Market Regulation Getting Ready to Trade.................................................................................................................

1
What is a trade? ...................................................................................................................................................................................8 What is a Security?...............................................................................................................................................................................8

Distributions the Prelude to a Prospectus..................................................................................................................1

Prospectus 1!1.....................................................................................................................................................................................1" Preli#inary Prospectus......................................................................................................................................................................1$ %&%' ( )or*ard looking )inancial in)or#ation................................................................................................................................+1 Material ,hange..................................................................................................................................................................................+" -.otic prospectus )or#s.....................................................................................................................................................................+8 ,i/il liability )or prospectus disclosure............................................................................................................................................. + Due diligence de)ences........................................................................................................................................................................ " -.e#pt transactions........................................................................................................................................................................... 0 Accredited Investor..........................................................................................................................................................................36 Minimum Investment Amount Exemption .....................................................................................................................................37 Benign Securities..............................................................................................................................................................................37 Hardship Exemptions.......................................................................................................................................................................38 Issuer relationship exemptions......................................................................................................................................................... ! Emplo"ee exemptions...................................................................................................................................................................... ! #nder$riter exemption.................................................................................................................................................................... % &ights '((erings............................................................................................................................................................................... % )onversions*+urchases..................................................................................................................................................................... % ,&I+S - ,ividend &einvestment +lans........................................................................................................................................... . &))ering Me#orandu#......................................................................................................................................................................"+ Resale Restrictions.............................................................................................................................................................................."0 ,ontrol Distributions.........................................................................................................................................................................."1

,ontinuous disclosure obligations...................................................................................................................................."$

Periodic ,ontinuous Disclosure.........................................................................................................................................................01 Material ,hange Disclosure...............................................................................................................................................................0+ ,i/il 2iability )or ,ontinuing Disclosure..........................................................................................................................................00 &ights o( Action Availa/le...............................................................................................................................................................07 )ore*1on2)ore ,ocuments..............................................................................................................................................................07 ,ue diligence de(ence to actions under s.%38.3...............................................................................................................................08

'nsider Trading.................................................................................................................................................................. 3!
3$o things )hinese (ire$alls and the &egulations.....................................................................................................................6. ,e(ences to Insider 3rading.............................................................................................................................................................6 Tipping.................................................................................................................................................................................................3" Re#edies )or Tipping4'nsider Trading.............................................................................................................................................30 Measure o( ,amages........................................................................................................................................................................60 'nsider Reporting................................................................................................................................................................................33

Takeo/er 5id Regulation..................................................................................................................................................1!

4hat is 5ointl" and in concert6.........................................................................................................................................................7% 4hat is /ene(icial '$nership6........................................................................................................................................................7% +seudo2simulation o( the process o( a ta7eover /id process (rom the /eginning............................................................................7 Takeo/er 5id -.e#ptions..................................................................................................................................................................13 Takeo/er 5id De)ences.......................................................................................................................................................................18 Share issues......................................................................................................................................................................................8! Brea7 (ees.........................................................................................................................................................................................8! Asset sales........................................................................................................................................................................................8% Shareholder &ights +lans poison pill de(enses............................................................................................................................8%

-n)orce#ent ......................................................................................................................................................................8
)ivil lia/ilit" provisions o( the 'SA s.%3! - %38.%....................................................................................................................83 3here are also statutor" o((ences under s.%....................................................................................................................................83 )riminal )ode provisions.................................................................................................................................................................83 +u/lic interest po$er o( the 'S) under s.%.7 o( the 'SA..............................................................................................................8 Investigations...................................................................................................................................................................................86

Market Regulation Getting Ready to Trade

Basicall" dealing $ith a set o( comprehensive rules a/out securities industr" in 'ntario 3here is an aspect here o( tr"ing to regulate unscrupulous activities Securit" is a /road thing as evidenced in the Act itsel(
o An" t"pe o( investment propert" that is not a commodit"

