Securities Regulation Course Summary 2008

Table of Contents

2The battle for provincial regulation

Securities regulators regulate securities trades that amount a distribution or offering2The law has a purposive approach to defining securities2Determining if a distribution has occurred3Determining if a Distribution has occurred3A reporting issuer4The Prospectus4Underwriters: definition4The Prospectus Process (s. 127 sanctions apply)5Cooling off period6Contents of a Prospectus6Refusing to Issue a Receipt9Material Fact9Material Change10The difference between a material change and a material fact10Issuers are not required, but can choose to include FOFI10Sanctions for failing to disclose in FOFI and Distribution11Sanctions for failure to deliver a prospectus11Alternatives to the prospectus11Misrepresentations in a Prospectus12Continuous and Periodic Disclosure Requirements14CanSox: Recent Canadian Reforms15Continuous Disclosure: Certification15Continuous Disclosure: Material Changes16Insider Trading21Prospectus Exemptions: Issuers and Investors24Prospectus Exemptions: Pre-existing R/ship between issuer and investor25Offering Memoranda Requirements re: Exemptions26Resale Rules / Control Distributions27Control block holders can sell off their securities in the following fashion28Takeover Bids28Exemptions from Takeover Bid Requirements: s. 93 SA30Takeover bids: Defensive Tactics (NP 62-202)31Takeover caselaw31Issuer Bids: Going Private32Enforcement and Public Interest Considerations37122. (1) Every person or company that,42s Applications to court43Interim orders44Liability for misrepresentation in circular44

The battle for provincial regulation

Ontario gets its ability to control securities from s. 92

If the feds were to get it, they would do so under s. 91

Mayland v. Lymburn (32) ( Prov. sec. reg. does not encroach on federal leg. law w/ respect to crim lawfed companies inc. under fed law can be subjected to prov. law

R v. Smith (66) ( Crim. powers ok in prov. sec. even if it covers the same ground as crim codeprovided that the two are not irreconcilable R v. McKenzie Securities (66) ( People can be subjected to laws of non-residential prov where they are violating the laws of that prov. (the guys selling to Manitoba)

Multiple Access v. McCutcheon (82) ( Both provs and feds have right to regulate insider trading (both laws are intra vires); where both laws can be followed; paramountcy cannot be invoked Quebec v. OSC(92) ( By entering the capital mrkts of another prov, Q subjects itself to their rules

Global Securities v. BCSC (00) ( Regulators are allowed to assist foreign agencies under 92(13); this assists future regulation efforts

Securities regulators regulate securities trades that amount a distribution or offering

The law has a purposive approach to defining securities

1. Start w/ the statute (likely going to go w/ s. 1(1)(n):

2. s. 1(1) SA employs a broad and open-ended definition:

a. any document, instrument or writing commonly known as a securityb. Any document constituting evidence of title to or interest in the capital, assets, property profits, earnings or royalties of any person or companyc. Document constituting evidence of an interest of legatees or heirs (historical)

d. Any document constituting evidence of an option, subscription or other interest in or to a security (options are themselves securities)

e. Any bond, debenture, note or other evidence of indebtedness, share, stock, unit, certificate, participation certificate, certificate of share or interest, pre-organization certificate or subscription other than a K of insurance evidence of deposit issued by a bank

f. Any 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

g. Any agreement providing that money received will be repaid or treated as a subscription to shares, stock, units or interests at the option of the recipient or of any person or company

h. Any certificate of share or interest in a trust, estate or associationi. Any profit-sharing agreement or certificate

j. Any certificate of interest in an oil, natural gas or mining lease, claim or royalty voting trust certificate

k. Any oil or natural gas royalties or leases or fractional or other interest therein

l. Any collateral trust certificate

m. Any income or annuity K not issued by an insurance companyn. Any investment K (this is what the courts use by looking at purposive approach to transaction)

o. Any document constituting evidence of an interest in a scholarship or educational plan or trust (RESPs for instance)

p. Any commodity futures K or any commodity futures option that is not traded on a commodity futures exchange registered w/ or recognized by the Commission under the Commodity Futures Act

NOTE: derivatives are not specifically listed; nonetheless, they qualify as options, futures or combinations of both

3. The court considers the following factors in deciding this:

4. Factors the court considers:

(1) Investor Protection:

Is the investor protected by other laws?

Does the investor otherwise need protection here?

(2) Expectation of profit:

Why give the money, expecting a profit?

Particularly where the idea is to get more than before

(3) Risk factor:

Any risk is enough; increased risk, increased intention

(4) Purchasers degree of control:

Where the investor has minimal control, need for protection

(5) Independent value:

Does the tradable item have independent value aside from acting as a security (think gold coins)?

(6) Substance over form:

Is this a security pretending to be otherwise?

(7) Overlap in definition:

Look for tradables that meet more than one def in s. 1(1)

(8) U.S. caselaw: U.S. cases are usefully cited.

See Howey and Hawaii (both below)

(9) Explicit exclusions:

insurance contracts and banking slips (o/w would qualify)f

5. To fight the definition, use Howeys bright-line test:

1. Investing money

2. Common enterprise

3. On expectation of profits

4. Solely from the efforts of the promoter/third party

b. SEC v. Howey ( facts: H sold interests in plots of lands which grew orange groves. Purchasers could then buy a service contract from H to farm the land. Ps could not farm land themselves and in some cases were restricted from accessing it. Each lot could be individually quite small. Note that some people did actually hire other party than H.

6. For a more purposive definition, use Hawaiis risk-capital test

1. Is there an investment in a

2. Common enterprise w/ is

3. Subject to the risks of the enterprise but is

4. Expected to generate a profit

7. For a more flexible Howey, use Pacific Coast Coin Exchange v. OSC

1. Investing money

2. Common enterprise

a. Amended to mean common among investors and promoters, not simply among investors

3. On expectation of profits

4. undeniably significantly from the efforts of the promoter/third party

a. Will have to be undeniably significant factors to success/failure of the enterprise

8. For an example of how difficult these are to define, consider Albinothree decisionstwo agreeing to regulate; one because he felt phantom stock options were securities; the other because he felt that it was in the public interest to regulate these things

Determining if a distribution has occurred

1. S. 1(1) SA says that a trade has five characteristicsif any qualify, regulation

a. Sale for valuable consideration (whether on margin, installment or otherwise)

i. Note that this covers sale but not purchases as there is an asymmetry between purchasers and buyers

b. Trades by professionals

c. Any receipt by a registrant of an order to buy or sell securities

d. Trades by control persons

i. Pledging by non control shareholders are excluded because c/hs are assumed to have greater access to info

e. Acts in furtherance of a sale

i. Providing a list of names of prospective securities purchasers or advertising an IPO

Determining if a Distribution has occurred

1. This step is essential as distributions call for prospectus requirements; section 1(1) says:

a. Securities not previously issued

i. Not previously issued in Ontario

b. Reissue of securities

i. Corp. cannot reissue securities in Ontario as per corp. law

c. Sale of securities by control persons

i. Rationale has three points:

1. C/P may have effective control over mgmt (better access to info)

2. Large sale could alter the companys mrkt pstn

3. C/P could be a significant factor in comp.s success; investors would want to know if leaving

d. IGNORE

e. IGNORE

f. Resale of securities

i. Only triggered where securities originally issued under an exemption

A reporting issuer

1. A reporting issuer is (1(1) SA):

a. Has issued voting securities on or after May 67 w/ a prospectus has been filed

b. Has filed a prospectus w/ the Director issuing a receipt

c. Has had securities listed on a recognized stock exchange in Ontario recognized by the OSC (need not have been a trade)

d. CBCA applies

e. Blah blahnot relevant

The Prospectus

1. Definition:

a. A detailed circular setting info underpinning the issuers distribution of the securities to the public

i. S. 53 SA requires a prospectus filing (both prelim and full) w/ the OSC before the distribution of a securityIPOs, primary offerings, and secondary offerings by c/h

Underwriters: definition

(1) S. 1(1) SA: An underwriter means a person or company who, as principal, agrees to purchase securities w/ a view to distribution or who, as agent, offers for sale or sells securities in connection w/ a distribution and includes a person or company who has a direct or indirect participation in any such distribution, but does not includesMost are investment banks

a. Underwriters role:

i. Offer credibility to issuers

ii. Determine price and terms of offering

iii. Give governance & compliance advice

iv. Meet public obligations to protect mrkt integrity

v. Sign prosectus as to validity knowledge, information and belief

b. Underwriters will employ one of the following

i. Direct offering: google-no underwriting

ii. Agency: use best efforts to place securities and take a commission on sale (typically 7 percent)

iii. Firm commitment: underwriter agrees to purchase all securities and profit on the spread

iv. Bought deal: Occurs where the underwriter makes a firm commitment to purchase a large block of shares within 2 days prior to the preliminary prospectus

c. Underwriters w/ generally employ a m/out or a d/out clause:

i. Market-out underwriter can terminate where securities for reasons of present market cannot marketed profitably

ii. Disaster-out underwriter can terminate where the mrkt as a whole is in the dumps

