? Derivatives markets are essential to global economy as they facilitate the transfer and mitigation of risk that could potentially limit a number of important economic factors including ability of manufacturers to enter into long-term contracts or corporations to do business in multiple currencies. Parties entering into derivatives transactions for speculative purposes (expectation of profit) are necessary as they provide liquidity and accept risk of counterparties (who wish to divest risks they cannot tolerate) .

G20 Countries Identified key risks that hadn’t been identified before

1. Lack of transparency 2. Significant market participants were at risk of default b/c they did have capital or collateral requirements

G20 Commitments: “All standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements.”

Transparency: Regulators needed information about accumulation of risk to manage it Counterparties didn’t have enough info to manage their own risk There was interconnection so you can’t leave it to bilateral parties Difficult b/c of the interconnectedness of these derivatives so you needed international co-operation Want to evaluate over time what the risk is, not wait until point of failure Avoid failure of integral institutions, they need to manage their risk better and have more assurance that they will better

manage their risk To Address Transparency, G20 requires:

o All derivatives be reported to trade repositories (provide aggregated info about derivatives and provide regulators about each derivative)

o Certain standardized derivatives would need to be traded on exchanges or other electronic platforms

Significant market participants were at risk of default b/c they did have capital or collateral requirements To address this risk G20 requires:

o Clearing of standardized derivatives by using a central counterparty (neutralizing the loss) o Mandatory requirements for how much collateral you have to post

Since this agreement, IOSCO has set out high level principles and set guidelines, and IMF has also set standards Adopted by Sec Regulators and other regulators Conduct of Canadian market participants was not the cause of financial crisis, weren’t trading those products or doing that

risky behaviour. It would be harmful for Canadian market to be have these strict regulations imposed there was a strong push back

o Agreements for the regulations: Internationality of the market and the need for consistent regulation. Don’t want to be a haven for these

risky trades Putting Canadian market in problematic spot if they can’t enter into derivatives trades with people in other

countries (ex: US and EU) Want to prevent these problems from occurring

BC has adopted rules to require reporting derivatives to trade repository Mandatory clearing and collateral if it is not through central clearing agency

Trade Repositories and Derivatives Data Reporting: MI 96-101 Requires trade repositories to be recognized, they will be a market intermediary playing an important role of gathering data

and disseminating it o Sets requirements around conflict

Requirement for everyone to report derivatives to the trade repository. Each derivative has two counterparties. Want to have the trade reported and any changes.

Don’t want both parties to report it, if there is a CCP they will report it. If one party is a dealer, they will report it. Trying to balance the regulatory requirements benefits with the costs. Must have an agreement in writing as to who will report it Every person has to have an identifying number (LEI). Also have to have a product identifier for each derivative type There are exclusions (Part 5 of 96-101)

o Commodity, and exposure to derivatives is less than $250million, you don’t have to report

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o Affiliated entities o Nonresident derivative dealers and non-local counterparties

Three recognized Trade Repositories in Canada

Under Transparency Certain Standardized Derivatives must be traded on exchanges or electronic platforms If you have post trade transparency by reporting to trade repositories and you have mandated central clearing, is there an

additional benefit of requiring the use of an exchange? o Must balance against businesses being able to hedge their risk at a lower cost (just bilateral contract) o This is still being considered o Could be that the risk is already being addressed by other measures

Central Counterparty Clearing Houses (CCP)Risk default by significant parties

Requirement for CCP Creates efficiencies Need to find balance for requirements you put on the CCP Requirements on who can participate on CCP, need to have the ability to manage the risk and have the money Requires that they post initial margin (collateral that they post at the outset) Collateral is evaluated daily (variation margin) If you default CCP will use the collateral from the fund to pay the other party, can require an increase in collateral

94-101 Mandatory CCP of derivatives Only interest rate swaps and Forward Rate Agreements are subject to this instrument. All other types of derivatives are subject to capital and collateral requirements

o Rules will also look at the types of eligible collateral o Don’t want the rules to be too prescriptive

Bilateral Clearing: Currently, bilateral transactions in the OTC derivatives market are cleared between the two parties to the trade If a derivatives counterparty were to default, all open derivatives positions and their related gains or losses would be

terminated and netted Close‐out netting gives legal certainty that the bankruptcy trustee will be unable to accept profitable transactions and disclaim

unprofitable transactions The “main problem with bilateral clearing is that is has resulted in a proliferation of redundant overlapping contracts,

exacerbating counterparty risk and adding to the complexity and opacity of the interconnections in the financial system”.

Clearing by CCP The role of a CCP is to interpose itself between counterparties to derivatives contracts traded in one or more markets,

becoming the buyer to every seller and the seller to every buyer. Potential to reduce risks to market participants by imposing more robust risk controls on all participants and, in many cases,

by achieving multilateral netting of trades Enhance the liquidity because it reduces risks to participants A CCP is designed to be transparent both through its rules and procedures concerning the flow of funds and methodologies

for valuations, as well as managing the default of a member

Risks & Concerns: Tie‐Up of Capital: could reduce liquidity in the entire market. Market participants would be forced to either divert resources

to meet large margin and collateral requirements or decide not to use derivatives to hedge business risks. Collateral Management: permit a market participant to calculate its total margin and collateral requirements across all

positions held with the dealer. This collateral management function currently offered by dealers is not easily transposed to a CCP model

Valuation: For margining processes, a CCP must be able to establish a settlement price. To be transparent, calculations may be complex, it does not benefit from the same price transparency as for publicly traded derivatives.

Other Concerns: race to the bottom, critical mass of participation, maximizing efficiencies, access by smaller participants, issues with disclosure, model risk

Clearing Options: 1. A general obligation to clear all OTC derivatives, or 2. An obligation only to clear derivatives trades that are appropriate for clearing, such as standardized derivatives which

have sufficient liquidity and would not threaten the risk model of a CCP Legislative changes will need to be made compelling the clearing of OTC derivatives that are not exempt, and regulators will

need rulemaking authority to implement the regime and avoid regulatory arbitrage

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The first option is to mandate that all OTC derivatives be cleared by a CCP with broad exemptive relief provided where the relevant market regulator believes that central clearing is not appropriate

o This option may force the CSA to define exemptions before international standards have been developed o It presupposes clearability and offers regulators less flexibility and does not provide industry with upfront certainty

as to which contracts must be cleared. The second option is to mandate central clearing of OTC derivatives that are determined to be appropriate for clearing and

capable of being cleared o Regulators would identify OTC derivatives appropriate for clearing and capable of being cleared. o Regulators should develop anti‐evasion rules so that OTC derivative contracts are not intentionally customized to

avoid mandatory clearing

Trade Repositories A trade repository centrally collects and maintains the records of OTC derivatives trades, providing a central source of

transaction and position data for a given OTC derivatives market. o It collects data, derived from centrally cleared or bilateral transactions as inputted by parties to a transaction.

Trade repositories can increase transparency o i)  increase market transparency through the public dissemination of aggregate data on open positions (for example,

the total notional value of outstanding credit derivatives denominated in Canadian dollars) and trading volumes on a periodic basis;

o ii)  increase post‐trade transparency (for example, by publicly disclosing price information on reported OTC derivatives); and

o iii)  increase regulatory transparency by providing regulators with periodic reporting and enabling regulators to access information through ad hoc requests (for example, for enforcement purposes).

Recommendation – Canadian provincial securities laws be amended to mandate the reporting of all derivatives trades by Canadian counterparties to a trade repository – real time reporting requirements should be required

RecommendationsElectronic TradingProvincial regulators should obtain regulatory authority to mandate electronic trading of OTC derivative products – such power should be only used to mandate the electronic trading of those products which are capable of being traded on an organized trading platform (products that are substantially standardized and liquid) and which pose a systemic risk to the market.

Capital and CollateralUsing a risk-based approach by imposing capital and collateral requirements to reflect appropriately the risks and entity assumes – should implement higher capital and collateral requirements for non-centrally cleared bilateral agreements as compared to transactions involving a CCP, subject to exceptions

In general terms, capital requirements mandate the amount of assets that an entity must have available to meet its obligations. Also, from a regulator’s point of view, capital requirements may be used as a tool when assessing the integrity of market participants. A failure to maintain regulatory capital may be a signal or warning of potential problems with a market participant.

Collateral is a pledge of assets by a party to secure their obligation to another party. Collateral typically takes the form of cash or liquid securities.

Capital requirements should be proportionate to the risks that an entity assumes and ideally not provide any category of entity with a competitive advantage – capital requirements should not constitute penalties – In all situations, bilateral arrangements should trigger higher capital or collateral requirements than transactions that utilize a central counter-party, subject to exemptions for non-financial end- users. This risk-based approach will provide incentives to encourage and reward standardization of contracts and use of a CCP.

End-User ExemptionsEstablishing exemptions from the regulatory proposals outlined in this paper for defined categories of end-users. The additional regulatory requirements being proposed may make it difficult and possibly prohibitive for some end-users to continue to trade in OTC markets as part of their hedging of business risk – any end-user exemptions to rectify this need to be narrowly drafted

Enforcement, Market Abuse, SurveillanceProvincial regulators should obtain authority to conduct surveillance on OTC derivatives markets, develop robust market conduct standards applicable to OTC derivatives trading and to obtain authority to investigate and enforce against abusive practices in the OTC derivatives marketplace. AIM in regulating derivatives markets is to provide protection for investors from unfair, improper or fraudulent practices while maintaining the integrity of the market

Segregation of CapitalFurther analysis required before making a recommendation regarding segregation of capital in Canadian OTC derivatives context

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AIM of segregating client assets is to ensure clients have priority over unsecured creditors in the event of a bankruptcy and the client is able to recover the assets pledged as collateral/margin in an orderly and expeditious fashion

Insider Trading Definition: Purchasing or selling of securities by someone that has a special relationship with a reporting issuer

o Past: justifiable perk available to corporate insiders Difference between Illegal and Legal IT:

o Legal IT regulated by disclosure – issuer has the obligation to report who their insiders are and the insiders must disclose their trades

o The insider’s (or special relationship person’s) state of knowledge at the time of the impugned activity. Common Law:

o Acting in the issuer’s best interests includes not realizing a profit by use of knowledge or information acquired as a director (Regal (Hastings))

o Knowledge acquired by a director or officer in the course of service is under a trust obligation and cannot use the knowledge even after leaving the issuer (Boardman v Phipps)

Difficulties with imposing the CL fiduciary obligation (Peoples Department Store)o 1) may be difficult to determine when a director or officer has abused his positiono 2) while directors and officers clearly owe fiduciary duty to the issuer at CL, it is less clear whether majority

shareholders (another type of insider), owe such a dutyo 3) at time of statutory reform, this was seen as a deficiency in need of correction

2004: criminal prohibitions added to the CC Kimber Report: improper if the insider profits by using confidential information when trading; otherwise ok to trade

o Lessen public confidence in the market place investor protection and efficient capital marketso Ideal securities market should be open and free and prices to be based on full knowledge

Policy: Fairness Risk-free trades are not allowed because they undermine this basic concept Therefore, the IT prohibition is based on a theory of “equal access” to information. Insiders should be required to report if

they are in a position to receive or have access to MNPI (material non-public information) before it is disclosed and/or are in a position to have control over the issuer

Critiques: If IT allowed, share prices might more correctly reflect the value of the securities because to some extent would reflect ALL

information // These arguments have not carried the day in Canada (nor would they go far as a defense) In most other markets, it’s buyer beware, so why is IT illegal in securities? Why complicated: How much the fine is depends more on how much money is involved rather than how culpable an

individual was (e.g. 9 year sentences); Scalping – easier to go after insider traders than people who caused financial crisis; Never person at the top of insider trading who get big sentence, it is the lower down people who can be scapegoated; Canada is lenient on insider trading – difficult to prove as use circumstantial evidence.

Costs: IT regime imposes a heavy compliance burden on the predominantly ethical corporate insiders in an attempt to deter or detect the unethical few

Legal Insider Trading (Reporting Issuer) Insider Trading Reports (ITRs) filed on SEDI

o Discourages insiders from using material non-public information for personal gain, as there will be a public recordo Increase investors’ confidence in integrity of marketso Increase market efficiency by providing information concerning trading activities of insiders of an issuer, and, by

inference, the insiders’ views of their issuer’s prospects

Criteria: 1) Reporting issuer; 2) Person is an insider; 3) Does not have material non-public information; 4) If a “reporting insider”, files an insider trading report

NI 55-102 → prima facie all insiders must file an “insider profile” on SEDI + an ITR as a signal to the market

[A] INITIAL AND SUBSEQUENT INSIDER REPORTInitial and subsequent insider report (not MF) (BCSA 87): an insider of a reporting issuer must, in accordance with the regulations,

(a) file reports disclosing the insider’s (i) beneficial ownership and (ii) interest in, and (b) make other prescribed disclosure.