3here is an element to securities that deals $ith the actions o( others

o Investors rel" on the compan"8s per(ormance (or example 3here are comprehensive regulations regarding securities loo7 at the si9e o( the /oo7 In this $a" it is similar to tax ver" rules driven 3here are (ive /asic themes to securities regulation o Ma7e (or good mar7ets through licensing :et /ad actors out o( the mar7et and 7eep them out o( the mar7et 3here are also di((erent t"pes o( licenses (or di((erent actors o +rimar" mar7et disclosure 3$o thoughts - there are primar" and secondar" mar7ets +rimar" - i( "ou $ant to sell securities to the pu/lic "ou must ma7e good disclosure do this using a prospectus $hich includes in(ormation a/out the compan" to allo$ the pu/lic to ma7e in(ormed investment decisions o 3here are a lot o( rules a/out prospectus8 including $hat needs to /e in them o 3he" o(ten cost a lot o( mone" and not ever"one can a((ord to go through this process In response to this there are provisions - called exempt distri/utions - $hich allo$ people to sell securities $ithout having to satis(" the prospectus re;uirements Secondar" - a(ter a compan"8s securities are alread" in the pu/lic domain and private investors $ish to trade amongst themselves the" do so through the secondar" mar7ets 3here are a criminal as $ell as civil penalties (or improper disclosure directors could /e lia/le But the" ma" have due diligence de(ences o )ontinuous disclosure Aimed at the secondar" mar7et 3here is an o/ligation on securit" issuers to 7eep the mar7ets in(ormed o( $hat is happening $ith the compan" 3here is also the idea o( material change disclosure o Insider trading I( one has special in(ormation the" cannot use the in(ormation to their advantage or tip it to others to use to their advantage Both the tipster and the one to $hom the in(ormation is tipped are lia/le (or damages o 3a7eover /ids <ind o( the opposite side o( the primar" mar7et idea $here someone $ants to ta7e a pu/lic compan" private the" must provide in(ormation again to allo$ investors to ma7e in(ormed choices As $ith much else in securities there are exemptions to rules (or ta7eover /ids 3here are also regulations a/out $hat companies can do to de(end themselves (rom ta7eover /ids Securities regulation in )anada is a provincial matter o As a result $e have %3 regulators - % (ederal= . territorial= and %! provincial o Some o( these simpl" collect (ees and per(orm record 7eeping duties o 'thers= such as 'ntario and British )olum/ia per(orm more extensive regulator" (unctions In the #S there is onl" one regulator - the SE) - and it operates on a national /asis 3his is the same as in Australia ,ue to provincial sovereignt" over securities $e have a some$hat (ractured s"stem o 3o do a national o((ering a compan" needs to have receipts (or its prospectus (rom each regulator But= in response to situations such as this= $e have national initiatives to ma7e things simpler o It is also possi/le to get exemptions to allo$ (or such activities as emplo"ee distri/utions etc. o It is necessar" (or companies to go to the regulator (or each 5urisdiction in $hich it operates $hen dealing $ith securities issues Some o( the regulations o( the di((erent 5urisdictions are inconsistent $ith each other /ut it is /etter than it used to /e Securities trading is /ecoming more international in operation $hereas it used to /e much more locali9ed It is no$ possi/le to have . hour a da" trading %