1. Retrieve Resources v. Canaccord Capital and CLD Financial ( Underwriters can only rely on market out-clauses where there complaint specifically applies to their mrktd. Underwriters have a duty of care: must take a adversarial role: must play devils advocate (YBM)

i. YBM: The phrase to the best of our knowledge, information and belief carries w/ it a requirement to obtain information before an underwriter can make that affirmation. An underwriter must go beyond the statements of the issuers directors, officers and counsel and must avoid automatic reliance.e. S. 2.1(2) 31-105CP (to NI 33-105) outlines three conflicts of interest that an underwriter may face

i. Underwriter as issuer: underwriter cannot act as underwriter in this capacity

ii. Related issuer: either issuer or underwriter is an influential shareholder of the other; underwriter cannot act as direct underwriter in this instance

iii. Connected issuer: issuer has r/s w/ underwriter w/ casts doubt on registrant

1. YBM Magnex ( Underwriters face a lower requirement for disclosure and certification only to the best of our knowledge, information and belief; h/w cannot accept issuer stmts as true

2. Kerr v. Danier ( Bought deals render rescission against the issuer impossible; however, not so against the underwriter

The Prospectus Process (s. 127 sanctions apply)

PeriodActivities of the PeriodDocuments IncludedContents of DocumentsNotes

Pre-Filing PeriodSecure services of underwriter, gather documents needed for prospectus, develop PP, file PP and obtain receipt form Regulator, organizational meetings, collection of corporate documents, minutes of board meetingsPP (preliminary prospectus)Assumed by regulator that documents are near completion (except security price, class): resolution of board authorizing filing, UW agreement, financial statements, certification note by officers, caution that PP is not finalPP is not a draft (s. 54)

Regulators can refuse to issue a receipt if not in the public interest (unconscionable) (SA s. 61(2)) but rarely happens (Tricorp)

Due process protection for issuer (s. 61(4) SA)

Regulator can prohibit PP distribution if there is a PP defect (s. 68 SA)

Shall issue receipt (s. 55)

Where adverse material change after receipt, must file amendment must be filed ASAP or in 10 days (s. 57)

Waiting Period (time between PP receipt and FP receipt)Once receipt is issued for PP, issuer can get interest from investors (s. 65(2) SA). Also revisions to PP are ongoing, as are distributions of commercial copies of PP, road shows and negotiations w/ OSCWaiting period minimum 10 days for long-form prospectuses (s. 65(1) SA)

Distribution of PP can be (un) solicited, but advertising can only alert to availability of PP (re Cambior)

Must maintain distribution list (s. 67) and provide PP to each prosp. Purchaser who requests it (s. 66)

Filing of final prospectusFiling of final prospectus and issuance of a receiptFinal Prospectus (FP)Business plan, financial statements for last three years (balance sheet, cash flow, income) (OSC 41-501), capital structure, estimated proceeds of distr., purpose for capital, underwriter agreement, list of factors making security riskyOverriding Principle

Certification required by CEO, CFO and 2 directors that prospectus contains full, true and plain disclosure of all material facts

Note Lapse date:

Distribution cannot continue 12 months after FP receipt (s. 62 SA)

Pre-closing StageCommercial copies of FP are delivered to investors, receipt for FP received from OSC, commercial copies of FP printed and distributed, cooling-off period begins to runInvestors cannot actually buy securities until after receipt for FP is received (s. 53(1) SA)

Cooling-off periodInvestors have 2 days to opt out of promise to buy after delivery of FP or amended FP (s. 71 SA)Deals w/interaction w/ material change reporting (s. 57 SA)

See cooling off period examples below

Post-closing stageDistribution of securities (note receipt from regulator for FP neededUnderwriters advise issuers that securities are out of distribution

Cooling off period

Governed by the interaction between s. 71(2) and s. 57

Where the purchaser informs the dealer in writing or telegraphic notice of an intent to w/draw, not later than midnight on the second business day, after receipt by the purchaser of the latest prospectus and any amendment (s. 71(2))

In effect, the cooling off period kicks w/ the delivery of the final prospectus

Filing an amendment pauses the cooling off period until the amendment is delivered

Example 1Example 2Example 3

Day 1: final prospectus received

Day 2: agreement to buy

Day 5: prospectus amendment filed

Day 6: investor wants out. Can they?

No. They made a binding agreement, and the cooling-off period ended on day 3. Investor wouldnt receive amendment that would trigger a new cooling-off periodDay 1: agree to buy

Day 4: receive FP

Day 5: Prospectus amendment filed

Day 8: Amendment delivered

Day 9: Want out. Can they?

Yes. An investor is entitled to get an amendment if it is filed during the cooling-off period and receipt on day 8 triggers a new cooling-off period

The cooling off period began on Day 4, but restarted on Day 5 and remains paused until day 8, thus day 9 is within the two daysDay 1: receive prospectus

Day 4: agree to buy

Day 5: prospectus filed. Entitled to receive?

No. If the investor is beyond the cooling off period when he agrees to buy, the cooling off period does not run.

Contents of a Prospectus

1. General compliance standard

a. SA s. 56(1): A prospectus shall provide full, true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed and shall comply w/ the requirements of Ontario securities law

i. Break this into two points:

1. Full, true and plain disclosure of all material facts

2. Comply w/ the requirements of Ontario securities law

b. Failure to comply w/ s. 56, the OSC rule, or section 57 can lead to sanction under s. 130, as per YBM Magnex (they ought to have disclosed the material fact re: FBI investigation)

c. 41-101 General Prospectus Requirements

d. A prospectus is to include:

i. Description of offering (i.e. securities characteristics) (NI 41-101 item 10)

ii. Financial statements (part IV of NI 41-101; NI 41-101F1 Item 32)

1. Must include three years worth, including interim financial statements (NI 41-101F1 32.1) for the most recently completed interim statement (released more than 60 days prior to the prospectus release). To include (as per NI 41-101 32.2(1)):

a. An income statement, a statement of retained earnings, and a cash flow statement for each of the three most recently completed financial years ended more than

i. 90 days before the date of the prospectus, or

ii. 120 days before the date of the prospectus, if the issuer is a venture issuer

2. Comparative interim financial statements of the issuer for the most recent interim period, if any, ended (a) after the companys most recent financial yearly report (NI 41-101F1 32.3(1)). To include (NI 41-101F1 32.4(2)):

a. Balance sheet at end of interim period and balance sheet at end of preceding financial year

b. An income statement, statement of retained earnings and a cash flow statement all for year-to-date interim period and comparative financial info for the corresponding interim period

c. For interim periods other than the firm interim period in a current financial year, an income statement and a cash flow statement, for the three month period ending on the last day of the interim period and comparative financial info for the corresponding period in the preceding financial year, and

d. Notes to the financial statements

iii. Description of business and business history (3 years) (NI 41-101F1 item 5(5.1 (describe the business) and 5.2(describe 3 year history)))1. Include market trends, significant acquisitions. Note that the material information includes that w/ can have an impact on the market (qualitative approach)

2. Section 6 is a narrative of main business events, milestones, principle products and services, markets, etc.

iv. Disclosure of risk factors (NI 41-101F1 item 21)

1. Risk can be internal business risk but can also relate to general economy, political environment, etc. Subsection 2 of 20 requires disclosure of risk to the security holder for the issuers liabilityv. Principle shareholders (identities) to be disclosed (item 15)

vi. Executive compensation disclosure (item 17)vii. Audit committees and corporate governance (item 19)

viii. Use of proceeds (item 6)

ix. MD&A (item 8)

x. Any legal proceedings (item 23)

xi. R/ship w/ underwriter (item 25)

xii. Material contracts (item 27; NI 41-101 s. 9.3)APPENDIX B

Schedule 2

FORM 41-101F1

INFORMATION REQUIRED IN A PROSPECTUS

TABLE OF CONTENTS

GENERAL INSTRUCTIONS

ITEM 1 Cover Page Disclosure

1.1 Required statement

1.2 Preliminary prospectus disclosure

1.3 Basic disclosure about the distribution

1.4 Distribution

1.5 Offering price in currency other than Canadian dollar

1.6 Non-fixed price distributions

1.7 Pricing disclosure

1.8 Reduced price distributions

1.9 Market for securities

1.10 Risk factors

1.11 Underwriter(s)

1.12 International issuers

1.13 Restricted securities

1.14 Earnings coverage

ITEM 2 Table of Contents

2.1 Table of contents

ITEM 3 Summary of Prospectus

3.1 General

3.2 Cautionary language

ITEM 4 Corporate Structure

4.1 Name, address and incorporation

4.2 Intercorporate relationships

ITEM 5 Describe the Business

5.1 Describe the business

5.2 Three-year history

5.3 Issuers with asset-backed securities outstanding

5.4 Issuers with mineral projects

5.5 Issuers with oil and gas operations

ITEM 6 Use of Proceeds

6.1 Proceeds

6.2 Junior issuers

6.3 Principal purposes generally

6.4 Principal purposes indebtedness

6.5 Principal purposes asset acquisition

6.6 Principal purposes insiders, etc.

6.7 Principal purposes research and development

6.8 Business objectives and milestones

6.9 Unallocated funds in trust or escrow

6.10 Other sources of funding

6.11 Financing by special warrants, etc.

ITEM 7 Dividends or Distributions

7.1 Dividends or distributions

ITEM 8 Managements Discussion and Analysis

8.1 Interpretation

8.2 MD&A

8.3 SEC issuers

8.4 Disclosure of outstanding security data

8.5 More recent financial information

8.6 Additional disclosure for venture issuers or IPO venture issuers without significant revenue

8.7 Additional disclosure for junior issuers

8.8 Additional disclosure for issuers with significant equity investees

ITEM 9 Earnings Coverage Ratios

9.1 Earnings coverage ratios

ITEM 10 Description of the Securities Distributed

10.1 Equity securities

10.2 Debt securities

10.3 Asset-backed securities

10.4 Derivatives

10.5 Special warrants, etc.

10.6 Restricted securities

10.7 Other securities

10.8 Modification of terms

10.9 Ratings

10.10 Other attributes

ITEM 11 Consolidated Capitalization

11.1 Consolidated capitalization

ITEM 12 Options to Purchase Securities

12.1 Options to purchase securities

ITEM 13 Prior Sales

13.1 Prior sales

13.2 Trading price and volume

ITEM 14 Escrowed Securities and Securities Subject to Contractual Restriction on Transfer