[1] Definition of “reporting issuer” (BCSA 1(1)): Means an issuer that (b) has filed a prospectus or statement of material facts and the Exe DIR has issued a receipt for it under this Act (see:

(c)-(f)). “issuer” means a person who (a) has a security outstanding, (b) is issuing a security, or (c) proposes to issue a security

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[2] “insider” (BCSA s.1(1)) meansa) Director or officer of an issuer;b) Director or officer of a person that is itself an insider or subsidiary of an issuer,

o “subsidiary” means an issuer that is controlled by another issuerc) A person that has beneficial ownership of, or control or direction over, directly or indirectly (or some combo), securities of an

issuer carrying more than 10% of the voting rights attached to all the issuer’s outstanding voting securities, EXCLUDES: securities held by UW during a distribution

d) Insider of itself: an issuer has purchased, redeemed or otherwise acquired a security of its own issues, for so long as it continues to hold that security,

e) a person designated as an insider by s 3.2 (commission considers it in public interest)f) a person that is in a prescribed class of persons regulations NI

[3] Does not have material non-public information

[B] “Reporting Insider” (NI 55-104 s 1.1(1) “reporting insider”) means an insider of a reporting issuer if the insider isa) the CEO, CFO or COO of the RI, of a significant SH of the RI or of a major subsidiary of the RIb) a DIR of “”c) a person or company responsible for a principal business unit, division or function of the RId) a significant shareholder of the RIe) a significant SH based on post-conversion beneficial ownership of the RI’s securities and the CEO, CFO, COO and every

director of the significant SH based on post-conversion beneficial ownershipf) a management company that provides significant management or administrative services to the reporting issuer or a major

subsidiary of the reporting issuer, every director of the management company, every CEO, CFO and COO of the management company, and every significant shareholder of the management company;

g) an individual performing functions similar to the functions performed by any of the insiders described in paragraphs (a) to (f);

h) reporting insider of yourself: the reporting issuer itself, if it has purchased, redeemed or otherwise acquired a security of its own issue, for so long as it continues to hold that security; or

i) any other insider that (power or influence)i. in the ordinary course receives or has access to information as to material facts or material changes concerning the

reporting issuer before the material facts or material changes are generally disclosed; andii. directly or indirectly exercises, or has the ability to exercise, significant power or influence over the business,

operations, capital or development of the reporting issuer;

Related definitions “Major subsidiary”: subsidiary whose assets or revenue are 30% or more of the parent’s consolidated assets or revenue “Significant shareholder”: one with direct or indirect beneficial ownership of, or control or direction over (or some

combination therefor) more than 10% of an issuer’s voting securities

Reporting requirement (NI 55-104 s 3.1): Insider must file insider reports under this Part and Part 4 in respect of a reporting issuer if the insider is a reporting insider of

a reporting issuer Initial report (NI 55-104 s 3.2): reporting insider must file an insider report in respect of a reporting issuer, within 10d of

becoming a reporting insider, disclosing the reporting issuer’so (a) beneficial ownership of, or control or direction over, whether direct or indirect, securities of the reporting issuer

ando (b) interest in, or right or obligation associated with, a related financial instrument involving a security of the

reporting issuer Subsequent report (NI 55-104 s 3.3): reporting insider must within 5d of any of the following changes file an insider report

in respect of a reporting issuer disclosing a change in the report insider’s (a) or (b) E.g. they traded

o “Related financial instruments” (BCSA 1(1) and NI 55-104 1(1) means: (a) an instrument, agreement, security or exchange contract the value, market price or payment obligations

of which are derived from, referenced to or based on the value, market price or payment obligations of a security, or

(b) any other instrument, agreement or understanding that affects, directly or indirectly, a person's economic interest in respect of a security or an exchange contract;

o 55-102F2 Insider Report: insider must disclose the nature of its ownership – whether it owns, controls or directs the securities that are subject of the transaction being report; # and value of the securities acquired or disposed of, date of the transaction, and the closing balance of the securities held by the insider

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o Insider Profiles (NI 55-102 s 2.1): shall be filed, Form 55-102F1 – insider’s relationship to the reporting issuer, including date became an insider, address, telephone number, email

o Issuer Profile Supplements (NI 55-102 s 2.2): shall be filed, Form 55-102F3 – including info about the reporting issuer’s classes of securities, coordinates for an “insiders affairs contact”

Exemptions to the ITR Requirements (NI 55-104)1) Automatic Securities Purchase Plan: for director or officer acquires securities through an ASPP

o New ITR deadline: 5 days after disposition; if not yet disposed of or if through specified dispositions, the delay may be until March 31 of the next calendar year: Part 5, s 1.1

2) Issuer Events: stock dividend, stock split, consolidation, amalgamation, reorg, merger or other similar evento Delay: report the change with next ITR they file: Part 8o Issuer Event Report: within 1 business day, Form 55-102F4: 55-102 s 2.4(1)

3) Issuer Grants as Compensation – stock or stock optionso If compensation plan previously disclosed on SEDAR, and reporting issuer filed req issuer grant report, director or

officer need not file an ITR within 5 days: NI 55-104 s 6.2o Delay (in such cases): ITR may be delayed until 5 days after disposition OR if not yet disposed of or if through

specified dispositions, the delay may until March 31 next calendar year: 55-104 6.4(2)4) Normal Course Issuer Bids and Publicly Disclosed Transactions

o Reporting issuer that has purchased, redeemed or otherwise acquired any of its own securities is a reporting insider itself normally ITR within 5 days

o Delay: if “normal course issuer bid”: ITR delayed until 10d after end of month in which the acquisition occurredo Normal course issuer bid: purchase in secondary market, fewer than 5% of the class or classes of the issuer’s

outstanding securities within a 12m period, or one that is conducted in accordance with the rule of a recognized exchange: 55-104 s 1.1(1)

5) Insiders of U.S. Issuerso Exempts provided the comply with US insider trading reporting: NI 71-102, s 4.12

General Exemptions: e.g. If a reporting insider has no beneficial ownership, or control or direction over, any security of the issuer, or any interest in a related fin instrument, that RI has no filing obligation (NI 55-104 s.9.4)

Discretionary Exemption: under BCSA 91, the regulator may grant a discretionary exemption to insiders where it would not be prejudicial to the public interest to do so; insiders may apply for a discretionary exemption.

o Test: access to specific undisclosed informationo Re British American Oil Company Ltd. “…in the complex of companies there are only certain groups of

individuals who are privy to what might be viewed as executive or policy knowledge which would affect their market decisions” // Held: Everyone who fit w/in the definition of “insider” but was not privy to material non-public info was granted an exemption from ITR req’s.

Halt Order (BCSA 89(1)): If the commission thinks there is something sketchy going on, b/c of insider trading, they can cease trade securities. Can do so on emergency basis w/o opportunity to be heard and hold it for 15 days.

1) a) commission or Executive Director considerso i) unexplained and unusual fluctuations in volume or market priceo ii) becomes aware of info, other than info filed, that when disclosed to public may cause (a)o (iii) considers that they may have been a material change in the business or ops of an issuer that, when disclosed,

could significantly affect the market price of a security issuedo iv) circumstances exist or are about to occur that could result in other than an orderly trading and

1) b) commission or Executive Director considers it to be in the public interest 2) notice must be sent immediately to the issuer whose securities are affected by it 3) if on an exchange in BC, must immediately send written notice to the exchange, and the order becomes effective 4) after providing opportunity to be heard, may extend order under subsection (1) until hearing held + decision

Consequences of failure to file insider reports (BCSA 155): Issuer has committed an offence and may be liable, under s. 155(2), to a fine of not more than $3 million, or to no more than 3 years imprisonment, or both. The regulator may also make an order for compliance under s. 157(1), or an enforcement order, including a cease trade order, under s. 161.

Illegal Insider Trading/Tipping/Recommending BCSA 57.2(1): in this section, “issuer” means (a) reporting issuer, or (b) any other issuer whose securities are publicly traded

[1] Illegal Insider Trading ( BCSA 57.2(2) ): Elements (BOP)

1) Person is in a special relationship with the [reporting] issuer2) Enter into a transaction involving a security of an [reporting] issuer3) Knows of a material fact or material change with respect to the [reporting] issuer

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4) That has not been generally disclosed

[2] Illegal Tipping ( BCSA 57.2(3),(4) ): 1) an issuer or a person in a special relationship with an issuer must not inform another person of a MF or MC with respect to

the issuer unlessa) the MF or MC has been generally disclosed, orb) informing the person is necessary in the course of the business of the issuer or of the person in the special

relationship with the issuer

Elements (BOP)1) an issuer or person in a special relationship with a [reporting] issuer2) must not inform another person of a MF or MC with respect to the issuer3) that has not been generally disclosed4) informs another person, other than when is necessary in the course of business

A tippee (y) can also be a tipper if she is also in a special relationship with the issuer and passes material undisclosed information along to another person – chain can continue indefinitely

o Tipper (x) will be guilty even if the recipient doesn't know the tipper is in a special relationshipo For the tippee (y) to be guilty, he must know that the tipper (x) was in a Special Relationship OR reasonably ought

to have known about the special relationship Per s.3(e), the tippee is also in a special relationship with the issuer because he or she got material

information from someone in a special relationship + knew/ought to have known about the special relationship

ALSO CONSIDER:Takeover/Business Combo (BCSA 57.2(4)) – a person who proposes to

a) Make a TOB, as defined in s 92, for the securities of an isuser,b) Become a party to a reorg, amal, merger, arrangement or similar business combination with an issuer, orc) Acquire a substantial portion of the property of an issuer,

Must not inform another person of a MF or MC w/ respect to the issuer unlessd) The MF or MC has been generally disclosed, ore) Informing the person is necessary to effect the TOB, business combination or acquisition Exemption: where that disclosure is part of ordinary course of business E.g. One way to defend against Hostile takeover is to get another company to buy you and you might have to tell this

company material non-public info (“White Knight Defense”)

Recommending (BCSA 57.2(5)) Elements:

o If a MF or MC with respect to an issuer has not been generally disclosedo The issuer, or person in a special relationship with the issuer with knowledge of the MF or MCo Must not recommend or encourage another person to enter into a transaction involving as security of the issuer or a

related financial instrument of a security of the issuer Recommendee does not receive material non-public information and is not liable

o E.g. Just nudging someone and hinting to buy. o Walton: incl some intention to convey information with expectation that it may be relied ono Unlike w/ tipping, a person who trades after having been illegally encouraged to do so IS NOT LIABLE FOR

ILLEGAL IT because the former is not trading on possession of material non-public info, they are trading on a recommendation (Holtby)

[1]: X must be in a SPECIAL RELATIONSHIP with the reporting issuer In a Special Relationship:

s.3(a): if an “insider”, “affiliate”, or “associate” of:o (i) Of the issuer itself; (ii) Of a person proposing to make a takeover bid of the issuer’s securities; OR (iii) Of a

person proposing to become party: to some sort of business combination (takeover, merger, amalgamation, rearrangement) with the issuer, or acquire a substantial portion of its property;

“Insider” (1(1)) See above (under Legal Insider Trading) “Affiliate”: issuer is an affiliate if a) one is subsidiary of the other OR b) each is “controlled” by the same

person (1(2)(a-b)) (i.e. sister corps or one controlled by the other). “Controlled” (1(3)) – Issuer is controlled if a) voting securities are held by or for benefit (would

cover trusts), AND b) the voting rights attached to those voting securities are entitled, to elect majority of directors.

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o “Beneficially Own” (1(4)): a person beneficially owns securities that are beneficially owned by (a) an issuer controlled by that person, OR (b) an affiliate of that person or an affiliate of any issuer controlled by that person.

“Associates” (1(1)): (a) partner other than LP, (b) a trust or estate, (c) issue which you own or direct more than 10% of voting rights OR (d) a relative (if living in same house) or a spouse.

s.3(b): a person engaging in or proposing to engage in any business or professional activity with or on behalf of the issuer or with persons mentioned in s.3(a) is in a special relationship (e.g. Lawyers, accountants, experts, etc.)

s.3(c): EEs/DIRs/OFRs of the issuer or an EE/DIR/OFR of anyone mentioned in s 3(a)-(b) (e.g. EE of a person proposing a take-over)

s.3(d): Someone who knows a material fact/change of the issuer from a previous relationship with the issuer such as those enumerated under s 3(a)-(c) is in a special relationship (e.g. Just quitting your job to trade does not mean you are not in a special relationship if you got that info in that capacity).