 It ma7es sense to have larger regulator" agencies - such as a national one - due to the changes in the securities industr" /ut
attempts at developing one in )anada have proven thus (ar unsuccess(ul 3here have /een man" attempts /ut it has not happened o >argel" /ecause the provinces $ould lose some sa" also some do not li7e the idea that 3oronto ?and /" extension 'ntario@ $ould /e the centre o( an" national regulator" agenc" Also there is the issue o( non2congruence in the vie$s o( the regulator" agencies - some do not agree on $hat regulation should loo7 li7e - e.g. B) $ith their recent changes 'ver the past t$o "ears the num/er o( I+'8s have (allen in )anada )ompanies are opting (or AIM in the #< /ecause o( easier listing re;uirements Another reason (or not changing the $a" things $or7 is a sense o( complacenc" the s"stem seems to $or7 (ine the $a" it is so $h" should it /e changed 3he ma5or issue is constitutional propert" and civil rights vs. regulation o( trade and commerce o Also the issue o( the (ederal po$er to regulate /an7s= insurance companies= and (ederal companies o It is li7el" that the (ederal government could pass securities regulation /ut it does not have the po$er to ma7e the provinces cede an" po$er $ould 5ust result in another regulator /eing created 3here used to /e regulator" po$ers in the )B)A /ut the" $ere ta7en out Multiple Access v McCutcheon o Aederal compan"= the )B)A had insider trading rules and the provinces prosecuted (or insider trading violations under their la$s o 3he S)) said that it $as possi/le to have complementar" legislation the" could co2exist o 3he $ould onl" /e an issue $here compliance $ith one la$ meant /reach o( the other Australia had a s"stem similar to ours /ut eventuall" moved to a national regulator no reason that $e could not do this either /ut unli7el" (or a/ove stated reasons 'ur s"stem is a /it o( a mess /ut $e (ind a $a" to ma7e it $or7 Multiple Access is an example 3he court could have ruled that it $as an occupied (ederal (ield and that there $as no room (or the provinces o A ruling li7e that $ould have perhaps provided impetus to the creation o( a national regulator Ontario v Quebec (Caisse case) o Action /" a Bue/ec compan" $ould not have violated Bue/ec la$ /ut it did violate 'ntario la$ o )aisse claimed it $as immune (rom 'ntario la$ /ecause it $as a )ro$n corporation o )ourt said that to an extent this $as true /ut that since the /reach occurred in 'ntario the Bue/ec )ro$n corporation has to a/ide /" the la$s o( 'ntario 3his ruling rein(orces the regulator" s"stem that $e have in )anada 'ntario is interested in securities transactions involving 'ntarians either selling to others or /eing sold to /" others In 'ntario the 'S) has the po$er to pass rules a/out the operation o( the securities mar7ets and these rules have the e((ect o( la$ B) and Alta also have this po$er $hile the other provinces must act /" regulation In order to smooth over some o( the di((erences /et$een 5urisdictions and ma7e it easier (or companies to operate $e have multi25urisdictional instruments ?or 1ational Instruments@ 'ne national polic" sa"s that provinces have agreed on prospectus8 o 'ne provinces8 regulator $ill loo7 over the prospectus and once it signs o(( the other regulators $ill provide receipts evidencing that the prospectus is valid I( "ou onl" issue securities in 'ntario "ou onl" need to $orr" a/out 'ntario rules o But $hat i( "ou list on the 3SC and someone in B) /u"s "our shares 1o pro/lem so long as the compan" itsel( does not go into B) to sell its shares or do some other thing that $ill mean that B) la$s appl" >oo7ing at the Statute ?Boo7@ o 3he colour /ars on the side have meanings 3he (irst one is the Statute itsel( But the rest o( the /oo7 is also important 3he Act itsel( is rather simplistic and straight(or$ard 3he regulations are also important /ut again short o Is the second section o 3he regulator" (rame$or7 is similar to that (ound in other regulator" s"stems o S.% 3?.@ o( the Act allo$s (or the regulations to /e enacted o #p until %DD the Act and the regulations $ere all that there $as to securities regulation in 'ntario .