14.1 Escrowed securities and securities subject to contractual restriction on transfer

ITEM 15 Principal Securityholders and Selling Securityholders

15.1 Principal securityholders and selling securityholders

ITEM 16 Directors and Executive Officers

16.1 Name, occupation and security holding

16.2 Cease trade orders, bankruptcies, penalties or sanctions

16.3 Conflicts of interest

16.4 Management of junior issuers

ITEM 17 Executive Compensation

17.1 Disclosure

ITEM 18 Indebtedness of Directors and Executive Officers

18.1 Aggregate indebtedness

18.2 Indebtedness of directors and executive officers under securities purchase and other programs

ITEM 19 Audit Committees and Corporate Governance

19.1 Audit committees

19.2 Corporate governance

ITEM 20 Plan of Distribution

20.1 Name of underwriters

20.2 Disclosure of conditions to underwriters obligations

20.3 Best efforts offering

20.4 Minimum distribution

20.5 Determination of price

20.6 Stabilization

20.7 Approvals

20.8 Reduced price distributions

20.9 Listing application

20.10 Conditional listing approval

20.11 IPO venture issuers

20.12 Constraints

20.13 Special warrants acquired by underwriters or agents

ITEM 21 Risk Factors

21.1 Risk factors

ITEM 22 Promoters

22.1 Promoters

ITEM 23 Legal Proceedings and Regulatory Actions

23.1 Legal proceedings

23.2 Regulatory actions

ITEM 24 Interests of Management and Others in Material Transactions

24.1 Interests of management and others in material transactions

24.2 Underwriting discounts

ITEM 25 Relationship Between Issuer or Selling Securityholder and Underwriter

25.1 Relationship between issuer or selling securityholder and underwriter

ITEM 26 Auditors, Transfer Agents and Registrars

26.1 Auditors

26.2 Transfer agents, registrars, trustees or other agents

ITEM 27 Material Contracts

27.1 Material contracts

ITEM 28 Experts

28.1 Names of experts

28.2 Interest of experts

ITEM 29 Other Material Facts

29.1 Other material facts

ITEM 30 Rights of Withdrawal and Rescission

30.1 General

30.2 Non-fixed price offerings

ITEM 31 List of Exemptions from Instrument

31.1 List of exemptions from Instrument

ITEM 32 Financial Statement Disclosure for Issuers

32.1 Interpretation of issuer

32.2 Annual financial statements

32.3 Interim financial statements

32.4 Exceptions to financial statement requirements

32.5 Exceptions to audit requirement

32.6 Additional financial statements or financial information filed or released

ITEM 33 Credit Supporter Disclosure, Including Financial Statements

33.1 Credit supporter disclosure, including financial statements

ITEM 34 Exemptions for Certain Issues of Guaranteed Securities

34.1 Definitions and interpretation

34.2 Issuer is wholly-owned subsidiary of parent credit supporter

34.3 Issuer is wholly-owned subsidiary of, and one or more subsidiary credit supporters controlled by, parent credit

supporter

34.4 One or more credit supporters controlled by issuer

ITEM 35 Significant Acquisitions

35.1 Application and definitions

35.2 Completed acquisitions for which issuer has filed business acquisition report

35.3 Completed acquisitions for which issuer has not filed business acquisition report because issuer was not

reporting issuer on date of acquisition

35.4 Results consolidated in financial statements of issuer

35.5 Recently completed acquisitions

35.6 Probable acquisitions

35.7 Pro forma financial statements for multiple acquisitions

35.8 Additional financial statements or financial information of the business filed or released

ITEM 36 Probable Reverse Takeovers

36.1 Probable reverse takeovers

ITEM 37 Certificates

37.1 Certificates

37.2 Issuer certificate form

37.3 Underwriter certificate form

37.4 Amendments

37.5 Non-offering prospectusesTricor: The difficulties of getting meaningful compliance w/ prospectus requirements

The Commissioner was reasonably sure that Irving Kotta convicted felonwas truly the head of Tricor and refused granting a receipt for the prospectus. OSC upheld the right of the Commissioner to refuse certification where the person does not meet the standard of honest and of good repute. CDS was listed as only registered owner of more than 10 percent; IK really controlled via son.

Refusing to Issue a Receipt

1. The OSC can refuse to issue a final receipt if it is not in the public interest to do so (s. 61(1))

2. Director can refuse where it appears that (s. 61(2):a. The prospectus/connected documents:

i. Do not comply w/ the act in any substantial respect

ii. Contains any statement, promise, estimate or FOFI that is misleading, false or deceptive

iii. Contains a misrep

b. An unconscionable consideration has been paid or give or is intended to be paid or given for any services or promotional purposees or for the acquisition of property;

c. Where the money to be acquired would be insufficient for the purpose statedMaterial Fact

1. Section 1(1) material fact is a fact that would reasonably be expected to have a significant effect on the market price or value of the securities

a. Includes internal (inner mgmt issues) and external (general market issues) factors

b. Canada uses a market impact test:

i. What is the likelihood this will occur?

ii. What will be the impact on the market

c. US uses a reasonable investor test (would this fact affect the thinking of reasonable investor in deciding whether to purchase or sell this security?)

Material Change

1. Material change defined as (s. 1(1) SA):

a. (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 any of the securities of the issuer, or (ii) a decision to implement a change referred to in subclause (i) made by the board of directors or other persons acting in a similar capacity or by senior management

2. NI 51-102 defines material change as 1.1(1):

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

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

3. s. 57 SA Where a material change occurs during the waiting or distribution period, an issuer has an obligation to:

1. Subject to subsection (2), where a material adverse change occurs after a receipt is obtained for a preliminary prospectus filed in accordance w/ subsection 53(1) and before the receipt for the prospectus is obtained or, where a material change occurs after the receipt for the prospectus is obtained but prior to the completion of the distribution under such prospectus, an amendment to such preliminary prospectus or prospectus, as the case may be, shall be filed as soon as is practicable and in any event within 10 days after the change occurs

2. Where an amendment to a prospectus is filed under subsection (1) additional distribution shall not be proceeded w/ for a period of ten days after the amendment is filed, or if the Commission objects to the further distribution, until such time as a receipt for the amended prospectus is obtained from the Director

3. An amendment to a preliminary prospectus shall be forwarded to each of recipient of the preliminary prospectus according to the record maintained under s. 67

4. An issuer has further obligations under s. 75 SA:

a. (1) Issue a news release and (2) file a report w/ the OSC of the change

The difference between a material change and a material fact

1. Pezim v. BC went far in distinguishing these issues:

2. Material facts include all risks (even external factors) that could reasonably be expected to significantly affect the securitys value3. Material changes only concern changes in the business, operation, assets or ownership of the issuer

Issuers are not required, but can choose to include FOFI

1. FOFIfuture oriented financial information can be included in a prospectus

2. Companies should do their best so that FOFI reflects a companys judgment based on the most probable set of economic conditions applicable to its forecast

3. Opinions have to be based on evidence and reasonable conclusions

4. FOFI are only to be included where the issuer has existed for more than 2 years

5. If less, can only make projections (essentially, to include a hypothesis about plausible circumstances rather than most probable economic conditions)

6. FOFI must include:

a. A cautionary note that results may vary widely from forecast

b. No forecasts beyond two years

c. Information material to the issuers circumstances (material being defined as info that would change or significantly affect a purchasers decision to buy or not

7. FOFI must be updated where there is a change in the events or assumptions used to prepare the FOFI that materially affects the FOFI

8. As per NP 48, issuers need to compare FOFI w/ actual results

Sanctions for failing to disclose in FOFI and Distribution

s. 130?