S 3(e): Tippie Liability - Person who knows of a material fact/change, having acquired the knowledge from another person at the time when (i) that person was in a special relationship with the issuer AND (ii) they knew or reasonably ought to have known the other person was in a special relationship with the issuer (Tippee – is in a special relationship)

o i) that other person was in a special relationship with the issuer, whether under this paragraph or (a) to (d), ando ii) the person that acquired knowledge of the MF or MC from that other person knew or reasonably ought to have

known of the special relationship referred to in (i) – POTENTIAL DEFENCEo NB: Person who learns if a material fact/change from a tippee is also a tippee. o Expands the definition outwards indefinitely through the sharing of information // Judged on a “reasonableness”

standard

[2] X traded based on knowledge of MATERIAL INFOMateriality in IT cases is to be determined objectively, from a reasonable investor’s perspective – requires application of judgment and common sense (Kapusta)

A question of mixed fact and law that requires a contextual determination that takes into account all of the circumstances (Re Biovail Corp).

Caution when evaluating after the fact – assessment based on what, beforehand, would reasonably have been expected to transpire (Kapusta)

o A drastic shift in market price after dissemination may be corroboration that the information was material but is not determinative.

Timing is important. As information accumulates, a fact or change can become material. Trades before that are ok (Kapusta). Material Change: “a change in the business, operations or capital of the issuer that would reasonably be expected to have a

significant effect on the market price or value of a security of the issuer”.o Potential acquisition of the reporting issuer by Motorola in AiT;o New drilling and assay results in Pezim;

Material Fact: “a fact that would reasonably be expected to have a significant effect on market price or value of securities”. o Donnini knew information about a probable deal would reasonable be expected to have a significant effect on the

market price or value of the securities Re Donnini; Knew of deal was likely at $6.75/share; counted as knowledge of MF even though deal was not certain Traded a high volume of securities through an intermediary, which constituted IT

o Unseasonably warm weather in Danier Leather.

Tests for Materiality: Market Impact Test (legally binding in Canada): Info is material if it is reasonable to expect that the release of that

information would impact the market price of the security. This is objective inquiry (Coventree). o Reasonable Investor Test (used in the US): Material fact or change is one that would be important to a reasonable

investor in making an investment decision with respect to the relevant security. Must guard against hindsight and reliance on actual market price changes (Coventree).

Materiality of Future/Potential Info: Probability/Magnitude Test (YBM): The materiality of a potential future event depends on (a) an assessment of the

probability that the event will occur having regard to all the known or ascertainable facts, and (b) an assessment of the magnitude or significance of the change, in terms of whether the info would be viewed by reasonable investors as important info for making a decision to buy, sell, or continue to hold their securities (Donnini – D learned about a second financing deal in a 3-min “hallway” conversation and then traded Kasten stock based on this info // OSC Held: this was material info because negotiations for this financing were “sufficiently advanced”).

o Muddies the water with Kapusta and can find something to be material even before a handshake deal.

[3] The material info relied on was NOT GENERALLY DISCLOSEDInfo cannot be public; two parts to making information public: 56

(1) Disclosure (releasing the info through Continuous Disclosure)(2) Dissemination (ensuring the info is distributed broadly enough)

2 factors to determine whether material info has been disseminated (NP 51-201 s.3.5(2)): (a) Disseminated in a manner calculated to effectively reach the marketplace (Consider all of the relevant facts and

circumstances, including company’s traditional practices for publicly disclosing information, and how broadly investors and the investment community follow the company), and

Recommend: A disclosure model centered around news release disclosure of material info, followed by an open and accessible conference call to discuss the info in the release (s. 3.5(5)).

NB: Internet posting is likely not enough on its own (s.3.5(6))(b) Investors must have a reasonable amount of time to analyze the information (Consider circumstances in which the event

arises, nature and complexity of the information, nature of the market for the company’s securities, manner used to release the information).

Green v Charterhouse – Dissemination times will shorten with advances in tech. Recommend: an insider trading policy that provides for a senior officer to approve and monitor the trading activity

of all their insiders, officers, and senior employees and to provide for blackout periods when insiders, officers and employees may not trade (NI 51-201 s 6.10)

New tech: may help, but may also hinder those with poorer technology skills

Evidentiary Issues: Commission must prove each element of IT allegations on BofP (defense) Can be difficult to prove, requiring circumstantial evidence

Re Suman (2012): Inferences may be drawn from circumstantial evidence when the inferences “are reasonably and logically drawn from the facts established by the evidence” and the evidence is “clear, convincing and cogent.”

o Impermissible: (1) Those that necessarily assume facts that have not been proven; (2) those that are linked only tenuously or speculatively to the facts that have been proven.

o Factors: Knowledge of an undisclosed material fact may be properly inferred based on circumstantial evidence that includes proof of the ability and opportunity to acquire the information combined with evidence of well-timed, highly uncharacteristic, risky and highly profitable trades; internet searches

Holtby: reasonable inference need not be the most obvious or only inference that can be drawn from the facts proved

o Three specific instances in which inferences could be useful: (1) as circumstantial evidence as to motive; (2) as circumstantial evidence as to a certain habit or practice; (3) as circumstantial evidence of after-the-fact conduct that could reflect consciousness of guilt – Must all be analyzed as a whole.

Walton: Increased the circumstantial evidence requirement - The recommender needs to know or intend that it is likely that recipient will act on that info in some way.

o Drawing inferences ok

o Speculation not ok: drawing an inference in the absence of any evidence to support that inference or in situations where there is no “air of reality” to the inference

o Just saying generic positive stuff not enough

o Sanctions: individual and general deterrence is a legitimate consideration Sanctions must be proportionate and reasonable General deterrence does not warrant imposing a crushing or unfit sanction on an individual Severity of sanctions left cause for concern as it lacked the justification and transparency that a proper

decision-making process requires

Defenses1. CHALLENGE THE ELEMENTS - Not in a “Special Relationship” (IT and Tipping)

E.g. No special relationship if too early to be in “proposing” requirement under the definition of “special relationship” (Re Donald – D is VP. RIM has a private golf event where another VP (Wormald) is sitting next to Donald at dinner. W starts talking about Certicom that is already providing IT services to RIM. D goes out and buys Certicom shares. Months go by, and eventually RIM announces intention to take over Certicom to buy all of its shares (eventually for twice the price that D paid). // Held: This was not insider trading. ONSC could not establish a special relationship between either W or D with Certicom).

2. Not a Material Fact or Change Look above at cases re: materiality (E.g. Donnini; Kapusta) (IT and Tipping)3. Reasonable Belief in General Disclosure (BCSA 57.4(1)(2)) (IT and Tipping)

To establish this defence, the onus is on X (special relationship person) to prove that he or she had a reasonable belief that the info was “generally disclosed” (Re Gorrie: An honest but unreasonable belief is not sufficient)

Gossip and Buzz (knowledge in the industry) about a material fact is not general disclosure but may warrant a reasonable belief in general disclosure (Baffinland, ONSC 2014 – There were negotiations between B and ArcelorMittal. It was seen as

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an open secret in the mining industry that B was going to be taken over. Waheed traded in the shares// A “pretty open” secret in a specialized industry (such as mining) does not count as generally disclosed. BUT only have to establish reasonable belief, the court held that he had a reasonable belief that that the info had been generally disclosed (got off)).

s.136.2 Due Diligence Defence against special civil liability quantum provisions4. Reasonable Belief in Specific Disclosure (BCSA 57.4(1)(2)) (IT and Tipping): A special relationship person will not be found

liable if that person can prove a reasonable belief that the other party or the tippee, respectively, had knowledge of the material information or ought reasonably to have known about it (*Onus on person in special relationship).

5. No Knowledge (BCSA 57.4(5)) (IT and Recommending): Limited defence exists for a person or company in a special relationship with a reporting issuer, if that person or

company can prove it had no knowledge of the material non-public information and is not acting on recommendation or encouragement of an individual who has that info

Individual = no actual knowledge Company = a SR person that is a company will not be found liable for illegal IT if it can prove that none of its

decision-makers knew the material non-public information at the time they entered into the transaction Important to have policies and procedures NP 51-201 57.4(5) “a person that is not an individual”, for individuals, just elements

6. Acting without Using the Information (BCSA 57.4(4)) (IT): A special relationship person will not be found liable for illegal IT if it can prove it entered the transaction (a) as agent for a party who made an specific unsolicited order to trade OR (b) agent under specific instructions that the agent solicited from the principal before obtaining the knowledge OR (c) as agent or trustee for another person b/c of that other person’s participation in an automatic plan, OR (d) as agent or trustee for another person to fulfill a written legal obligation of the other person

7. Tipping in the “Necessary Course of Business” (Tipping) (NP 51-201 s.3.3) NP 51-201: Idea of selective disclosure where a company discloses MNPI to one or more individual companies and not

broadly available to the investing public Test: whether a particular disclosure is being made in the necessary course of business is a mixed question of law and fact

that must be determined in each case and in light of the policy reasons for the tipping provisions. Tipping is prohibited so that everyone in the market has equal access to, and opportunity to act upon, material information: NP 51-201 s 3.3(1)

o Royal Trust Co: Disclosing information to major SH to defend against a Take-over bid is not held to be in the necessary course of biz.

o Re George: Sharing biz of the firm with analysts to tell others in the industry is not in the necessary course of biz. NCOB EXCEPTION would generally cover communications w/ (NP 51-201 3.3(2)) - (a) Vendors, suppliers, (b) EE,

OFRs, and board members, (c) lenders, legal counsel, auditors, UW’s, financial and other professionals (d) parties to negotiations (e) labour unions and industry associates, (f) Government agencies and non-gov’t regulators (g) credit rating agencies (provided that the info is disclosed for purpose of rating debt securities)

o Best practice to have these parties sign NDAs and they cannot trade on the info BUT not communications to analysts, institutional investors or other securities market professionals (s.3.3(5)) 3.3 (6) analyst “brought over the wall” to act as advisor in specific transaction – becomes person in special relationship –

prohibited from further informing anyone of material undisclosed information they learn in this advisory capacity 3.3(7) disclosure to credit rating agencies generally NCOB

o Generally, objective is a widely available publication of the ratingo Analysts provide research to their clients – work for investment dealers in business of buying and selling

3.4 if disclose material non-public information in NCOB – should ensure recipients understand they cannot buy or sell the issuer’s securities until the information is generally disclosed, and also cannot pass the information onto anyone else (other than in NCOB)

Confidentiality agreement on its own is not enough, must still be NCOB 8. Tippee Unaware that Tipper was a Special Relationship Person (IT and Tipping) – tippee cannot logically be liable either for

illegal IT or for tipping another person, if the original tippee did not know and could not have reasonably known that the original tipper was a special relationship person – original tipper still liable

9. Reasonable Mistake of Fact Regarding Materiality (IT) To establish this defence, the onus is on X to prove that he or she had a genuine reasonable belief that the information in

question was not material (recall: IT is a strict liability offence – definition of “material fact” is subjective, not objective, in this context) (Lewis v Fingold).

o Did he believe that this information would have a substantial effect on the company’s share price? o Onus on A to show on a BoP that she had a reasonable belief that the information did not constitute a material fact

E.g. Successful: Lewis v Fingold, 1999 – F worked for Cineplex. F started selling Cineplex shares (he knew the results were not what they meant to be, i.e. share price was higher than it should be given the company’s performance). F argued that he had a reasonable belief that he did not have access to material info. He genuinely believed in the owner that everything was going to work out in the end // Held: Found he did have a mistaken belief

E.g. Unsuccessful: R v Harper, 2000 – Mining co was conducting geochemical soil survey plus trench digging. Initial results were very favourable and disclosed immediately by the issuer. Secondary results were much less favourable, were not immediately disclosed, Harper sold 227,600 shares prior to the disclosure in knowledge of the MNPI // Held: 1) the results

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were a material fact; 2) neither genuine nor reasonable belief; bad selling + press release smells bad; ignored the experienced geologist in favour of inexperienced

10. Automatic Dividend or Written Obligations (BCSA 57.4(3)) (IT): a person does not contravene 57.2(2) (insider trading) where transaction is entered under written automatic dividend reinvestment plan, purchase plan, or as the result of a written legal obligation entered prior to obtaining knowledge of the material fact/change or MOI.

11. “Make them Prove it” Look at Evidentiary issues (above) and could use these hurdles as a “defense.” E.g. Walton: Inferences and circumstantial E are not enough to successfully convict. They help corroborate E but that is it.