Aor a/out %0 "ears prior to this the 'S) $as pu/lishing polic" statements that dealt $ith the 'S)8s interpretation o( the Act and regulations 3he regulation o( the securities industr" $as not a /ig issue up till then it $as di((icult to get changes to the Act or ne$ regulations enacted especiall" since capital mar7ets move ;uic7l" 4hen individuals (aced prosecution (or /reaches o( polic" statements the" $ould claim that the polic" statements $ere not la$ t$o cases led to changes in the la$s +e9im in B) and Ainsle" in 'ntario In 'ntario this led to the enactment o( s.1" 617 allo$ing (or rule ma7ing po$er (or the 'S) o 3he 'S) has 6. heads o( rulema7ing po$er some are /road and in essence the 'S) no$ has the po$er to enact rules related to an"thing doing $ith securities in 'ntario S.1" 61 7 2 I( there is a con(lict or an inconsistenc" /et$een a regulation made /" the >ieutenant :overnor in )ouncil under this Act and a rule= the regulation prevails /ut in all other respects a rule has the same (orce and e((ect as a regulation As a result o( this provision the 'S)= in e((ect= has the po$er to ma7e la$ in relation to securites in 'ntario 'S) can /ring their expertise to /ear in the area o( securities la$ and regulation 3he Act contains ver" strict procedures (or passing a rule s.1" .+ o 3he 'S) needs to dra(t the rule and put it in the mar7etplace (or comment must /e out (or comment (or a period o( at least D! da"s ?send it out to mar7et participants@ o I( the comments lead to material changes to the rule it then needs to /e repu/lished (or comment (or a (urther D! da"s o 4hen the comment period is done the 'S) can send the rule to the Minister $ho can do one o( three things Accept it Amend it Send it /ac7 to the 'S) (or re$or7ing o 3his area o( la$ is expertise driven man" $ill de(er to the discretion o( the 'S) /ecause o( its expertise )ourts $ill limit their oversight o( the discretion o( the 'S) o 'nce the Minister approves the rule it then has the (orce o( la$ 'S) rules o '(ten have companion policies that deal $ith the interpretation o( the rule 3he" deal $ith $hat the 'S) thin7s the rule means /ut the" do not have the (orce o( la$ o 3here are also multilateral instruments ?such as 1ational Instruments ?1I@@ +arts o( the 1I are 'ntario la$ i.e. 'ntario $ill have passed a rule dealing $ith this issue 'ther 5urisdictions $ith rulema7ing po$er $ill also do this 3hose $ithout rulema7ing po$er $ill need to pass regulations instead Multilateral instruments /ecome la$ once adopted 3here are agreements /" the provincial regulators to enact such a la$ A(ter multilateral instruments there are multilateral policies )ompanion policies that deal $ith the interpretation o( the instrument /ut the" have no legal e((ect Multilateral instruments need not /e adopted /" all provinces 4ill include some$here in the instrument $hich provinces have adopted the instrument o Also have commission orders ,ecision o( the 'S) on some area o( securities la$ $here the 'S) is entitled to ma7e an order under the Act 3he 'S) also has the po$er to grant exemptions i( it is in the interest o( the pu/lic or the mar7ets to do so )an also get an order $here sta(( have made a decision and "ou do not agree can appeal a sta(( decision to the )ommission 'S) also has the po$er to revo7e licenses /ut onl" a(ter a hearing But orders do not have the e((ect o( la$ 'rders can provide "ou $ith an overvie$ o( the outcome o( an" proceeding that "ou ma" have /e(ore the 'S) at the time Also have /lan7et orders ?and /lan7et exemptions@ Blan7et orders provide (or a (act scenario and i( "ou (it $ithin the (act scenario then "ou can rel" on the /lan7et order to 7no$ the outcome o( "our particular situation and ho$ to proceed Blan7et orders have the e((ect o( la$ since the" are in e((ect the )ommission8s ruling on a certain situation the )ommission is using its discretionar" po$ers o Also have sta(( notices 3