See Kerr v. Danier

See Weinstein

Sanctions for failure to deliver a prospectus

1. s. 71 defines the requirements for delivering prospectuses: A dealer not acting as agent of the purchaser who receives an order or subscription for a security offered in a distribution to which subsection 53(1) or section 62 is applicable shall, unless the dealer has previously done so, send by prepaid mail or deliver to the purchaser the latest prospectus and any amendment to the prospectus filed either before entering into an agreement of purchase and sale resulting from the order or subscription2. Where this has been finalized, three possibilities:

a. Penal Sanction

i. S. 122(1)(c): distributing without a prospectus or by incorrectly using an exemption will results in an order preventing further distribution and being found liable under s. 122

b. Administrative order for compliance

i. S. 127(1) (5) empowers the OSC to issue an Order that a release, report, preliminary prospectus, prospectus, return, financial statement, information circular, takeover bid circular, issuer bid circular, offering memorandum, proxy solicitation or other document:

i. Be provided by a market participant

ii. Not be provided

iii. Be amendedto the extent that amendment is practicable

c. Civil sanction

i. S. 133: A purchaser who should have received a prospectus, a takeover bid circular, issuer circular, etc. but did not in violation of s. 95 or s. 98 has a right of action for rescission or damages against the dealer or offeror who failed to comply w/ the applicable requirementii. Apply under s. 128?

iii. CL1. Jones and Deacon Hodgson ( An agreement is void if there was a failure to meet prospectus requirements2. More specifically, Deacon Hodgson distinguishes between failing to file a prospectus and failing to deliver one

a. A failure to file a prospectus renders a K voidAlternatives to the prospectus

AlternativeGoverning instrumentDescriptionEligibilityContents

SFP (short form prospectus)NI 44-101 (all other rules that govern a prospectus also apply to SFP)

MRRS rules under NP 43-201 govern the review timelinesAllows large, repeat issuers to make timely and cost-efficient public offerings. Due to recently-enhanced eligibility, long-form prospectus will now only be used for IPOsdebt securities must be rated by a rating agency (2.3(e));

44-101 2.2: (a) be SEDAR filer, (b) be an RI in a CDN jurisdiction, (c) have filed all periodic and timely disclosure documents, (d) has in at least one jurisdiction current annual financial statements and a current AIF, and (e) is listed on a short form eligible exchange (TSX, TSX Venture, etc.) and is not an issuer whose operations have ceased or has cash as its principle assetsInitial and current AIF

SFP requirements on form 44-101F

Distribution Plan

Intended Market

Use of proceeds

Rights attaching to securities

Continuous disclosure filed during year (thus, misreps are actionable under s. 130)

Summary statement can also be filed that can be used to sell instead of a prospectus

See item 11 (1194) for list of docs to be included

Note requirement for active, brief writing style 44-101CP part 4

Shelf ProspectusNI 44-102A shelf-prospectus allows an issuer to file an SFP in advance, and shelve it until use (max. 25 months)

Securities can be distributed at any timeAvailable to any issuer that qualifies for an SFPWhen it is time to distribute, only a supplement to update info is requiredNI 44-102s. 5.6 (1229) itemizes info that can be omitted from a base shelf prospectus (info re: securities, price, info re: underwriter,etc.) This info is provided later, when security is to be issued

Post-receipt pricing prospectus (PREP)NI 44-103Main difference between a PREP and an Shelf P. is that the post-receipt period is much shorter (90 days on the shelf; not 2 years)PREP is available to all issuers, not just those who qualify for SFPBasically same contents as SFP

Two step filing process (file base P (which has 90 day life) but can only be used for a single-type of security NOT rights offering

MJDS ProspectusNI 71-101Enables prospectus offerings for distributions in CAN and US or distributions by US issuers in Canada (provided compliance w/ NI 71-101Issuer must have a sufficient reporting history or be of sufficient mrkt size, etc. based on type of security

RI in CDA for 1 year

Public float of $75mMajor benefits to CDN issuers who want to access US capital markets (and vice versa).

Facilitates the extension to CDN investors in US issuers of to bids, issuer bids, etc.

Capital pool companiesOSC 41-601 and reqs for listing on exchange CDNX Policy 2.4Special arrangement for comp.s that have no assets other than cash and have not commenced business activityCPC will submit PP and FP and after the distribution closes the CPC has 18 months to complete a qualifying transactionHighly scrutinized by regulators due to increased risks. Popular form for small mining companies needing funds for explorations

Misrepresentations in a Prospectus

1. Limitation Period (s. 138)

a. Rescission: 180 days after the date of the transaction that gave rise to cause of action or

b. Any other action: earlier of

i. 180 days after the plaintiff had knowledge of facts giving rise to cause of action

ii. three years after the date of the transaction that gave rise ot the cause of action

2. A plaintiff must first meet the following test:

a. Purchase securities offered under the prospectus

b. Buy said securities during distribution period

c. Be able to prove a misrepresentation existed in the prospectus

i. NOTE: no need for reliance via s. 130 (deemed reliance)

3. S. 130(1) allows investors to pursue either damages or rescission where an issuer has a misrepresentation (and by implication omission) in their prospectus

a. For damages or rescission: An investor can pursue

i. 130(1)(a) the issuer or

ii. 130(1)(b) the underwriter who signed the certificate required by s. 59

b. For damages only: An investor can pursue action against

i. (c) Every director at the time of the prospectus/amendment was filed,

ii. (d) (Experts) every person or company whose consent has been filed pursuant to a requirement of the regulations but only with respect to reports, opinions or statements that have been made by them

iii. (e) every person or company who signed the prospectus/amendment other than the persons or companies mentioned in (a)-(d) (i.e. CFOs)

c. Misrepresentation can also be pursued:

i. Where it occurs in offering memoranda and takeover bid circularsii. And against those in a special r/ship w/ the RI, who purchase or sell based on insider infod. Pursuing under s. 130 does bar further legal action (s. 130(10)) in addition and without any derogation from any other right the purchaser may have at law4. A plaintiff is limited in terms of recovery by s. 130(6)-(9)

a. (6) Underwriters can only be liable for portion they underwrote

b. (7) Where a liable party can show that other causes explain the depreciation in stock price, the court can lower the damages award

c. (8) Joint and several liability

i. Not really a limit on recoverymerely empowers a liable party to indemnify other liable actors

d. (9) In no case shall the recoverable amount exceed the price at which the securities were offered

i. No opportunity costs are recoverable5. A liable party can cite one of the following statutory defences to avoid liability (this is to ensure g/f transactions do not get pulled by the sharp teeth of s.130

i. NOTE on expected stndrd of bhvr: reasonable is defined for the following sections as : The standard of reasonableness shall be that required of a prudent person in the circumstances of the particular case (mixed obj/subj stndrd for reasonable investigation / grounds for belief)

b. The decrease in stock value can be explained by other innocent factors (s. 130(7))

c. A purchaser who knows about the misrep cannot recover (s. 130(2))

i. Onus on D

ii. Complete defence

d. The prospectus was filed without Ds knowledge and/or approval (s. 130(3)(a))

i. Onus on D

ii. Could show lack of due diligence on Ds part

iii. May be difficult to prove

e. D withdrew his consent to the filing of the prospectus (s. 130(3)(b))

i. Onus on D

ii. Valid, but if D followed all of the steps it is hard to see how the prospectus would have gotten out in the first place

iii. D needs to know that he:

a. Withdrew after the issue of the receipt and before a purchase of securities

b. Withdrew as soon as the misrepresentation became apparentc. Provided reasonable general notice of his withdrawal (to the public)

f. D was not negligent because he relied on an expert (s. 130(3)(c))

i. Onus on D

ii. D must prove:

1. Expert gave this advice

2. D had reasonable grounds to be believe in and did not think it wrong

3. D did not misrepresent or unfairly mischaracterize experts advice

g. Where D is an expert, D can show that his report was mischaracterized or that he withdrew (however, use d. above) (s. 130(3)(d)

i. Onus on D

1. D must prove that his expert report was:

a. Not fairly characterized

h. Due Diligence: Experts can use the due diligence defence to escape liability in good faith (s. 130(4))

i. O Onus on P to show that (a) he did not conduct reasonable investigation or (b) believed that there was a misrepresentation

1. D must show that he

a. Conducted a reasonable investigation, which

b. Gave him reasonable grounds for the belief that there was no misrepresentation

i. Due Diligence: Non-experts, such as directors, can show that they used due diligence and that the misrepresentation was not apparent to them (s. 130(5))

i. Onus on P to show that (a) he did not conduct reasonable investigation or (b) believed that there was a misrepresentation

1. D must show that he

a. Conducted a reasonable investigation, which

b. Gave him reasonable grounds for the belief that there was no misrepresentation

j. Escott v. BarChris ( US case (note that in US Ds have onus of showing D/D). The court considered D/D of each D (holding a lawyer to a higher stnrd based on his unique experience and skills). This case puts forth a tough objective stndrd, relaxed by YBM

k. YBM Magnex ( OSC applies an obj/subj stndrd. Follows BarChris in considering liability of each director. Degree of conflict and degree of experience were applicable factors.

l. Kerr v. Danier ( Court considers D/D, but applies business judgment rule, thus linking BJR to s. 132 of SA. Continuous and Periodic Disclosure Requirements

(1) CHECK defines a RI as an I w/ securities trading in the public domain through a previous prospectus, merger, amalgamation or arrangement or when so deemed by the regulator(2) This area is governed by several MIs, Nis, and rules:

a. NI 51-102 general c/d requirements for Canada

b. NI 71-101 Multi-jurisdictional disclosure system

c. NI 51-101 and NI 53-101 sector-specific requirements for oil and gas and minerals, respectively

d. MI 55-103 Insider reporting for certain derivative transactions has CD requirements

(3) Other involved parties face CD requirements as well:

a. Insiders must report status to OSC (s. 107)

i. As per s. 107(1), must do so within 10 days!