Criminal Liability 2004 additions to CC

o Differences: extension to all issuers not just reporting issuers, and importation of mens rea 382.1 (1) A person is guilty of an indictable offence and liable to imprisonment for a term not exceeding ten years who,

directly or indirectly, buys or sells a security, knowingly using inside information that theyo (a) possess by virtue of being a shareholder of the issuer of that security;o (b) possess by virtue of, or obtained in the course of, their business or professional relationship with that issuer;o (c) possess by virtue of, or obtained in the course of, a proposed takeover or reorganization of, or amalgamation,

merger or similar business combination with, that issuer;o (d) possess by virtue of, or obtained in the course of, their employment, office, duties or occupation with that issuer

or with a person referred to in paragraphs (a) to (c); oro (e) obtained from a person who possesses or obtained the information in a manner referred to in paragraphs (a) to

(d). 382.1 (2) Except when necessary in the course of business, a person who knowingly conveys inside information that they

possess or obtained in a manner referred to in subsection (1) to another person, knowing that there is a risk that the person will use the information to buy or sell, directly or indirectly, a security to which the information relates, or that they may convey the information to another person who may buy or sell such a security, is guilty of

o (a) an indictable offence and liable to imprisonment for a term not exceeding five years; oro (b) an offence punishable on summary conviction.o NOTE: NCOB

382.1 Definition of inside informationo (4) In this section, inside information means information relating to or affecting the issuer of a security or a security

that they have issued, or are about to issue, that (a) has not been generally disclosed; and (b) could reasonably be expected to significantly affect the market price or value of a security of the issuer.

Difference: CC must knowingly use inside information

Sanctions for Illegal Insider Trading/Tipping (See Below for More Detail)The following sanctions may apply if X is found guilty of illegal insider trading or tipping in contravention of BCSA s. 57.2.

1. Administrative Sanctions under the BCSA (most common) (BCSA 161): The regulator may make various enforcement orders when it is in the public interest to do so (e.g. monetary penalties up to $1M (162), cease trade orders, denials of exemptions, and prohibitions from acting as a director or officer).

EXAMPLE: The regulator may suspend, restrict, or terminate the X’s registration, exclude X from trading in BC markets, remove X or prohibit X from acting as a director/officer of an issuer, or reprimand X.

Sanctioning Guidanceo Walton (admin penalties): Sanctions: individual and general deterrence is a legitimate consideration

o Sanctions must be proportionate and reasonableo General deterrence does not warrant imposing a crushing or unfit sanction on an individualo Severity of sanctions left cause for concern as it lacked the justification and transparency that a proper decision-

making process requireso AMF v Roy: guidance on size of admin penalty

o Seriousness of the breach; position of the offender (insider vs tippee); offender’s past record and general conduct; intentionality of the actions taken; extent of the offender’s repentance; profits made; mitigating factors; damages caused to the market’s integrity; sanctions imposed in similar situations

Mitigating factors: collaboration w/ investigation, general inexperience w/ financial markets, was not one of the RI’s insiders; particular factual background; absence of risk of re-offending

2. Quasi-Criminal Sanctions under BCSA 155(5): The maximum penalty for a contravention of 57.2 is a fine not more than the greater of $3 million and an amount equal to triple any profit made by X thanks to the contravention, or imprisonment for not more than 3 years, or both.

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Profit made: applies when the special relationship person sells securities. It is the amount the person sold for less the securities’ average trading price for 20 trading days after the material non-public information was generally disclosed

Loss avoided: applies when the special relationship person buys securities. It is the average price over those 20 trading days, less the amount the person paid. For a tipper, the “profit made” is any consideration the tipper received for tipping.

3. Statutory Civil Liability (IT, Tipping or Recommending) (BCSA 136): TARGET (1) A P may recover losses against [(issuer or person in SR with issuer) + contravenes 57.2] (2) person may recover losses incurred in relation to a transaction, if the transaction was entered into during the

period (a) starting when the contravention occurred, and (b) ending at the time the MF or MC is generally disclosed

(3) Quantum: lesser of (a) loss incurred by the P, and (b) amount determined in regs (4) Quantum: in determining the losses incurred by a P, a court must not include an amount that the D proves is

attributable in the market price of the security that is unrelated to the MC or MF S 136.1 accounting for benefits: (1) If a person is an insider, affiliate or associate of an issuer, and if the person

contravenes section 57.2 [IIT/tip/reco], the person must pay to the issuer an amount equal too (a) the benefit that the person received as a result of the contravention, ando (b) the benefit that all persons received as a result of the contravention.o SEE 137 action on behalf of issuer

136.1(2) If a person contravenes section 57.3 [front running], the person must pay to the investor, as defined in that section, an amount equal to

o (a) the benefit that the person received as a result of the contravention, ando (b) the benefit that all persons received as a result of the contravention.

s.136.2 Due Diligence Defence: A person is not liable under section 136 or 136.1 (1) if, after a reasonable investigation occurring before the person (a) entered into the transaction, (b) informed another person of the material fact or material change, or (c) recommended or encouraged a transaction, the person had no reasonable grounds to believe that the material fact or material change had not been generally disclosed.

137 action by commission on behalf of issuer: on application by commission or person who at time of transaction or application was a security holder of the issuer

o The SuprCt may, if satisfied that reasonable grounds under 136.1(1), and issuer has failed to commence action within 60 days of written request of applicant or failed to prosecute diligently

o May authorize the person or commission to commence an action on behalf of the issuer to enforce liability created by 136.1(1)

4. Civil Court Proceedings (BCSA 157): The regulator may apply to the BCSC for an order that X has contravened a provision in the act, an order that X pay the regulator any amount obtained, directly or indirectly, as a result of the contravention, an order setting aside a trade, or an on order that X otherwise rectify the contravention to the extent that rectification is possible.

Take-Over Bids Occur when a bidder (“Offeror”) corp makes an offer to purchase some or all of the outstanding shares of target

corporation (“Offeree”)o Hostile bids occur when target mgmt/DIRs do not invite and are not generally in favour of the bido Friendly bids occur when target mgmt. approves of the takeover and cooperates with the bidder in selling the bid to

target shareholders Takeover bid occurs with making of an offer, not with completion of transaction Under the Competition Act, large TOBs challenged by the Commissioner of Competition must be approved by the

Competition Tribunalo If the acquisition ‘prevents or lessens, or is likely to prevent or lessen, competition substantially in a market’, it may

disallow the bid. Under the Investment Canada Act, the Minister of Industry must review any large proposed acquisition of a Canadian

company, in which the offeror is not Canadian – “likely to be of net benefit to Canada”

Purpose of TOB Regs (NP 62-202 s.3(2)): 1) the protection of bona fide interests of the SHs of the target company; 2) to provide a regulatory framework within which take-over bids may proceed in an open and even-handed environment

NP 62-202 s 2.1: to establish a clear and predictable framework for the conduct of bids in a manner that achieves three primary objectives

o 1) equal treatment of the target’s securityholderso 2) provision of adequate information to the target’s securityholders; ando 3) an open and even-handed bid process

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Target-securityholder protection is sought to be achieved through three principal requirementso 1) giving target company securityholders the information relevant to their decisions on whether to accept or reject

the offer;o 2) ensuring they have time to assess the information and make reasoned decisions, ando 3) requiring that all target company securityholders be treaty equally in terms of the price they receive for their

securities; and pro rata participation in the TOB NP 62-202 s 1.1(2)

o The primary objective of the take-over bid provisions of Canadian securities legislation is the protection of the bona fide interests of the shareholders of the target company.

o A secondary objective is to provide a regulatory framework within which take-over bids may proceed in an open and evenhanded environment.

o The take-over bid provisions should favour neither the offeror nor the management of the target company, and should leave the shareholders of the target company free to make a fully informed decision. The Canadian securities regulatory authorities are concerned that certain defensive measures taken by management of a target company may have the effect of denying to shareholders the ability to make such a decision and of frustrating an open take-over bid process.

Twin goals? Narrow focus on the interests of the target’s securityholders may come at the expense of market efficiency in some circumstances

o Tension between securityholder-centric view and corporate law fiduciary duty to act in the best interests of the corp (BCE)

Argument against regulation of TOBs:o Those against the TOB can sell their shares and get outo There may be a disconnect between the deal price and the market, which is why TOB regs are needed

Which shareholders’ interests should be considered here?o The original ones or the new ones that began trading after the announcement of the deal?

DefinitionTRIGGER: BCSA 98: A person must not make a take-over bid or an issuer bid, whether alone or acting jointly or in concert with one or more persons, except in accordance with the regulations.

“Take-Over Bid” (BCSA 92) – means a direct or indirect offer to acquire a security that is (a) made by a person other than the issuer of the security, and (b) within a prescribed class of offers to acquire.

NI 62-104 s.1.1: “take-over bid” means an offer to acquire outstanding voting securities or equity securities (i.e. not debt securities) of a class made to one or more persons, any of whom is in the local jurisdiction (i.e. Province), where the securities subject to the offer to acquire, together with the offeror’s securities, constitute in the aggregate 20% or more of the outstanding securities of that class of securities.

o If own 10% of company and buy another 10% this would be a takeover bid. o Does not matter whether you succeed or not, simply if offering to acquire enough securities to get to 20%. o Offer: can be both direct and indirect (tries to prevent the application of TOB regs by the use of intermediaries)

Offer must be for equity securities or voting securities (non-debt securities with a vote in all circumstances, or under specific conditions that have occurred and continue at the time of the offer)

o 20% threshold may be met by the aggregate holdings of multiple parties acting “jointly and in concert” Acting “Jointly & in Concert” (s.1.9(1) of NI 62-104): It is a question of fact as to whether a person is

acting jointly with an offeror. Includes making a formal or informal agreement, commitment or understanding by (a) acquiring or offering to acquire securities of the same class as those under the TOB; or (b) intending to exercise voting rights attached to the target’s securities jointly or in concert with the offeror (or anyone acting jointly or in concert with offeror) (Re Arthur-Jones)

o Why 20%? Many SHs don’t attend AGMs of public companies Can control and influence companies with a low percentage of the shares (i.e. 20%)

TOB does not include (s.1.1): an offer to acquire if it is a step in an amalgamation, merger, reorganization or arrangement that requires approval in a vote of security holders Anything subject to SH vote under corporate law is not a takeover bid.

Conversion: offeror deemed to have beneficial ownership of securities that it may or must acquire or convert within 60 days of the date at which ownership is being assessed: 62-104 ss 1.7, 1.8(1)

Direct/indirect: “offer” includes both direct and indirect offers (of ownership, control or direction): 62-104 s. 1.10

Exemptions from “formal” takeover bid requirements (NI 62-104; PART 4 – DIV 1) (Catch-then-exclude)[1] Normal Course Purchase Exemption (4.1): Offeror may acquire up to 5% of the outstanding securities of a given class over a 12-month period w/o triggering TOB regulation.

Target securities must be listed or quoted for trading on a published market.

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Value of the consideration paid cannot exceed the market price of the target securities at the date of acquisitiono Market Price = simple average of the closing price over the past 20 business days (s.1.11(1))

[2] Private agreement exemption (4.2): Whereby purchaser may enter single or separate agreements with up to 5 vendors – cannot be made to security holders generally and value of consideration paid may not exceed 115%, including broker fees and commissions, of market price at date of bid (e.g. 5 target SHs may control 80% of shares)

Often used to purchase securities from a control block person Regulators essentially deems 15% or less to be the control block person’s premium, if premium higher, share w/ all

securityholders through a full TOB

[3] Non-reporting Issuer Exemption (4.3): TOB exempt if target (1) Is not a reporting issuer (2) No published market for its securities AND (3) Max of 50 securityholders (excluding the target’s and its affiliates’ former and current employees).

Rationale: securityholders of small and closely-held targets are less likely to need protection than securityholders of widely-held targets (presumed to have info they need to make informed decision)

[4] Foreign take-over bid exemption (4.4): at least 90% of offerees are resident outside of Canada At commencement of bid, offeror reasonably believed that Canadian residents beneficially own less than 10% of the

outstanding securities of the class subject to the bid Publish market on which greatest volume of securities was traded in past 12m must be outside Canada Securityholders in Canada must receive at least as favourable terms

o Must receive their bid materials at the same time; at least brief summary in Englisho If no bid materials, just a notice, notice must be published in Canada in at least one major newspaper of general and

regular paid circulation explaining how to get copies of the bid materials

[5] De Minimis Exemption (4.5): TOB is exempt from regulation within a jurisdiction (i.e. a province or territory) if only a minimal portion of the bid occurs in the jurisdiction. Factors:

Fewer than 50 beneficial holders of target class in the jurisdiction (province); Who hold less than 2% of the outstanding shares of the class in the aggregate; Security holders in the jurisdiction are entitled to participate in the takeover bid on terms at least as favourable as those that

apply to securityholders outside the jurisdiction; Bid materials must be sent to securityholders in the jurisdiction at the same time as to securityholders outside the jurisdiction

[6] Discretionary Exemption (BCSA 114(2)): On application of an interested person or on own motion, may be exempt from TOB req’s if not prejudicial to the public interest.