)ould /e sta(( sa"ing that the" are considering a particular rule and 5ust allo$ing (or people to have some notice o( potential changes that ma" /e coming )ould also /e simpl" the sta(( letting people 7no$ ho$ rules are num/ered o 3he &ules /rea7 do$n into D discrete chun7s 3hese ma7e it a /it easier to (ind the particular rules 4e $ill loo7 mostl" at sections = 0= and 6 o( the rules - distri/ution re;uirements such as prospectus and exemptions 0 - ongoing re;uirements (or issuers and insiders o A(ter "ou sell securities into the mar7et "ou still have o/ligations o 1eed to 7eep the mar7et in(ormed o( $hat is going on o Insiders insider trading rules and rules a/out insider in(ormation and disclosure 6 - ta7eover /ids o Issuer /ids= insider /ids etc. o I( someone $ants to ma7e a /id (or a compan" the" need to ma7e disclosure o I( the" are an insider the" $ill /e held to a higher standard /ecause the" ma" have some in(ormation that is advantageous o Issuers also (ace these additional re;uirements 4e $ill also loo7 at s.3 a little /it regulation o( participants o 1um/ering s"stem (or rules AB2),E A E part= section o( the act ?coincides $ith = 0= 6= etc (rom a/ove@ B E su/5ect matter part o( the section that the rule deals $ith ) E 5urisdictional level % E national polic" ?multilateral instrument@ 3 E sta(( notice 0 E 'ntario rule ?or local rule@ ,E EE o '(ten "ou $ill have a situation $here there is a national polic"= a sta(( notice= and a local rule I( there is a local rule dealing $ith the same thing as a national instrument it means that 'ntario has supplemented the national instrument in some (ashion 3his ma" /e /ecause 'ntario $anted some extra provisions related to the rule 4ho are the regulators and ho$ do the" (unction o 3he 'S) is the main regulator in 'ntario /ut there are also su/sidiar" regulators such as stoc7 exchanges and sel(2 regulator" organi9ations ?S&'8s@ 3he 'S) o Is a )ro$n corporation $ithout share capital $ith the usual incidents o( a corporation o But the 'S) also acts as an agent o( the )ro$n o 3he 'S) is sel(2(unded this is a recent development as it used to /e (unded /" the province In recent "ears the 'S) has actuall" /een a net contri/utor to the province 3his is /ecause through its statutor" po$ers it has the a/ilit" to raise mone" Rule 1 80!1 deals $ith the pa"ment o( (ees o 3he rule deals $ith +art %= section 3= local rule o ,eals $ith procedures &eporting issuer must pa" a (ee depending upon its mar7et capitali9ation >arger the mar7et cap the larger the (ee o Aor example +art 3 o( the rule deals $ith capital mar7et participation (ees Aees (or all people $ho hold licenses 3his (ee is /ased on the amount o( (ees generated in 'ntario o Aor under$riters= /ro7ers etc o +art o( the rule deals $ith activit" (ees +a" a (ee (or a num/er o( di((erent proceedings o 3here are also late (ees involved Aunding occurs on a user pa"s /asis $hich is /ased upon the level o( participation in the securities mar7ets 3here is a diagram at page %%7 o( the /oo7 outlining the structure o( the 'S)