ii. SEDI allows for Electronic Disclosure by Insiders

b. Shareholders or takeover bidders must disclose intention to takeover via the early warning system (s. 101(1)

i. After 10 percent, release (a) press release and (b) within two days file a report containing info re: news release

(4) RIs have to have ensure that they meet disclosure requirements for the following:

a. Financial Statements: NI 51-102 Part 4

i. Must file quarterly and annual financial statements, including

1. Income statement, statement of retained earnings, cash flow statement, balance sheet, which are to be comparative to previous years filings (s. 4.1)

2. Certification by board and officers (s. 4.5)

3. Auditor committee review report (s. 4.1(2) and s. 4.3)

a. 4.3 includes provisions for disclosure of the auditors review of annual statements (required) and also interim statements (optional but if engaged and then unable to complete or there were reservations, must be disclosed)b. For info on what needs to be disclosed, see (s. 4.3(3))c. Goals: enhancing investor confidence and reducing risk of auditor capture

4. Filing deadlines for interim statements (s. 4.4)

a. RI ( 45 days; VI ( 60 days

5. Filing deadlines for annual statements (s. 4.2)

a. RI ( 90 days; VI ( 120 days

6. Delivery Requirements (51-102 s. 4.6)

a. As per the access equals delivery concept, RIs need only send a form to shareholders enabling them to request copies (otherwise, look online)

7. Continuous disclosure for SEC issuers (s. 4.3(4))

a. Reconciliation requirements for converting between US and CDN GAAP

8. Change of auditor (s. 4.11)

a. Where an RI changes auditors for any reason, the RI must disclose the change, including the previous auditors review in certain cases

b. However, a right to apply for an exemption exists

b. Management Discussion and Analysis (MD&A): NI 51-102 Part 5

i. DEF: Narrative interpretation of issuers current fin. Position and future prospects. Whereas fin. Statements describe what happened, MD&A describe why it happened (and can make future predictions)

ii. All CDN RIs must include MD&A

iii. Content defined by NI 51-102F1

1. Material Information

a. Defined by NI 51-102F1 Part 1: Would a reasonable investors decision whether or not to buy, sell or hold securities in your company likely be influenced or changed if the information in question was omitted or misstated?

i. If yes, then material

2. Capital Structure

a. Designation and number and classes of shares (NI 51-102 s. 5.4)

3. Forward-looking information (part 1)

4. Off-balance sheet arrangements (51-102F1 Item 1.8

5. Approval requirements

a. By the board or audit committee for interim MD&A s. 5.5

6. Filing requirements (s. 5.1(2))7. Delivery requirements (s. 5.6)iv. Note that OSC Staff Notice 51-713, the OSC found that 72 percent of reviewed MD&As contained one or more of the following deficiencies:

1. Omit info material to investors

2. Disclose an excessive amount of immaterial info

3. Disclose good news but not bad news

4. Tend not to have a forward-looking orientation to their MD&A

5. Lack adequate internal policies and procedures for preparing, reviewing and approving MD&Ac. Annual Information Form (AIF) NI 51-102 Part 6

i. Similar to prospectus

ii. Requires detailed info re: history, operations, and financial affairs

iii. Still used by large issuers to communicate extensive info in order to qualify for SFP

iv. Now all non-venture issuers must file (s. 6.1)

v. Content: prescribed by NI 51-102F2

1. Definition of materiality same as above

2. 51-102F2 items 5.1(4), 5.2 (risk factors): a new explicit requirement is social and environmental policy information for policies fundamental to operations

vi. Filing requirement (NI 51-102 s. 6.2)

1. Must be filed within 90 days after the end of issuers financial year

2. No delivery requirement

3. However, must file w/ SEDAR

CanSox: Recent Canadian Reforms

NI 52-108 (auditor oversight)

Role of Canadian Public Accountability Board (CPAB)

Participation Agreement NI 52-109 (certification of annual and interim filings)

What are CEO and CFO required to certify?

Form 52-109F1

Liability issues: NI 52-109 CP, Part 12 MI 52-110 (audit committees)

Characteristics of non-venture issuer audit committees (see parts 3&6 of MI 52-110)

Three members

Independence (ss. 1.4 & 1.5)

Literacy (MI 52-110CP)

Responsibilities of audit committee

MI 52-110 Part 2

AIF disclosure re audit committee (MI52-110F1)

Audit committee compliance reviews by CSA staff (CSA Staff Notice 52-312) NI 58-101 / NP 58-201 (disclosure of corporate governance practices)

Disclose and explain approach to corporate governance practices

NI 58-101F1

NP 58-201 corporate governance guidelinesContinuous Disclosure: Certification

NameRulePurposeRequirements

Certification of disclosure in issuers annual and interim filingsMI 52-109Meet a standard of overall material accuracy and completeness that is broader than financial reporting requirements under GAAP (applies to all non-foreign, non-investment fund issuers)

Liability: subject to quasi-criminal, or civil proceedings. Subject to private actions for damages either at CL, civil law (Qu.) or statute (SA)CEO and CFO must personally certify that there is nothing misleading and that there is no misrepresentation in issuers annual and interim financial statements

Must certify the establishment of disclosure controls for auditing

Each certificate filed in SEDAR separately

Fair PresentationMI 52-109 CPBroader than GAAP: fairly present defined as a materially accurate and complete picture of the issuers financial condition. Financial condition includes qualitative and quantitative factors (CICA). There is deference to GAAP, but not if the standard fails to meet an obvious and reasonable standard of fair presentation readily apparent to the trier of fact (Kripps v. Touche BCCA)Fair presentation includes disclosure of accounting policies, proper application of those policies, informative financial info, and additional disclosure to provide materially accurate picture of RI

Internal Control over Financial ReportingProposed MI 52-111 (DBLCHKI dont exist)Enhanced audit control rules are a direct transplant of SOX Rule 404 (delayed due to RI concerns), h/ever RIs say too costlySimilar to 52-109, except that not only have audit control procedures been put in place, but that they are evaluated annually in comparison to a suitable control framework

Audit CommitteesMI 52-110 (BC not included)Note: applies to non-venture issuers

An audit committee is a board committee responsible for oversight of financial reporting process. Rules in place to prevent auditor capture, to enhance independence and financial literacy of committee, and improve transparency (disclosure)

Responsibilities include (MI 52-110 2.3): helping directors meet their responsibilities; enhancing communication between directors and external auditors; enhancing independence of external auditor; increasing the credibility and objectivity of financial reports; strengthening the role of directors; must have Charter (2.3(7)); must establish procedures for dealing w/ complaints (whistleblower function); pre-approval of non-audit services provided by the external auditorMust contain at least 3 directors of issuer (3.1(1))

F. literacy, education, and experience of members is to be disclosed in AIF

Whether audit committees exemption utilized (tbd)

Must be independent (1.4, 1.5) cannot have material relationship w/ issuer (past officer, partner of firm providing legal or accounting, cannot have received more than 75k annual pay from issuer)

Must have ability to read broad and complex financial statements (GAAP knowledge optional)

Disclosure of corporate governance practicesNI 58-101Mrkt-based apprch: the best practices in NP 58-201, but the mrkt should know if they are not being followed and be able to decide accordinglyDisclosure of governance practices and the extent to which these best meet best practice guidelines (Form 58-101F). If they are not being followed, the directors are to explain why

Disclosure of corp governance practicesNP 58-201Adopts a disclose and explain approach to corp. governance

Describes best practicesBest practices include:

Maj. of board independent (3.1)

Chair independent (3.2)Independent mbrs meeting sprtly (s. 3.3)

Board following a business mandate, code (s. 3.4; 3.8-9)

Other: orientation, education, compensation

Canadian public accountability board (CPAB)NI 42-108Sets out stndrd for accountants and auditors

Continuous Disclosure: Material Changes

(1) Defining material change:

a. S. 1(1) SA: 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 any of the securities of the issuer and/or a decision to implement a change referred to in sub-clause (i) made by the board of directors or other persons acting in a similar capacity or by senior mgmt of the issuer

(2) The law requires that material changes be disclosed in the following fashion:

a. S. 75(1) subject to 75(3), where a material change occurs in the affairs of a RI, RIs must issue and file a news release authorized by a senior officer disclosing the nature and substance of a material change

b. (2), subject to (3), RIs must file a report of such material change in accordance w/ regulations as soon as practicable and in any event, within 10 days of the date the change occurred

c. (3) Confidential Disclosure: RIs who think revealing the m/change would unduly detrimental or a decision is pending approval of the board may file w/ OSC the confidential report and the reasons for the confidentiality

i. (4) Where RI wants to maintain confidentiality, must advise OSC in writing every 10 daysii. (5) Where it becomes apparent that trading is occurring based on conf. info, the OSC will release it

d. Issuers are to use the form in NI 51-102F3

i. Note on NI 51-102

1. (substantially the) Same def as s. 1(1)

2. NI 51-102 7.1 requires news release to be filed and material change report filed as soon as practicable and in any event within 10 days

e. Best practices are outlined in NI 51-201

i. Elements:

1. Establish corporate disclosure policy

2. Review by board/audit committee

3. Designate authorized spokespersons

4. Establish policy re: analyst conference calls and reports

5. Establish policy re: quiet periods and insider trading monitoring

6. Establish policy re: electronic communication

ii. S. 2.2: issuers may w/hold public disclosure if it is unduly detrimental, but must still make a confidential filing w/ reg.

iii. S. 2.3: If rumours leak or impact stock price then must make full disclosure

iv. Part 3 Selective disclosure see below

v. Section 4.2: Examples of material change information: changes of structure financial & corporation, changes of financial operations

1. So regulators have made distinction between operations and structure, material facts and changes are both included in this policy

vi. Section 6.14: guidance re: handling rumours: should adopt a no-comment policy

vii. Section 75(3) SA & NP 51-202 s. 7.1(2)confidential disclosure

1. Advice(Disclose to regulators but not to investors2. Where an issuer arrives at a decision to keep matters confidential in good faith, they can rely on this section to avoid liability

viii. NP 51-201 Part IIIselective disclosure

1. Anti-tipping provisions

2. Advice(Establish corporate disclosure policies and clearly define who within the company has responsibility for corporate communications (51-201 Part VI)

a. Establish corporate disclosure policy

b. Review by board/audit committee

c. Designate authorized spokespersons

d. Establish policy re: analyst conference calls and reports

e. Establish policy re: quiet periods and insider trading monitoring

f. Establish policy re: electronic communications3. General Principle knowledge of not generally disclosed material facts or changes should not be traded ona. Selective disclosure of material corporate information to analysts, institutional investors or other market professionals not necessary course of buseinss (51-201 s. 3.3(5))

b. Disclosures to credit rating agencies is normal course of business; to analysts is not ((7))

c. OSC will consider the following in a selective disclosure proceeding (51-201 s. 3.7)

a. If and to what extent a company has adopted / maintained / followed a reasonable policies and procedures to prevent contraventions of the tipping provisions

b. Whether any selective disclosure was unintentional

c. What steps were taken to disseminate information that had been unintentionally disclosed (and the speed w/ which this was done)

d. While it is fine for analysts to call officers and review earnings estimate, a company takes on a high degree of risk where it selectively confirms that estimates are on target, too high or too low (51-201 s. 5.2(1)) and if companies are truly worried about analyst reports, then they should release info to the market more regularly ((3))

e. Confidentiality agreements are good business but are not protections against tipping (51-201 s. 5.3)ix. NI 51-102 s. 8.3 ( Disclosure of significant acquisition

1. Where an RI completes a significant acquisition of a business or related business, said RI must file a BAR (business acquisition report, including balance sheet of RI) within 75 days of acquisition.

2. Significant is defined by s. 8.2:

a. Asset, investment or income test(If any exceed 20 percent of buyers assets, assets or income (respectively) then BAR must be filed

3. VIs face a different test

(3) Violating disclosure obligations leads to sanctioning:

a. Under the SA

i. S. 122(1)(b) [making statements or failing to make statements], (c) [contravenes Ontario Securities Law] (general offences provision)1. Consider s. 122(3) director and officer liabilityii. s. 127[orders in the public interest

1. OSC conducts continuous disclosure review in conjunction w/ insider tradingb. Under the CSA

i. CSA staff notice 57-301 Where an RI fails to file in a timely manner, it is possible to order a mgmt cease-trade

c. Under OSC regulation

i. OSC policy 57-603 as s. 2.1, the commission will, generally, respond to a Financial Statement Filing Requirement default by issuing a Management and Insider Cease Trade Order

d. Civil Action

i. Tort claim for fraudulent/negligent misrepresentation

ii. S. 138.3(1)

iii. Where a responsible issuer or a person or company w/ actual, implied or apparent authority to act on behalf of a responsible issuer releases a document that contains a misrepresentation, a person or company who acquires or disposes of the issuers security during the period between the time when the document was released and the time when the misrepresentation contained in the document was publicly correct has, without regard to whether the person or company relied on the misrepresentation, a right of action for damages against,

a. the responsible issuer

b. each director (at the time of misrep)

c. each officer who authorized, permitted, acquiesced in the release

d. each influential person (and director/officer of the same) who knowingly influenced

i. the RI to release the document

ii. A director/officer of the RI to release the document

1. Influential persons include control person (>=20 percent or materially affect the control of RI), promoters and insiders (>=10 percent)

e. Each expert where

i. The misrep is also contained in expert report

ii. The document summarizes exp. rpt and

iii. If the doc. was released by a person other than expert, the expert consented in writing to the use of the report in the doc.

2. Break the above apart:

a. Releases a doc that contains a misrepresentation

b. The person who acquires or disposes of security

c. During the period between the time when the doc was released and the time when the misrepwas publicly corrected

d. Deemed reliance

e. Has a right of action

(4) Can pursue action where:

i. Document contains misrep s. 138.3 (1) [RIs],(3) [Inf. Prsn]1. Core documents are:

a. For directors/influential persons: prospectuses, takeover bid circulars, MD&A, AIF, annual financial statements and interim financial statements

b. For issuers/officers: all of the above + material change reports2. Released by issuer or about issuer by a comp/person w/ actual, implied or apparent authority to act on b/half of RI

a. For core doc, P must prove:

i. Acquisition/disposition at relevant time

ii. Existence of misrep

b. For non-core doc, P must additionally prove:

i. D knew there was a misrep OR

ii. Deliberately avoided knowing OR

iii. D was guilty of gross misconduct in connection w/ doc/sttmnt

ii. Public oral statements carry misrep 138.3 (2) [RI],(3) [inf. Prsn]

1. Made by RI or person w/ actual, implied or apparent authority to speak on b/half of RI

a. For core doc, P must prove:

i. Acquisition/disposition at relevant time

ii. Existence of misrep

b. For non-core doc, P must additionally prove:

i. D knew there was a misrep OR

ii. Deliberately avoided knowing OR

iii. D was guilty of gross misconduct in connection w/ doc/sttmnt

iii. Documents or statements by influential persons (s. 138.3(3)

1. Where inf prns make statements or produce documents w/ misrep, the same people as above are liable, but the influential person can be liable without having to show that person knowingly influenced issuera. For core doc, P must prove:

i. Acquisition/disposition at relevant time

ii. Existence of misrep

b. For non-core doc, P must additionally prove:

i. D knew there was a misrep OR

ii. Deliberately avoided knowing OR

iii. D was guilty of gross misconduct in connection w/ doc/sttmnt

iv. Failure to make timely disclosure (138.3(4))

1. How shareholders could have pursued YBM

a. P must prove:

i. D knew of material change OR

ii. D deliberately avoided knowing OR

iii. D guilty of gross misconduct in connection w/ failure to make timely disclosure

(5) D has some defences available to him:

i. S. 138.4 provides statutory defences:

(5) P acquired/disposed w/ knowledge of misrep or w/ knowledge of material change. Onus on D to prove

(6) D made reasonable investigation and had no reasonable grounds to believe that [onus on D]

a. There was a misrep

b. That the failure to make timely disclosure would occur

(7) Court will consider following factors as to reasonable investigations (due diligence)

c. All relevant circumstances, including nature of issuer, knowledge, office held, existence of any system designed to ensure responsible issuer meet its continuous disclosure obligations

(8) In defence of failure to make timely disclosure, D also has the defence of prior confidential disclosure (as allowed under s. 75(3)

d. Must show reasonable basis for making disclosure on confidential basis(9) Not liable for forward-looking misrep where (s. 138.4(9)):

e. (1) The document/public oral statement included (i) reasonable cautionary language identifying the forward-looking info as such (results can differ) and (ii) a statement of material factors or assumptions that were applied in reaching the conclusion/forecast and (2) the person had a reasonable basis for drawing the conclusion that they did(6) There are limits on Ds liability/Plaintiffs reward:

i. Actions can only be damages (rescission in not available)

ii. Proportionate liability (s. 138.6)

1. Prop to the extent of breach of each D

2. However, full amount where D other than issuer knowingly authorized or permitted misrep or failure to disclose material change

3. S. 130 contemplate joint/several liability

iii. Damages are assessed as followed:

1. Securities sold on or before 10 trading day after the correction of the misrep, assessed damages shall equal the dif between average price paid for those securities (including commissions) and the price received upon the disposition of those securities (without deducting commission)

2. Securities disposed of after the 10 day, assessed damages to equal the lesser of:

i. An amount equal to the dif between average price paid (including commission) and the price received upon disposition of those securities (without deducting commission) AND

ii. An amount equal to the number of securities disposed multiplied by the dif between average price paid and

a. If on a published mrkt, the trading price for the 10 trading days following the public correction OR

b. If no published mrkt, amount deemed just by court

iv. Damages are assessed differently for dif. parties (s. 138.5)