TOB ProceduresTRIGGER: A person must not make a take-over bid, whether alone or acting jointly or in concert with one or more persons, except in accordance with the regulations (BCSA 98)

BCE: there is a fiduciary obligation to consider best interests of the corp BUT under NI 62-202, what is supposed to be considered is the bone fide interests of the shareholders of the target company This is an unresolved problem between securities regulation and corporate law.

[A] Early Warning System: Requires persons to disclose their holdings of a company’s securities at certain thresholds – prevents creeping take-overs. NI 62-103 – Part 3 requirements

When acquire beneficial ownership, direction or control over 10% or more of a classo Must “promptly” issue and file a news release.

o Within business 2 days, must file a formal report with the Commission – includes name, address and security holdings, consideration offered, purpose of transaction (62-104 s 5.2(1)(a); 62-103 s. 3.1(1)).

Every 2% increase or decrease, must do this again (only if still above 10%): 62-104 5.2(2)(a) Change in MF: Must disclose any change in any material fact set out in a previous report: 62-104 5.2(2)(b) The person is restricted from trading in securities of the class while the info is being disclosed and disseminated (5.2(3))

o Period = event triggering disclosure to one business day after report is filed

Four major exemptions from Early Warning: o (a) Mutual funds or other “eligible institutional investors” (generally, passive investors, MFs) who make use of an

alternative monthly reporting system (NI 62-103 ss 3.3, 4.1-4.8).;

“Eligible institutional investor” means: (a) a financial institution (CND FI, financial services, regulated under banking, insurance); (b) a pension fund …; (c) a mutual fund that is not a reporting issuer, plus more

Disqualified: makes or intends to make a formal bid; solicits proxy of persons as directors other than persons proposed by management

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o (b) When a person’s security holdings change due to certain issuer actions such as share redemptions or distributions from the treasury (62-103 ss.6.1, 6.2);

o (c) An UW who owns the securities only as an UW and has made certain disclosure by new release (62-103, 7.1);

o (d) Commissions have the discretion to grant exemptions (“Public Interest”) (62-103, 11.1; 62-104, 6.1).

[B] The Offer: Recommendation relating to bid, BCSA 99: (1) when a TOB has been made, directors of the issuer whose securities are the subject of the TOB must

a) Determine whether to recommend acceptance or rejection of the TOB or determine not to make a recommendation, andb) Make the recommendation, or a statement that they are not making a reco, in according with regulations 2) An individual director or officer of the issuer whose securities are the subject of a take-over bid may recommend

acceptance or rejection of the take-over bid if the recommendation is made in accordance with the regulations

(1) To Whom: A TOB must be made to all in the class in the jurisdiction (62-104, 2.8). 50% Minimum Tender Requirement – Bids will be subject to a mandatory minimum tender requirement of more than 50%

of the outstanding securities of the class that are subject to the bid, excluding those beneficially owned, or over which control or direction is exercised, by the bidder and its joint actors (2.29.1)

o Examples: Have 15% minimum tender is 42.5% (50% of 85% outstanding)o Have 50%, want 40% minimum tender is 25% (50% of 50% outstanding) – GOTTA MAKE IT GOOD

Too many? Pro rata take up: NI 62-104 2.26.1 105-day period minimum deposit period: 2.28.1 Mandatory 10-day extension period: 2.31.1

(2) Commencing the Bid: Two ways: (i) Delivering the bid to the offerees in the jurisdiction (62-104, 2.9(1)(b)); OR (ii) Publishing an advertisement containing a brief summary of the bid in a “major daily newspaper of general and regular

paid circulation” in each jurisdiction in which offerees reside (2.9(1)(a)). o Conditions:

(1) TOB must be filed and delivered to target issuer’s principal office on or before the date on which the ad is first published;

(2) Offeror must request a list from the target issuer of its securityholders (offerees) in the jurisdiction on or before the date of publication;

(3) Offeror must deliver the TOB to the offerees within 2 business-days of receiving the list (62-104, 2.10(2)).

(3) Minimum Deposit Period: TOB must allow offerees 105 days to decide whether to accept the bid and deposit their securities under the terms of the TOB (62-104, 2.28.1).

Exceptions:o 2.28.2 – target issuer’s board of directors may issue a “deposit period news release” in respect of a proposed or

commenced take-over bid providing for an initial bid period that is shorter than 105 days but not less than 35 dayso 2.28.3 - Alternative transaction (Issuer issues a news release that it is doing this) – E.g. trying to use defensive

tactic (e.g. White Knight), then bid period can only be 35 days.

(4) Consideration: Cash, securities, other consideration, or a combo – if all or part cash, must be available to make full payment (62-104, 2.27(1)).

A class must receive identical consideration (2.23(1)) o Even if buyer takes up some then ups the offer, must give higher consideration to all: 62-104 s 2.23(3)

o Prevent early people getting a premium: TOB consideration must be at least as high as highest paid in preceding 90d: s 2.4(1)(a)

Exemption: Normal course trades in a published market, as long as no unreasonable fee or commission, nor any solicitation by the seller or purchaser (s.2.6)

o Fundamental that all securityholders are treated equally

Prohibition Against Collateral Agreements (2.24) - If a person makes or intends to make a take-over bid, the person or any person acting jointly or in concert with that person MUST NOT ENTER into any collateral agreement, commitment or understanding that has the effect, directly or indirectly, of providing a security holder of the offeree issuer with consideration of greater value than that offered to the other security holders of the same class of securities.

o Exception (2.25) – 2.24 does not apply to employment compensation arrangement, severance arrangement or other employment benefit if certain conditions are met.

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Offerors must acquire at least as high a percentage of the outstanding securities under the TOB as the highest percentage it acquired during that 90 days: 2.4(1)(b)

[C] Supplemental Warning System: Operates after a TOB is launched. Any person acquiring an aggregate of 5% or more of the securities subject to the bid must issue a news release before trading opens on the next business day (62-104, 5.4). Every 2%+, must do the same.

[D] Offeror’s TOB Circular: TOB circular must be concurrent with the bid (62-104, 2.10(1)(a)). BCSA 98 – must not make a bid except in accordance

with regulations. o Protect investors, foster efficient capital markets by empowering individuals to make fully informed decisions

Info needed to be included (62-104F1): Name/description of usual activities // Class/number of section subject to TOB // Dates on which TOB will commence & expire // Offeree’s withdrawal rights // Purpose of TOB // Material facts that would impact offeree’s decision // Signed certificate that circular contains no untrue statement of material fact/omission.

Change in Info: After TOB circular mailed and before TOB or withdrawal rights expire, must inform offerees of any changes in TOB circular which “would reasonably be expected to affect” their decisions to accept or reject the bid (62-104, 2.11(1)).

Variations: The offeror must promptly inform offerees of any variations in the TOB terms (s.2.12)o A TOB cannot expire before 10 days after the date of the variation notice (s.2.12(3)(4))

File: Must be filed with the Commission (62-104, 2.10(4)). TOB Circular Is not vetted by the Commission

[E] DIRs’ Circular (issued by DIRs of Target): Conceptual problems:

o Fiduciary duty: best interest of corp (BCE) vs best interests of shareholders (NP 62-202) Fiduciary duty vs losing their jobs

Special committee: only independent directors, assess merits, give them money, legal counsel, accountants, investments bankers

Must prepare and send a DIRs’ circular no more than 15 days after the date of the bid (and TOB Circular) (62-104 s.2.17) MUST MAKE: 1) Recommendation to securityholders to accept or reject the bid, together with reasons for that

recommendation; 2) Advise they cannot make recommendation with reasons; 3) Advise they are still considering but will advise later: 2.17

o E.g. of Required Information (62-104F3): Names of offeror and target DIRs // The interests of the target’s DIRs and OFRs in any material transactions with offeror // A signed certificate stating the circular contains no untrue statement of material fact or omission of material fact.

o Timing: must deliver directors’ circular to offerees within 15 days of announcement of TOBo Deadline: Make recommendation or explain why they cannot at least seven days before deposit period is scheduled

to end: 62-104 s 2.17(3)o Individual director: or officer may prepare a “Director’s or officer’s circular” including a signed certificate: 62-104

s 2.20o Changes: Director’s and individual director’s or officer’s circular must be modified if they are any changes in the

information: 62-104 ss 2.18, 2.20(2) BCSA 99 – DIRs MUST (a) determine to recommend acceptance or rejection of the TOB or determine not to make a

recommendation, and (b) make the recommendation, or a statement that they are not making a recommendation. o Accept = Friendly; Reject = Hostile. o Best practice: set up a special committee of independent DIRs, and they have a job to figure out in the 105-day

period whether or not it is in the best interest of the corp to be taken over and its SHs. They hire their own counsel, accountants, and have access to all the needed info to determine if the bid is good or not.

o Usually, the first DIRs’ circular just states a special committee is made, and then after will recommend if bid should be expected or not.

o If there are particular DIRs that disagree, they can issue their own information circular! (should do this for liability reasons)

[F] No Contemporaneous Acquisitions 62-104 Once offeror announces TOB, may not acquire or agree to acquire any securities of that class until TOB expires: 2.2(1) May make limited purchase in the normal course: 2.2(3)

o 1) no outside purchases until 3rd business day after the TOB is madeo 2) offeror must have stated its intention to make outside purchases in the TOB circular

Or if it later changes its intention, must state that in a news releaseo 3) during the entire TOB period, the offeror must not use this method to acquire more than 5% of the securities

outstanding in the class, ando 4) the offeror must issue and file a news release at the end of each day during which it made outsides purchases

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[G] Variations Varies terms, including extend deposit period, must promptly issue and file a news release and send notice of variation to all

who got TOB circular and whose securities have not been taken up: 62-104 2.12(1), 62-504F5o Must have at least 10 days between the notice and end of deposit period (can extend): 2.12(3)o 10d does not apply if just waiver of condition and bid is cash – just news release: 2.12(4)

[H] Withdrawal Rights Offerees may withdraw securities they have deposited

o any time before the offeror takes up the securities;o any time before the 10-day extension period for changes or variations expires; or o any time 3 or more days after the securities are taken up, if at that time the offer has not yet paid for them: 62-104 s.

2.30(1) Not in these circumstances

o offeror has already taken up the offeree’s securities by the date the offeror gives notice of a variationo the only variation is an increase in consideration and the extension is not more than 10 days (those already taken up

get the increase: 62-104 s 2.23(3)o or, the consideration is cash, and the only variation is the waiver of a condition in the TOB: 62-104 s 2.30(2)

[I] Take Up Pay within 10 days: offeror must take up and pay within 10 days of TOB expiring: 62-104 s 2.32(1)

o None can be taken up until 105-day TOB period is over: 2.29o Pay ASAP, but not later than 3 business days after they are taken up: 2.32.1(2)

If deposited under mandatory 10-day extension period, take up and pay within 10 days after deposit: 2.32.1(3) Must not extend bid beyond 10-day mandatory extension unless first take up all: 2.32.1(4) Proportionate take up: if get too many, proportional: NI 62-104 2.26.1 – disregarding factions

[J] Post-TOB Acquisitions Whether or not offeror takes up any; may not acquire any securities of class for 20 business days after TOB expires: 2.5 Exception: normal course trades on a published market: 1) any broker acting for the offeror must perform only ordinary

functions and collect only usual fees or commissions; and (2) the offeror not solicit offers to sell and the seller not solicit offers to buy: s 2.6

[K] Other Required Filings E.g. lock-up agreement

DefensesTarget Company, through its DIRs, may want to defend against a hostile TOB: Need Board to Set up a Special Committee (of independent DIRs)

3 Major reasons for defenses: 1) Compensation is inadequate – seek higher bidder; 2) Don’t like the idea of the offer – avoid or search for more palatable offer; 3) Selfish Reasons – discourage offers.

Fiduciary duty: generally to canvas market for other options, stimulate an action, but may also mean resist

NP 62-202 s 3(2) The primary objective of the take-over bid provisions of Canadian securities legislation is the protection of the bona fide

interests of the shareholders of the target company. A secondary objective is to provide a regulatory framework within which take-over bids may proceed in an open and

evenhanded environment. 6(5): The Canadian securities regulatory authorities consider that unrestricted auctions produce the most desirable results in

take-over bids and they are reluctant to intervene in contested bids. However, they will take appropriate action if they become aware of defensive tactics that will likely result in shareholders being deprived of the ability to respond to a take-over bid or to a competing bid.

[1] White Knight: A different offeror, brought in by the target’s DIRs to make a competing TOB. Usually have to “sweeten the deal” to induce a White Knight to takeover company. Break Fee: Promise that if the White Knight doesn’t succeed in taking over the company, then the target must pay the White

Knight. This would hollow out the value of the company (if the white knight does not work) and would improve the value of the competitor (e.g. 3-5% of the value of the company).

[2] Issuer Bid: If target co cannot find a white knight, they may cause the target itself to make a bid for its securityholders securities. “Issuer Bid” (BCSA 92) – Issuer buying back their own securities. Bid period is 35 days’ because if issuer is doing the bidding, don’t need time to fight their own bid.

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Will get competing bids between Issuer bidding to buy and the take-over bid. Exemptions from IB Regulation: Issuer acquisition or redemption (if provisions added when securities are issued,

purchases from employees, executive officers, directors and consultants Nearly identical to TOB procedures, but different in that:

o It may be initiated only by delivering the bid to the relevant SHs and not publico No directors’ circularo Offeror cannot make purchases through a published market during the IB process

[3] Sale of the Crown Jewel: Agreement with third party to sell a significant asset to make the company a less attractive take-over target (E.g. Sell interest in land or sell a division of the company).

As the Board of DIRs need to say, in keeping with Fiduciary duty, it is better to sell crown jewel than be taken over. This sale can be contested in court.

[4] Lock-Up Option: Option granted to a party to acquire a large block of securities or a substantial percentage of the target’s assets if a “trigger event” – e.g. a hostile bidder acquiring 20% of the targets voting securities – occurs.

[5] Showstopper: This is litigation // Can also delay Can be an effective defensive tactic in delaying takeovers, through court-ordered injunctions or otherwise May involve challenges to disclosure provided in hostile takeover bid circular

[6] Golden Parachute: Compensation package given to DIRs and OFRs that include generous severance payments or pensions that are triggered if their employment is terminated after a hostile TOB. Can gut target company

[7] Conflicting Out: give all leading law firms some work

[8] “Greenmail”: strategy adopted by certain offerors; purchase number of target’s securities then blackmail them back to target – e.g. threaten to dissolve corp if get control

[9] Poison Pill (Shareholders Rights Plan): (THIS IS A MATERIAL CHANGE) Can be adopted prior to OR during a takeover bid Typically, a rights offering offered by the target company to its securityholders, entitling them to purchase more voting

shares at a heavily discounted price on the occurrence of a “triggering event.”o The “trigger”: may be the acquisition by a party of a certain % of the shares or the launching of a TOB.

May be a permanent feature of a corp’s articles or may be implemented when a company realizes it may become a target in the future.

o Best way to do this is to get SH approval – agree that it is necessary.o If no SH approval – it is a tactical SRP. It has less credibility if the target company SHs have not voted for it. This

suggests that management and DIRs of target company are to put the poison pill to SH’s it may only exist to entrench the DIR’s in their position.

Result: Makes a TOB considerably more expensive for the offeror, since it will need to purchase the newly issues securities + will extend the bid period giving the target more time to explore other options (e.g. bringing in a white knight).

Royal Host (TEST): DIRs cannot use SRPs to “just say no” to a TOB in perpetuity (at some point, the SRP will be cease traded). – via s 114 applications to the commission

WHEN TO CEASE TRADE SRPs: At some point, it will be cease traded - Need to find balance between permitting board to fulfill fiduciary duty and protecting the rights of SHs to tender shares as they see fit

o There is no “holy grail” to determine when a “pill must go” (longest (before changes in law) was 120 days)o Starting point for the analysis is NP 62-202, Take-Over Bids – Defensive Tactics

Factors to consider (Royal Host):o Whether SH approval (“vote”) of the rights plan was obtained (vs. a tactical decision by the board). o When the plan was adopted (e.g. if been in place a long time);o Whether there is broad SH support for the continued operation of the plan o The size and complexity of the target company;o The other defensive tactics, if any, implemented by the target company;o The number of potential, viable offerors;o The steps taken by the target company to find an alternative bid or transaction that would be better for the SHs;o The likelihood that, if given further time, the target company will be able to find a better bid or transaction (e.g.

Market conditions – there may not be another bidder out there);o The nature of the bid, including whether it is coercive or unfair to the shareholders of the target company;o The length of time since the bid was announced and made;o The likelihood that the bid will not be extended if the rights plan is not terminated.

Re Pulse Data: Hostile TOB offering a low premium, significant majority of SHs voted to maintain SRP even though new offers weren’t coming in and ASC was okay with it because most SHs on board and maintaining the SRP would protect the

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bona fide interests of the SHs Re Neo Material Technologies: 81% of SHs wanted to keep the SRP, “so long as the SRP continues to allow the target’s

management and board the opp to fulfill their fiduciary duties to act in the best interests of the corp, the plan continues to serve a purpose and should not be cease-traded”; don’t need to have an auction

Re Icahn Partners LP/Lions Gate: Against Pulse and Neo in that those two cases had an overreliance on the SH votes; SRPs are a temporary defence and the issue is not whether an SRP should go, it’s when

Re Baffinland Iron Mines Corp 2010: generally, time for a SRP to go when the rights plan has served its purpose by facilitating an auction, encouraging competing bids or otherwise maximizing SH value

[10] Private placement as a new defensive tactic – see exempt distributions (private placement = exempt dist) USE ROYAL HOST TEST FOR EXAM PURPOSES Re Red Eagle: Hostile bid by Batero and friendly bid by Red Eagle of Target CB Gold

o SRP: plan was not aiding continued auction process SHs overwhelmingly approved of the SRP Public interest give SHs opportunity to tender their shares to either offer

o CB Gold enters into a transaction to sell a substantial amount of its assets to Batero On the day the deal was announced, certain target SHs go to Red Eagle to conduct a hostile TOB SH approval required – target knew they would lose the vote

o Red Eagle announces a TOB so then CB and Batero get into a friendly deal and PP Red Eagle seeks to cease trade the PP and the SRP

Cease traded the SRP because there was an auction happeningo Private Placement: have other business purposes

Even w/o contravention, may make order in the public interest May override business judgement rule and cease trade a PP that inappropriately alters the basic dynamics

of an M&A transaction To be exercised conservatively; where there is an abuse of capital markets Here: did not find that PP was clearly (primarily) a defensive tactic; not abusive

Re Hecla, 2016The Applicable Test: Is the private placement a defensive tactic?

Does the evidence clearly establish that the PP is not, in fact, a defensive tactic designed, in whole or in part, to alter the dynamics of the bid process?

o Evidentiary Onus: first applicant to establish impact of private placement on existing bid environment; then target board have onus of establishing that the private placement was not used as a defensive tactic

o Non-exhaustive considerations a. whether the target has a serious and immediate need for the financing; b. whether there is evidence of a bona fide, non-defensive, business strategy adopted by the target; and c. whether the private placement has been planned or modified in response to, or in anticipation of, a bid

(a) if the private placement is clearly not a defensive tactico If not, NP 62-202 principles are inapplicableo Consider whether some other reason to interfere w/ the PP under the Commissions’ broad public interest mandate

(b) if the private placement is or may be a defensive tactico Unclear, insufficient evidence, then NP 62-202 principles engaged - balanceo If may be defensive tactic – consider above 3 + balancing factors below that are relevant to whether a PP should be

interfered with a. would the private placement otherwise be to the benefit of shareholders by, for example, allowing the

target to continue its operations through the term of the bid or in allowing the board to engage in an auction process without unduly impairing the bid?

b. to what extent does the private placement alter the pre-existing bid dynamics, for example by depriving shareholders of the ability to tender to the bid?

c. are the investors in the private placement related parties to the target or is there other evidence that some or all of them will act in such a way as to enable the target's board to "just say no" to the bid or a competing bid?

d. is there any information available that indicates the views of the target shareholders with respect to the take-over bid and/or the private placement?

e. where a bid is underway as the private placement is being implemented, did the target's board appropriately consider the interplay between the private placement and the bid, including the effect of the resulting dilution on the bid and the need for financing?

o Separate: consider whether there are any other capital markets policy considerations or other public interest considerations that are relevant under the circumstances

Here: PP was non-defensive purposes

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o Contemplated before TOB // size not inappropriate given current liabilities // considered larger financing but decided not to pursue // terms of existing loans indicate would seek equity // no evidence modified in response to bid // not for purpose of circumventing bid // bidder knew or reasonably would have known that target was planning to raise equity // no evidence modified bid to be defensive // bona fide corporate objective of increasing its flexibility

Clearly not defensive, do not need to balancing factors

Commission + Court Powers: Regulatory Responsibilities vs Court Powers “Interested person” (BCSA 92) - an offeree issuer; and OFR; DIR or securityholder of an offeree issuer; an offeror; the DIR; or any person that the Commission considers to be a “proper person” to apply.

APPLICATION TO THE COMMISSION (BCSA 114) (Commission is faster, has expertise, better suited to short timeframes) 114(1): On app of an “interested person,” if a Commission considers that a person has not complied or is not complying

with a requirement under this Part (has to consider – not on BofP or Rules of E), may order (a) Restraining the distribution of any record used or issued in connection with a TOB, (b) Requiring an amendment to or variation of any record used or issued in connection with a TOB and require it to be distributed (c) Directing any person to comply with a req’t under this part (d) Retrain someone from contravening (e) Direct the DIRs and OFRs of any person to cause the person to comply.

114(2): The Commissions have the discretion to exempt parties from any of the TOB or IB requirements, where doing so is not contrary to the public interest.

NB: Nothing about K law, fiduciary duties, DIRs remedies or derivatives or oppression remedies (BUT see court powers (below))

APPLICATIONS TO THE BCSC (BCSA 115) – On application of an “interested person,” if the SC is satisfied that a person has not complied (must be satisfied a person has not complied – need E, etc.), it may order (a) Compensating any interested person who is a party to the application for damages suffered as a result of a contravention of a requirement, (b) Rescinding a transaction with any interested person, (c) Requiring any person to dispose of any securities acquired through the TOB (d) Prohibit any person from exercising voting rights (e) Require the trial of an issue.

Emerging IssuesDerivatives can be used to uncouple legal voting rights and economic exposure.

“Empty voting” refers to situations where an investor has voting rights but no net economic exposure to the shares being voted.

“Negative voting” refers to situations where an investor has voting rights and negative net economic exposure to the shares being voted – that is, the investor has an interest in the share price decreasing. This can help to avoid certain disclosure obligations, helping to hide a voting interest until ready.

Hidden ownership: The investor has economic exposure to the shares but no voting rights. An investor might be able to convert its interest into voting rights (just in time to vote in a TOB).

The investor avoids disclosure obligations, concealing its economic interest in the issuer. In the context of TOBs, hidden ownership undermines the early warning regime, as the investor technically does not have ownership or control.

TELUS v CDS: tiny ownership, but lot of votes

Solutions: include equity derivative positions in early warning calculations (substantially equivalent in economic terms to conventional equity holdings; broaden scope of disclosure to include equity equivalent interests, and provide greater transparency and disclosure of, securities lending arrangements for the purposes of early warning disclosure requirements

Enforcement (NOT ON THE EXAM)Every securities act in Canada has a number of provisions dealing with enforcement falling into four broad categories of enforcement:

Administrative/regulatory (BCSA)o Civil (BCSA) – applications to courto If it seems like the conduct is criminal, it must go to the criminal stream, which has different (less) powers.

Penal/Quasi-Criminal (BCSA) Criminal (CC) Collections (Insolvency)

Goals: prevention of future misconduct; protection of investors and the capital markets – specific/gen deterrence

Majority of securities matters arise in BC, Alberta, Ontario and Quebec BCSCn (w/ ASC) overlooks the TSX-V FINTRAC: federal organization/agency, no investigatory powers, gather information, financial intelligence

o They can send reports to the commissions and the commissions can ask for reports as well

Securities regulators not bound by precedent, but usually do follow precedent.