1. Issuer limit: greater of 5 percent of market cap and $1 million

2. Individual limit: greater of 25k and 50 of aggregate annual compensation

v. However, law protects individuals from b/ruptcy under s. 138.7

1. D only pays the lesser of aggregate damages assed and liability limits

2. Limit does not apply to a D other than the RI if the plaintiff proves that the D authorized, permitted or acquiesced in the making of the misrep or the failure to make timely disclosure while knowing that it was a misrep or a failure to make a timely disclosure, or influenced the making of the misrep or the failure to make timely disclosure while knowing that it was a misrep or a failure to make timely disclosure

a. IN OTHER WORDS, no limit on fraud

b. HOWEVER, plaintiffs have to claim fraud from beginning

b. Procedural problems:

i. Plaintiffs must get leave of court s. 138.8

1. Must satisfy court that this action is brought in good faith and that there is a reasonable possibility of winningii. Reliance is deemed s. 138.3(1)

iii. Cannot use s. 138.3(1) for purchases of shares during distribution period (s. 138.2(a)) or for purchases during exempt distribution (s. 138.2(b))

iv. Plaintiffs must get approval of settlements by the court (s. 138.10)

v. loser pays cost rules apply (s. 138.11)

(7) Cases

a. Pezim Discussed issue of material change

i. HELD: a change in the value of assets (i.e. mines) is a material change

1. Test:

2. Change must be in relation to the affairs of issuer

3. Change in the business, operations, assets or ownership of issuer

4. Material (would reasonably effect investor thinking)

ii. Also held that reasonableness is the stndrd of review

b. Kerr v. Danier

i. HELD: interim financial reports are not disclosable where differences are in regards to warm weather (material factnot change)

c. YBM Magnex

i. Supports probability/magnitude test to determine whether future events are material. The test has two prongs

1. Assessing the probability the event will occur

2. Assessing the magnitude of the change on reasonable investors

ii. Here the high likelihood that YBM would not be able to file its statements on time given that its auditor withdrew services was definitely disclosable (especially given that YBM was releasing other statements)

d. Donnini

i. Uses probability / magnitude test to conclude that the party was liable for insider tradinge. AiT Technologies

i. Consider the timeline

1. Feb 17, 2002: 3M makes unsolicited bid

2. March 26-28: First due diligence visit

3. April 11-12: Meeting in St. Paul re: valuation

4. April 25: AiT board meeting and e-mail to CIBC

5. April 26: letter of intent signed

6. May 7-9: second due diligence visit

7. May 9: RS callsunusual trading of AiT

ii. Factors considered by the court:

1. No senior mgmt of 3M in on deal

2. Non-binding nature of LOI

3. Small company

4. Huge differences between what AiT wanted and what 3M was willing to pay

iii. Held: singing a non-binding LOI is not a material changeInsider Trading

1. Must first determine if party in question qualifies as an insider using s. 1(1)s definition of insider/insider of RI:

a. Every director or senior officer of RI

b. Every director/senior officer of a company that is itself an insider/subsidiary of RI

c. Any person/comp who beneficiary owns, directly or indirectly, voting securities of a RI or exercises control or direction over voting securities of a RI or a combination of both, carrying more than 10 percent (shares w/ voting rights) (excludes underwriters)

d. An RI that has purchased, redeemed or otherwise acquired any of its securities

b. The law also deems retroactive insider status where:

i. An issuer becomes an insider of a RI, every director/senior officer of the RI shall be deemed to have been an insider for the previous six months or for shorter (where director/officer was not such for past six months) (s. 1(8))

ii. An RI becomes an insider of another RI, every director/senior officer of target RI shall be deemed to have been an insider of bidder for the previous six months or shorter (s. 1(9))

2. Insiders can trade, provided that they comply w/ s. 107

a. S. 107(1) Insiders must file a report disclosing any direct or indirect beneficial ownership/control/direction of shares within 10 days from the day they became insiders

b. S. 107(2) file a change in the report within 10 days of the change

c. S. 107(3) file a retrospective report (after merger)

3. Insiders are to use SEDIsystem for electronic disclosure by insiders

a. Insiders must file an insider profile (55-102 F1) and reports (55-102F2) on the internet form s. 107

4. There are some exemptions that allow insiders not to report:

a. Issuer changes the nature of all securities (i.e. splits them)

i. NI 55-101where there is a dividend or amalgamation that affects all, the RI has to inform the OSC anyway (within 1 day)

b. Directors/officers of subsidiaries can apply for exemptions

i. NI 55-101Where D/Os can show that they dont have material knowledge of RI

c. Directors/officers of affiliates can apply for exemptions

i. NI 55-101Where D/Os can show that they dont have material knowledge of RI

d. OSA can allow exemption at its discretion

i. Interested persons can apply for an exemption or OSC can on its own motion where just and convenient

ii. Test is whether party has access to material insider info

e. Eligible institutional investors can receive exemptions as well

i. Where institutional investors have filed an early warning report and do not have knowledge of any material fact or change

ii. Essentially in situations where a fund may via its clients manage over 10 percent but really have no takeover intentions

5. Failure to do this will violate securities law

a. Securities law can do the following:

i. Where A realizes a profit of $2m, he can be required to pay $6m (3X the amount) as sanction (s. 122, s. 122(4))

1. S. 122(4) says fine of greater of (a) $5m or (b) an amount equal to triple the profit realized

ii. Civil damages (s. 134(1),(4), and 135

1. S. 134(1) civil law damages

2. S. 134(4) must account to RI for benefit/advantage received unless RI can prove he thought generally disclosed

3. S. 135 Order by the OSC

iii. Administrative (s. 127, 128)

1. S. 127 Orders in the public interest

2. S. 128 Several orders available upon applying to the court

b. Necessary to define special r/shipi. S. 76(5) Person or company is in a special r/ship w/ a RI if

a. A person or company that is an insider, affiliate or associate of,

i. The RI

ii. A per/comp proposing a takeover bid of RI

iii. A person or company that is proposing to become a party to a reorganization, amalgamation, merger, major asset purchase, w/ RI

b. A person/comp that is engaging in or proposes to engage in any business/professional activity w/ or on b/half of RI w/ or on b/half of a person/comp described in (a)(ii),(iii)

c. A director/officer/employee of the RI or of a person listed in (a)(ii),(iii),(b)

d. A person/comp that learned of the material fact/change w/ respect of the RI while the person/comp was a person or company described in (a), (b) or (c)

e. A person/comp that learns of a material fact/change w/ respect to the RI from any other person/comp described in this subsectionincluding one listed in this clauseand knows or ought reasonably to have known that the other person or company is a person/comp in such a r/ship

c. Insider trading ( S. 76(1) No person or company in a special r/ship w/ a RI shall purchase or sell securities of the RI w/ the knowledge of a material fact or material change w/ respect to the RI that has not been generally disclosed.

i. Must prove:

1. A was in a special r/ship w/ RI

2. A purchased/sold RI securities

3. A made the purchase/sale w/ knowledge of material info (facts/changes), which had not been generally disclosed

d. Tipping ( s. 76(2): No RI and no person or company in a special r/ship w/ a RI shall inform, other than in the necessary course of business, another person or company of a material fact or material change w/ respect to the RI before the material fact or material change has been generally disclosed

i. Must prove:

1. A was in a special r/ship w/ RI

2. A informed a 3rd party of material info other than in the normal course of business3. A informed said 3rd party before the info was generally disclosed

ii. Further considerations:

1. Tippee does not have to trade for there to be an offence

2. T/ee does not have to know that A is in a special r/ship (except where a charge is being made against T/ee)

iii. Where a t/ee does know of special r/ship, he can be found liable as an inside trader or as a tipper (essentially falling into s. 76(5)(e)

e. Criminal code provisions ( Max Term 14 years (aggravating circumstances can increase the harshness of the penalty)i. Insider trading:1. S. 382.1(1) CC: indictable offence to directly or indirectly buy or sell a security knowingly using insider information by virtue of various r/ships w/ issuerii. Tipping1. S. 382.1(2) CC: Indictable offence to knowingly engage in tippingiii. Note that these provisions apply to all issuers, not just RIsiv. Note that knowingly is emphasized in both provisions6. Caselaw on insider tradinga. Re Donninii. D was a financier of KCA, shorted KCA stocks to hedge against risk based on info not publicly released. D had special r/ship, sold securities, based on material info (while info not confirmed info, court used prob/mag test to determine material fact) and material info not yet public. b. Re Harold P Connori. Held that general disclosure is a two-pronged test:1. Info has to be disclosed to market2. Market needs time to digest infoii. One full trading day was deemed sufficient time to wait after info disclosed before insiders can tradeiii. Test is now contained in NP 51-201 3.5(2)c. Pezim v. BCi. Insiders have a duty to inquire about material changes/facts at the RI before making insider trading transactions (even where Chinese walls are being used)d. R. v. Rankini. First tipping prosecution under s. 76 (brought under s. 122)ii. Rankin was an I-bankeriii. Circumstantial evidence that Rankin was tipping his friendiv. Friend testified against Rankin7. Available defences:

a. Reasonable belief that info had been generally disclosed

i. SA s. 76(4)

ii. Green v. Charterhouse Group ( Hinting at existence of material info in a letter is not significant enough to court as disclosure of material info

iii. Re Harold Connor ( Disclosure must be completely honest and forthright w/ adequate time for market to absorb data (1 trading day) for defence to be allowed

b. Best Practices:

i. Chinese wall

1. SA Regulations 175

a. There must be reasonable policies and procedures in place to prevent info sharing

b. Person will achieve exemption from s. 76 only if the trader did not have knowledge of the material info from other business partner

c. Note that Donnini supports Chinese walls; Rankin is entirely skeptical

ii. Guidelines for preventing info from disseminating

1. OSC Policy 33-601

a. Education of employees (re: insider rules, ethical standards) and containment of insider info (codenames for files, grey lists, restricted lists)

c. Reasonable mistake of fact

i. Only available for constitutional reasons (must have as this is otherwise strict liability)

ii. Lewis v. Fingold (under s. 122)