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Enforcement Options Warning Letter: not public Settlement: public, any time, by the Executive Director Prohibitions: by the Executive Director Disgorgement: by the Executive Director Undertaking to Pay: by the Executive Director, enforceable, Reciprocal Order: prohibitory order based on the order of another commission Abridgment Order: breach of order then goes to the criminal team for this type of order

Enforcement Procedure Initiated by complaints to comsn or self-initiated by enforcement departments – investigations must be initiated by an order Commissions can initiate a formal investigation for two reasons: 1. Due administration of securities laws 2. Regulation

of capital markets in the province Not allowed to disclose info found in investigation – Statutory Blanket Order – to protect integrity of investigative

process and protect persons who provide info o BCCA – found unconstitutional unjustified limitation of the right to freedom of expression

Cannot mislead commission (but BCSA and OSA include a due diligence defence if did not know they were misleading)

o Re Fletcher – If give untrue answers (obstruction of investigation) should correct them in interview to avoid specific deterrence

Protections for those investigatedo Compelled testimony cannot be used against them in offence proceedings (court), cannot compel privileged

materials, anyone giving evidence has right to counsel, cant search private residences, no disclosure allowed of examinees name or any info revealed in the exam

Orders without a hearing o Hearing not always required, commissions can do the following without a hearing – investigate, apply to court for

declaration of non-compliance, freeze funds In Ontario – if the OSC considers it expedient it may direct the preservation of funds, securities, or property

(a freeze order) which will last until revoked, the OSC consents to release some funds, or court orders it = not required to give notice before the direction

BC, AB – the commission may order a freeze order when one of several broad preconditions is met BC – orders subject to appeal to a court; AB – orders subject to review by a panel

A direction to preserve property is justified by the commissions public interest jurisdiction o Temporary Orders in Public interest

Commission can make temporary specific admin orders in public interest without holding a hearing – suspending, restricting, terminating or imposing terms on registration or recognition; ceasing tradeing in or purchasing of any securities; removing exemptions; ordering certain material not be provided to anyone

Hearings Respondents must receive adequate notice of the case they have to meet Common practice requires disclosure by commission to the respondents of all non-privileged info in possession that has

reasonable possibility of being relevant to right to make full answer and defence (stems from Stinchcombe standard – key = relevance)

o Disclosure need not be perfect Re Arbour – objective is to assist respondent without allowing the proceeding to be diverted by

irrelevancies or become a conglomeration of satellite hearings Re Phillips – OSC said cant say that docs are or should be independently obtainable by the respondent from

another source, or by waiving privilege Re Smolensky – BCSC – an alleged violation of the disclosure requirement is not an abuse of process, but

is grounds to apply to commission for further disclosure – at later stage, flawed disclosure may be considered to have caused a denial of procedural fairness

Evidence: Commission not bound by strict court evidence rules – but not bound to ignore either… Reasons: Commission ahs to provide reasons

o Dunsmuir – SCC – reasonableness review of a decision involves an inquiry into the qualities that make the decision reasonable (reasons and outcome) reasonableness is concerned with the existence of justification, transparency, intelligibility within the decision making process, also concerned with whether the decisions falls within a range of acceptable, possible outcomes which are defensible in respect of facts/law

Dunsmuir criteria is met if the reasons allow court to understand why decision was made and determine whether within range

Enforcement Mechanisms: Admin sanctions, civil actions, penal actions, CC prosecutions

Appeals

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Anyone DIRECTLY AFFECTED by a decision is entitled to a heating and review or an appeal to the commission Decision to grant/not grant an exemption cannot be appealed All jurisdictions provide for judicial review Walker v BC – BCCA set out 6 factors for an appellate body to consider in deciding whether to grant leave to appeal

from a securities tribunal o 1. Question of general importance to tribunal’s jurisdiction 2. Whether the appeal is on qurstions of law involving

statutory application, stat interp of important to the parties or wording 3. Whether the previous decisions show a marked difference of opinion 4. Whether the appeal has some prospect of success 5. Whether the appeal will lead to any clear benefit 6. Whether the issue has been considered by numerous appellate bodies

Standard of Review: It seems accepted that reasonableness will usually be the SOR for commission decisions unless an exception applies

Investigative Provisions (Part 17 BCSA, ss 141-144) Forced Disclosure (141): Exe DIRs may require certain persons to disclose records or documents during a formal investigation. Compliance review for SRO or exchange (141.1) // Compliance review of registrant or custodian (141.2) // Compliance

review of reporting issuer (141.3) // Compliance review of other market participants (141.4) Warrants for Private Residence (141.5): 141.1(2)(a), 141.2(2)(a), 141.4(2)(a) gives power to enter bus premises

o (1) if the business premises is a residence, the person conduct the review may enter the residence only with the consent of the occupant or under the authority granted under (2)

o (2) On application by the commission, the Supreme Court may make order authorizing for the purpose of carrying out a review under 141.1, 141.2 or 141.4 to enter into a residence at any reasonable time, as long as a) Reasonable and probable grounds to believe that records that reasonably relate to the review are present in the residence, b) entry is necessary for purpose, and c) You have been refused entry or you believe on reasonable grounds you will be denied entry, or consent cannot be obtained

o (3) application may be held w/o notice and heard in the absence of the public Investigation order by commission (142): allows BCSCn to appoint a person to make investigations the commission considers

expedient: o For the administration of the BCSA, o the regulation of securities in another province, o in respect of matters regarding securities traded in BC/another jurisdiction

Scope (142(2)): must define the scope Powers (143): (1) broad powers; (2) powers commission may authorize if necessary and in the public interest;

(3) powers on application to Supreme Court; (4) can be secret warrant; (5) investigative stuff must be done quick and stuff returned promptly

Enforcement Powers (144): (1) investigator appointed under 142/147 has the same power as the BCSC to (a) summon/enforce attendance of witnesses, (b) compel witnesses to give evidence on oath or in any other manner, and (c) compel witnesses to produce records and things and classes of records and things; (2) A failure of a witness to do (the above) makes the W, on application to BCSC, liable to be committed for contempt.

o Criminal investigations by the police or the Commission don’t have compulsion powers Costs (150, 174): may order a party to pay the investigation or hearing costs Freeze Order (151): power to freeze property (usually bank or trading accounts) Register Against Real Property (151(5)): effect of a certificate of pending litigation on title Rules of evidence do not apply – as long as it might be relevant, the evidence might apply See BC Policy 15-601

Criminal CodeInformation for search warrant

487 (1) A justice who is satisfied by information on oath in Form 1 that there are reasonable grounds to believe that there is in a building, receptacle or place

o (a) anything on or in respect of which any offence against this Act or any other Act of Parliament has been or is suspected to have been committed,

o (b) anything that there are reasonable grounds to believe will afford evidence with respect to the commission of an offence, or will reveal the whereabouts of a person who is believed to have committed an offence, against this Act or any other Act of Parliament,

o (c) anything that there are reasonable grounds to believe is intended to be used for the purpose of committing any offence against the person for which a person may be arrested without warrant, or

o (c.1) any offence-related property,may at any time issue a warrant authorizing a peace officer or a public officer who has been appointed or designated to administer or enforce a federal or provincial law and whose duties include the enforcement of this Act or any other Act of Parliament and who is named in the warrant

o (d) to search the building, receptacle or place for any such thing and to seize it, and

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o (e) subject to any other Act of Parliament, to, as soon as practicable, bring the thing seized before, or make a report in respect thereof to, the justice or some other justice for the same territorial division in accordance with section 489.1.

General production order 487.014 (1) Subject to sections 487.015 to 487.018, on ex parte application made by a peace officer or public officer, a

justice or judge may order a person to produce a document that is a copy of a document that is in their possession or control when they receive the order, or to prepare and produce a document containing data that is in their possession or control at that time.

Offence ActSearch warrants

21  (1) A justice who is satisfied by information on oath in Form 1 that there is reasonable ground to believe that there is in a building, receptacle or place

(a) anything on or in respect of which an offence has been or is suspected to have been committed, or(b) anything that there is reasonable ground to believe will afford evidence as to the commission of such an offence

may issue and sign a warrant authorizing a person named in it or a peace officer to search the building, receptacle or place for that thing, and to seize the thing and to bring it or a report of it before the justice who issued the warrant or another justice for the same territorial division, to be dealt with under section 24.(2) If the building, receptacle or place in which anything mentioned in subsection (1) is believed to be is in another territorial division, the justice may issue a warrant in a similar form, modified according to the circumstances, and the warrant may be executed in the other territorial division after it has been endorsed in Form 16 by a justice who has jurisdiction in that territorial division.(3) An endorsement made on a warrant under subsection (2) is sufficient authority to the peace officers to whom it was originally directed, and to all peace officers within the jurisdiction of the justice by whom it is endorsed, to execute the warrant and to take the things to which it relates before the justice who issued the warrant or some other justice for the same territorial division.(4) A warrant issued under this section must be executed by day, unless the justice, by the warrant, authorizes execution of it by night.(5) A search warrant issued under this section may be in Form 3.(6) If a thing is seized under this section, as soon as reasonably possible after the seizure, the person who executed the warrant must bring the thing, or a report of the thing, before a justice to be dealt with under section 24.

Option 1: Administrative SanctionsMost frequent used sanctions. Use BofP standard, making the burden on the Commission less onerous than in quasi-criminal or criminal matters (Re Holtby).

Davis v. British Columbia (Securities Commission), 2018 BCCA 149 R. v. Samji:

Enforcement Orders (BCSA 160-164): 161: administrative sanctions (enforcement orders): commission or exec director + in the public interest 162: administrative penalty: commission + in the public interest + contravention Both after a hearing (but some temp orders w/o hearing) Effective only in jurisdiction in which it is made

In the Public Interest Standard: The Commission can, after a hearing, make one of more of these orders if it concludes that such orders are in the public interest. Appropriate to deal w/ situations that are inconsistent with the best interests of investors or where a txn constitutes a flagrant

abuse of the marketplace: Re Canadian Tire Corpo Abuse of marketplace: that will attract these consequences is something beyond and broader than mere instances of

unfairness Power is limited by the investor protection and efficient capital markets goals of securities regulation, as well as by the fact that it

is a regulatory power (thus protective and preventative) (Asbestos Minority SH).o Re Hamilton: created a shell company; may have tried to use the company for manipulation; made an order for the

public interest because it was abusive to the capital markets Sanctions are preventative and prospective, not punitive or remedial: Re Cartaway General deterrence is legitimate to consider (still prospective and to prevent future misconduct) (Re Cartaway) Factors to Consider when determining appropriate admin sanctions to impose (Siddiqi):

o 1) The seriousness of the misconduct (and the respondent’s recognition)o 2) The harm to investors and the capital market, and any benefits given to the respondento 3) Risk to investors and the capital market from future misconduct by the respondent or similar misconduct by others

(deterrence both specifically and generally)71

o 4) The respondents characteristics, including past conduct or reputation in the communityo 5) Mitigating Factorso 6) Orders made by the Commission in similar circumstances.

“Residual Power”: Regulators can use their public interest powers to impose sanctions even when they find no specific violations of securities legislation (Re Canadian Tire). Power should not be lightly used.

o To meet the “residual public interest test”, the conduct or transactions must clearly be demonstrated to be abusive of shareholders in particular and capital markets in general (Canadian Tire).

Re Fletcher: incautious and imprudent behaviour not enough Re Donald: ITT allegations not sustained; found contrary to public interest and abusive of the capital markets and to the

confidence in the capital markets

s.161 Sanctions: Standard is “in the public interest”: (1) If the commission or the executive director considers it to be in the public interest, the commission or the executive director, after a hearing, may order one or more of the following:

A. Sanctions Against Registrants (161(1)(f)): Commission may suspend, restrict, terminate or impose terms and conditions on a person’s registration or recognition (Powerful Tool: Registration is a key method of regulating the securities industry. NB: Does not apply to those exempt from registration).

a. if exempt, could be punished under denial of exemptionsB. Cease Trade Order (161(1)(b)): Order that says trading in (or purchasing, sometimes) of securities be ceased temporarily or

permanently (Because so blunt, the Commission may have a hard time justifying this one). C. Denials of Exemptions (161(1)(c)): Affects those who have exemptions (eg to distribute). Can be permanent or temporary.

(any and all exemptions set out in this Act, that exemptions do not apply)a. Look into alleged or suspected problems and avoid formal and expensive litigation

D. Reviews of and Changes to Practices and Procedures (161(1)(h)): Commission can order a review of, and direct changes to, a market participant’s practices and procedures (extensive supervision with low expenditures).

E. Orders to Provide, Not to Provide or to Amend any Document (161(1)(e)): Where the Commission is satisfied that securities laws have not been complied with, it has broad powers to make orders regarding any document.

a. incl prospectus, report, proxy, etcF. Reprimands (161(1)(j)): This sanction is useful where the Commission believes some sanction is warranted, but where other

sanctions would be too harsh.G. Orders to Resign as DIR or OFR, Prohibitions on Becoming or Acting as a DIR or OFRs (161(1)(d)(i), (ii)): Two

different sanctions: A forced resignation and a ban on positions for a specified time or permanently, the two achieve the same goal in practice. Goal: Is to ensure undesirable people are not in the position to repeat undesirable behaviour.

H. Prohibitions on Becoming or Acting as a Registrant or Promoter (161(1)(d)(iii)) I. Prohibition against Acting in a Management or Consultative Capacity or Engaging in Investor Relations Activities

(161(1)(d)(iv), (v)): More powerful than preventing a registrant from their status. BCSA allows the Commission to prohibit a person from engaging in ‘investor relations activities’ which means activities or communications that promote the purchase or sale of securities to the issuer (s 1.1)

a. Thwarts indirect attempts to influence or control an entity of a person prohibited from acting as DIR or OFR. J. Administrative Penalty (162): below: cannot be awarded unless there is a contravention of the securities laws of the

applicable jurisdictionK. Disgorgement (161(1)(g)): This power is intended to prevent a person or company from retaining financial benefits that

were received by contravening securities laws. The legislative provisions refer to ‘amounts obtained’. Relevant amount is what a respondent obtained through misconduct, not what the respondent retained or spent inappropriately.

a. Poonian: purpose of disgorgement is not restitution or compensation; not to look at the victim’s losses, but rather what was gained (revenue, not profit); joint and several liability

L. Restitution (Not explicit provision to allow this): But, the BCSCn and the OSC have the authority to direct money to third parties from financial payments made by respondents under administrative penalty and disgorgement (s.15.1). In BC, Commission must notify the public, and people have three years to file a claim to reclaim money.

M. Compliance (161(1)(a)): BCSA allows the commission to order compliance.N. Reciprocal Orders: A Commission order only applies in the jurisdiction where it’s made. Various Commissions, however,

have been empowered to make enforcement orders based on proceedings from another jurisdiction called ‘reciprocal’ orders, and they usually mirror the bans given in the original jurisdiction: BCSA 161(6)

Administrative Penalties ( BCSA 162 ): Are ‘administrative’ not ‘penal’ and, as always, must fit in with the public interest and the goals of sanctioning.

If the commission, after a hearing, (a) determines that a person has contravened a provision of this Act or regulations…(b) considers it to be in the public interest to make order,

o Commission may order person to pay commission not more than $1M for each contravention Cannot be awarded without a violation of a securities law. Amount to be determined in combination with other sanctions

imposed in the circumstances. You need the sanction to be in the public interest and heard by the commission (Re Cartaway). Maximum = $1,000,000

Guidance from IT context:72

o Walton (admin penalties): Sanctions: individual and general deterrence is a legitimate considerationo Sanctions must be proportionate and reasonableo General deterrence does not warrant imposing a crushing or unfit sanction on an individualo Severity of sanctions left cause for concern as it lacked the justification and transparency that a proper decision-

making process requireso AMF v Roy: guidance on size of admin penalty

o Seriousness of the breach; position of the offender (insider v tippee); offender’s past record and general conduct; intentionality of the actions taken; extent of the offender’s repentance; profits made; mitigating factors; damages caused to the market’s integrity; sanctions imposed in similar situations

Mitigating factors: collaboration w/ investigation, general inexperience w/ financial markets, was not one of the RI’s insiders; particular factual background; absence of risk of re-offending

Costs ( BCSA 160 ): After conducting a hearing, a Commission may order a party to pay the investigation or hearing costs (or both) – 150;174.

160: person convicted of an offence against this Act or regulation is liable for the costs of the investigation Includes: Reasonable amounts paid to non-Commission staff appointed in the investigative process; preliminary matters;

time spent by Commission staff; fees paid to witnesses and legal costs. Commissions may not order costs against Commission staff (no “loser pays” - problematic).

Failure to Comply with Filing Requirements ( BCSA 164 ): Cease trade order without hearing. Fails to fail; file record not completed (3) must send to any person directly affected by an order under (1)(a) written notice of the order, and (b) written notice of a

revocation of the order, if any.

Halt Order (BCSA 89(1)): If the commission thinks there is something sketchy going on, b/c of insider trading, they can cease trade securities. Can do so on emergency basis w/o opportunity to be heard and hold it for 15 days.

1) a) commission or ExecDir considerso i) unexplained and unusual fluctuations in volume or market priceo ii) becomes aware of info, other than info filed, that when disclosed to public may cause (a)o (iii) considers that they may have been a material change in a the business or ops of an issuer that, when disclosed,

could significantly affect the market price of a security issuedo iv) circumstances exist or are about to occur that could in other than an orderly trading and

1) b) commission or ExecDIr considers it to be in the public interest May, w/o opportunity to be heard, order halt for period no longer than 15 biz days 2) notice must be sent immediately to the issuer whose securities are affected by it 3) if on an exchange in BC, must immediately send written notice to the exchange, and the order becomes effective 4) after providing opportunity to be heard, may extend order under subsection (1) until hearing held + decision

Option 1(b): Civil Remedies – Applications to CourtBCSA s.157 Order for compliance: - BOP

(1) In addition to any other powers it may have, if the commission considers that a person has contravened or is contravening a provisions of this act or of the regulations, or has failed to comply or it not complying

(1) One or more of following:o (a) an order that

(i) the person comply with or cease contravening the provision or decision, and (ii) the directors and officers of the person cause the person to comply with or to cease contravening the

provision or decision;o (b) an order that the person pay to the commission any amount obtained, or payment or loss avoided, directly or

indirectly, as a result of the failure to comply or the contravention;o (c) an order setting aside a transaction relating to trading in securities or exchange contracts;o (d) an order that a security or exchange contract be issued or cancelled;o (e) an order that a security or exchange contract be purchased, disposed of or exchanged;o (f) an order prohibiting the voting of a security or the exercise of a right attaching to a security or exchange contract;o (g) an order appointing a director of the person that is the subject of the application;o (h) an order that the person repay a holder of a security or an exchange contract money paid by the holder for the

security or exchange contract;o (i) an order that the person compensate or make restitution to any other person;o (j) an order that the person pay general or punitive damages to any other person;o (k) an order that the person correct a record;o (l) an order that the person rectify any contravention of this Act, or the regulations, to the extent that rectification is

possible. (2) On an application, Supreme Court may make order applied for and any other order considered appropriate. And the commission considers it in the public interest to do so

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Can double-tap someone (3) order may be made even though a penalty has already been imposed on that person in respect of the same non-compliance or contravention.

The commission may apply to the Supreme Court for order(s) – LOTS OF STUFFo Ex: Forcing compliance, ordering transactions be rescinded, financial statements be produced, appoints of OFRs or DIRs,

compensation or restitution, or ANY other order it considers appropriate. o Note: does not require hearing

Option 2: Penal (Quasi-Criminal Provisions)General – They are not criminal provisions b/c not in CC but they use BARD burden of proof (b/c imprisonment)

Commissions’ investigation and enforcement divisions determine if a matter should be pursued quasi-criminally (before prov ct), rather than administratively (before Commission), or criminal (CC)

[1] General Offences (BCSA 155(1)): any person provides quasi-criminal offences which must be proven BARD:a) fails to file, provide, deliver or send a record that i) is required or ii) is required … within the time required under this Act;b) contravenes any of section of s. 34 (registration) … 50 (reps prohibited) … 57 (fraud) … 57.2 (Insider trading) … 61 (Prospectus), 85(b) (Timely Disclosure) … c) fails to comply with a decision made under this Act;d) contravenes any of the provisions of the regulations that are specified by regulation for the purpose of this paragraph;e) contravenes any of the provisions of the commission rules that are specified by regulation for the purpose of this paragraph.

DEFENSES: 1) Due Diligence – the Accused must prove he or she did everything reasonably possible to avoid committing the offence; 2) Where the allegation is that a required thing was not done, the burden is on the Accused to prove that it was done (R v Boyle)

[2] DIR/OFR permitting an Offence (155(4)): If a person, other than an individual, commits an offence under (1), an EMPL/DIRs/OFRs or agent who authorize, permit or acquiesce (i.e. willful blindness) in the commission of a general offence are liable for the offence, regardless of whether their corporation or firm has been charged or found guilty.

Prosecution must prove that the DIR or OFR knew a general offence was committed. : R v Armaugh Corp, 993 Ont Gen Div DEFENSE: Limited to Due-Diligence Defense.

REPRESENTATIONS PROHIBITED 50 (1) A person, while engaging in investor relations activities or with the intention of effecting a trade in a security, must not do

any of the following: - trade = dispositiono (a) represent that the person or another person will resell or repurchase a security or refund its purchase priceo (b) giving an undertaking relating to the future value or price of securityo (c) representing (w/o Exec Dir prior permission) that the security will or, or application has been made that it be,

listed on an exchangeo (d) make a statement that the person knows, or ought reasonably know, is a misrepresentation

1(1) "misrepresentation" means (a) an untrue statement of a material fact, or (b) an omission to state a material fact that is (i) required to be stated, or (ii) necessary to prevent a statement that is made from being false or misleading in the circumstances in

which it was made;o (e) engage in an unfair practice

FRAUD ( 57 ) Manipulation and fraud: A person must not, directly or indirectly, engage in or participate in conduct relating to securities or

exchange contracts if the person knows, reasonably should know, that the conducto (a) results in or contributes to a misleading appearance of trading activity in, or an artificial price for, a security or

exchange contract, oro (b) perpetrates a fraud on any person

See CC – use Therouxo AR: the prohibited act; and deprivation caused by the prohibited act (loss or at risk)o MR: subjective knowledge of the prohibited act; and subjective knowledge that the prohibited act could have as a

consequence the deprivation of another (incl. put at risk)

PENALTIES:General (155(2)): Liable to a fine of not more than $3million or to imprisonment for not more than 3 years, or both (Charter has never been successfully argued here though).

Failure to do periodic disclosure is not an offence under this.

DEFENCES: due diligence defence b/c strict liability; accused must prove he or she did everything reasonably possible to avoid committing the offence – see above also74

Special Set of Penalties for Fraud and IT if contravene 57, 57.2 (155(5)): (a) not less than any profit made by all persons b/c of the contravention of s 57, 57.2 or 57.3 AND (b) not more than the greater of (i) $3M, and (ii) triple profit made b/c of contravention

Additional Remedies (155.1): If the court finds that a person has committed an offence under section 155, the court may make an order that

(a) the person compensate or make restitution to another person, or (b) the person pay to the commission any amount obtained, or payment or loss avoided, directly or indirectly, as a result of

the offence.

Contraventions Attributable to Employees, Officers, Directors and Agents (168.2)Option 3: Criminal Fraud (380 (1)): Every one who, by deceit, falsehood or other fraudulent means, whether or not it is a false pretence within the meaning of this Act, defrauds the public or any person, whether ascertained or not, of any property, money or valuable security or any service,

(a) is guilty of an indictable offence and liable to a term of imprisonment not exceeding fourteen years, where the subject-matter of the offence is a testamentary instrument or the value of the subject-matter of the offence exceeds five thousand dollars; or

(b) is guiltyo (i) of an indictable offence and is liable to imprisonment for a term not exceeding two years, oro (ii) of an offence punishable on summary conviction,

where the value of the subject-matter of the offence does not exceed five thousand dollars.

Theft (322 (1)): Every one commits theft who fraudulently and without colour of right takes, or fraudulently and without colour of right converts to his use or to the use of another person, anything, whether animate or inanimate, with intent

(a) to deprive, temporarily or absolutely, the owner of it, or a person who has a special property or interest in it, of the thing or of his property or interest in it;

(b) to pledge it or deposit it as security; (c) to part with it under a condition with respect to its return that the person who parts with it may be unable to perform; or (d) to deal with it in such a manner that it cannot be restored in the condition in which it was at the time it was taken or

converted.

Punishment for theft (330): Except where otherwise provided by law, every one who commits theft (a) is guilty of an indictable offence and liable to imprisonment for a term not exceeding ten years, where the property stolen

is a testamentary instrument or the value of what is stolen exceeds five thousand dollars; or (b) is guilty

o (i) of an indictable offence and is liable to imprisonment for a term not exceeding two years, oro (ii) of an offence punishable on summary conviction,

where the value of what is stolen does not exceed five thousand dollars.

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