1. F violated it in every way, save that that his limited experience reasonably led him to believe that this information was not such that would affect stock values2. In a strict liability offence, the D can avoid liability by establishing that on a balance of probabilities that he reasonably believed in a mistaken set of facts, which if true, would render the prohibited act an innocent one.

a. To help understand this as a defence, D is not arguing that he did not rely on a material fact in making a trade; rather, D is arguing that he reasonably believed that X was not a material factiii. R. v. Harper

1. H mistaken belief that negative result was not material was deemed not to be reasonable given his level of experience2. TEST: Has [D] demonstrated on a balance of probabilities an honest and reasonable mistaken belief to refute his knowledge of facts which the Court finds to be material and which D admits to being in possession

3. The soil samples were held to be material facts, notes that he traded based on that info and rejects that he did not know these to be material factsd. Necessary course of business

i. NP 51-201: necessary course of business would not permit selective disclosure of material info to an analyist, institutional investor or other market professional

1. Royal Trustco v. OSC

2. Disclosing info to a shareholder (that a dividend would be paid) as part of a defence against a takeover was deemed not to be in the necessary course of business3. Qualified as tipping

8. Investigations suggest that insider trading is alive and well in Canadaa. CSA established independent task force to assess enforcement of illegal insider trading in CDb. McNally and Smith did a study that suggests insiders do not avoid trading prior to the announcement of material information and that violations are infrequently enforcedc. Recommendations as follow:i. Allow snitchers to keep a portion of fine leviedii. Harmonize TSX and OSC Rulesiii. Require insider trades be reported sooner than 10 day periodiv. Insiders should be restricted from trading in a period just prior to pre-planned announcements (for instance, prior to earning releases)

Prospectus Exemptions: Issuers and Investors

Jones v. FH Deacon Hodgson ( Where an issuer relies inappropriately on an exemption and should have provided a prospectus, those who purchased the securities are not-timed limited in seeking a remedy under s. 53 (including rescission).

s. 74(1) The OSC can upon application rule that any trade, intended trade, security, person or company is not subject to s. 25 or s. 53 (requirement for prospectus) where it is satisfied that to do so would not be prejudicial to the public interest, and may impose such terms and conditions as are considered necessary.

1. Policy objectives:

a. Concerns for start-ups / smaller issuers

b. Prospectus unnecessary for wealthy / sophisticated investors

c. Pre-existing r/ship between issuer and buyer of securities

d. Some types of securities are extremely safe investments

2. Government Incentive Security (OSC Rule 45-501; NI 45-106 s. 2.13)

a. Allows business entities to be established for tax purposes (mainly junior exploration issuers in the resource sector)

b. Rules:

i. Max 75 investors solicited (2.1(1)(a)

ii. Max 50 can purchase (anti-avoidance rules apply) (2.1(1)(a)

iii. Investors must receive substantially the same info as a prospectus (s. 2.1(1)(c))

iv. Cannot advertise offering (s. 2.1(1)(d)

v. GIS can only be used once per annum

vi. Investors must receive offering memorandum (s. 2.1(1)(b)

vii. Report must be filed within 10 days of trade using form 45-501F (s. 7.1, 7.2)

c. Qualified Investors:

i. Must be able to valuate security (or able to consult an independent evaluator) (s. 2.1(c)(i))

ii. Officer/director of Issuer ((i))

iii. Spouse / child of such ((i))

3. Private Issuer Exemption (NI 45-106 s. 2.4)

a. Applies to private issuers who are not also RIs

b. Rules:

i. Securities must not be bonds or debentures

ii. Securities must have restrictions on transfer in articles of incorporation (or via trust agreement)

iii. Securities cannot be owned by more than 50 people

iv. No cap on capitalization

v. Distributions do not need to be reported to regulators

c. Qualified Investors:

i. Director/officer/founder/employee/control person (s. 2.4(2)(a)

ii. Spouse, parents, grandparents, children, close personal friend, close business associate of directors, officers, founders or control persons (or their spouses ((b)-(f))

iii. Other people in exempt class (resale rule) ((g))

iv. Accredited investors ((h))

v. Persons not the public ((k))

1. Employees are the public (Ralston Purina)

4. Founder/Control Person/Family Exemption (NI 45-106 s. 2.7)

a. Only available in Ontario, this exemption targets first-generation financing

b. Rules:

i. No limits on financing available

ii. No reporting requirements

c. Qualified Investors:

i. Founders (45-106 s. 2.7(1)(a))

ii. Affiliate Founder ((b))

iii. Spouse, parent, sibling, grandparent, or child of officer, director or founder ((c))

iv. Control person ((d))

5. Accredited Investor Exemption (NI 45-106 s. 2.3)

a. 2.3(1) The dealer registration requirement does not apply in respect of a trade in a security if the purchaser purchases the security as principle and is an accredited investor

b. Essentially available where financial institutions purchase securities through private placements

c. In fact, seller is not defined

d. Rules:

e. Qualified Investors:

i. Accredited Investor: (NI 45-106 s. 1.1)

1. (a) CDN financial institution

2. (b) Business development bank of Canada

3. (f) Government of Canada (and prov/mun gvrmnts)

4. (i) Pension fund / (q) mutual fund / (p) trust companies, etc.

5. (j-l) Individuals who:

j. Financial assets test: liquid financial assets (w/ or w/o spouse) exceed $1m net of any related liabilitiesk. Income test: Net income before taxes (w/o spouse) exceeds 200k or (w/ spouse) 300k for past two years and expect to qualify again this current year (law allows for a reasonable expectation of exceeding same net income level each year)l. Net asset test: not necessarily financial assets, but investor must have assets generally worth more than $5m (including properties)6. Minimum Investment Exemption (NI 45-106 s. 2.10)

a. Exemption kicks in where investor invests 150k in cash at time of trade for a single transaction

b. Anti-avoidance rule (6.1)

c. Still face reporting requirements as above

Prospectus Exemptions: Pre-existing R/ship between issuer and investor

1. Securities as Part of Dividend Payment (NI 45-106 s. 2.31)

a. Applies when new securities are used to pay dividends to security holders

b. Rules:

i. Must be in respect of a trade by an issuer in a security of its own issue to a security holder of the issuer as a dividend, OR

ii. In respect of a trade by an issuer in a security of a reporting issuer as a dividend

2. Options of converting cash dividends in stock dividends (NI 45-106, s. 2.2)

a. Applies where dividends/interest/cash payments can be used to acquire additional securities

b. Cash options are allowed to be converted into stock-dividend reinvestment plan

c. Limitation:

i. Shares issued in this fashion not to exceed 2 percent of issued/outstanding shares of a class

3. Reorganizations (NI 45-106 s. 2.11)

a. Two types are considered:

i. Amalgamation / merger w/ another business involving a share exchange

ii. Reorganization of issuer due to insolvency where debt is exchanged for equity

4. Conversion / Exchange / Exercise (NI 45-106 s. 2.42)

a. Applies to securities w/ a previous right of conversion, exchange or purchase

b. Technically, exercising this right creates new securities, but this exemption prevents that from requiring prospectus

c. This includes: warrants (options to acquire additional shares for cash), options, convertible debt, convertible preferred shares

5. Rights Offering (NI 45-106 2.1; 45-101CP)

a. Allows existing shareholders to acquire additional securities

b. The exemption applies to both the granting of right and issuing of securities pursuant to that right

c. Constrains on this exemption as investors may be tempted to use it exclusively

d. It will not be available where:

i. Increase of 10 percent must disclose holding and file a press release (s. 102.1(1))

1. 101(1) Every offeror that acquires beneficial ownership of, or the power to exercise control or direction over, or securities convertible into, voting or equity securities of any class of a RI that, together w/ such offerors securities of that class, would constitute 10 percent or more of the outstanding securities of that class

a. Shall issues and file forthwith a news release containing the information prescribed by the regs and

i. NI 62-103, part 3 and appendix E set out requirements

b. Within two business days, shall file a report containing the same information as is contained in the news release issued under (a)i. NI 62-103 Part 3ii. Note that every further increase of 2 percent requires a press release s. 102.1(2)

iii. Note that there are time restrictions on further acquisitionswhen disclosure required, must wait one business day after the date of disclosure (s. 102.1(3)) unless acquiror who already has 20 percent (s. 102.1(4))

iv. Where other parties are acquiring significant shares during a takeover, they have to report at 5 percent mark (102.2(1)) and at further 2 percent (102.2(2))

1. The news release to contain: (a) acquirors name, (b) number of securities beneficially acquired, and (c) acquirors intention (OSC Rule 62-504 s. 7.2)v. NI 62-103 An exemption is available for mutual funds or eligible institutional investors, entitles whose shares increased solely because of some action by the issuer, underwriters (but where they are holding shares for purposes of underwriting)

1. However, where there is an intent to complete a takeover, these exemptions do not apply

11. Timing

a. Must remain open for 35 days (s. 98(1))b. Not permitted to take-up or accept for