Have a chair and vice2chair these are largel" polic" /ased positions Also have an Executive ,irector $ho= in e((ect= is similar to a )'' ?)hie( 'perating '((icer@ 3he chair o( the commission is the external (ace o( the commission #nder the E, there are a num/er o( directors o( di((erent departments have di((erent responsi/ilit" areas ,irector o( (inance $ill have under them (inance teams dealing $ith speci(ic reporting issuers )apital mar7ets deals $ith the exchanges= issues $ith mar7ets and mar7et participants En(orcement is an important area dealing $ith investigations= surveillance etc Surveillance loo7s at the trading o( a compan"8s stoc7 and an" t"pe o( activit" that $arrants an investigation ,irector o( investment (unds this position is evidence o( the changing nature o( securities and investment as it did not exist %! "ears ago )ommissioners sit on the commission as an ad5udicative panel o I( someone disagrees $ith the decision o( the sta(( the" are then (aced $ith having to go to the commission (or a determination &an7ing o( decision ma7ing in securities matters Airst sta(( decision Second appeal to the commission Ainall" appeal to the courts ,ecisions o( the commission can /e appealed to the courts $here the onl" real hope is to attac7 the 'S) decision on the /asis o( the standard o( revie$ $hich is usuall" patentl" unreasona/le o An appeal $ill either need to /e grounded on the standard o( revie$ or on an incorrect legal interpretation /" the )omission A/sent either o( these there is limited chance o( success at the court level 3he 'S) is empo$ered to determine the case= ma7e a decision= en(orce a decision= 5udge a decision and investigate the decision o 3his multiplicit" o( roles can potentiall" create issues o I( "ou 5ump the ;ueue - go to a commissioner over the head o( the sta(( - it can lead to pro/lems later on It is also necessar" to loo7 at the legislation creating the 'S) o 3he purpose provisions o( the Act are recent onl" /eing implemented in the past (e$ "ears o 3he" $ere put in to protect the pu/lic interest Purpose provisions of the Act S.1.1. 2 3he purposes o( this Act are= o ?a@ to provide protection to investors (rom un(air= improper or (raudulent practicesF and o ?/@ to (oster (air and e((icient capital mar7ets and con(idence in capital mar7ets. 3here is a need to /alance these t$o purposes o It is possi/le that the most e((icient mar7et is one $ithout an" investor protection o It is also possi/le that a mar7et $ith e((ective investor protection is one that is ine((icient 3his depends= in some measure= on the $a" that "ou measure e((icienc" Aor the (irst i( e((icienc" is determined on the /asis o( /eing a/le to get things done then a mar7et $ith investor protections ma" not /e e((icient There are also principles of consideration in the Act S.+.1 2 In pursuing the purposes o( this Act= the )ommission shall have regard to the (ollo$ing (undamental principlesG o %. Balancing the importance to /e given to each o( the purposes o( this Act ma" /e re;uired in speci(ic cases. o .. 3he primar" means (or achieving the purposes o( this Act are= i. re;uirements (or timel"= accurate and e((icient disclosure o( in(ormation= ii. restrictions on (raudulent and un(air mar7et practices and procedures= and iii. re;uirements (or the maintenance o( high standards o( (itness and /usiness conduct to ensure honest and responsi/le conduct /" mar7et participants. o 3. E((ective and responsive securities regulation re;uires timel"= open and e((icient administration and en(orcement o( this Act /" the )ommission. o . 3he )ommission should= su/5ect to an appropriate s"stem o( supervision= use the en(orcement capa/ilit" and regulator" expertise o( recogni9ed sel(2regulator" organi9ations. o 0. 3he integration o( capital mar7ets is supported and promoted /" the sound and responsi/le harmoni9ation and co2 ordination o( securities regulation regimes. o 6. Business and regulator" costs and other restrictions on the /usiness and investment activities o( mar7et participants should /e proportionate to the signi(icance o( the regulator" o/5ectives sought to /e reali9ed. o o o o 0

 +u/lic interest is an important consideration in the securities arena S.1+1617 2 3he )ommission ma" ma7e one or more o( the (ollo$ing orders i( in its opinion it is in the pu/lic interest to ma7e
the order or ordersG %. An order that the registration or recognition granted to a person or compan" under 'ntario securities la$ /e suspended or restricted (or such period as is speci(ied in the order or /e terminated= or that terms and conditions /e imposed on the registration or recognition. .. An order that trading in an" securities /" or o( a person or compan" cease permanentl" or (or such period as is speci(ied in the order. ..% An order that ac;uisition o( an" securities /" a particular person or compan" is prohi/ited= permanentl" or (or the period speci(ied in the order. 3. An order that an" exemptions contained in 'ntario securities la$ do not appl" to a person or compan" permanentl" or (or such period as is speci(ied in the order. . An order that a mar7et participant su/mit to a revie$ o( his= her or its practices and procedures and institute such changes as ma" /e ordered /" the )ommission. 0. I( the )ommission is satis(ied that 'ntario securities la$ has not /een complied $ith= an order that a release= report= preliminar" prospectus= prospectus= return= (inancial statement= in(ormation circular= ta7e2over /id circular= issuer /id circular= o((ering memorandum= prox" solicitation or an" other document descri/ed in the order= i. /e provided /" a mar7et participant to a person or compan"= ii. not /e provided /" a mar7et participant to a person or compan"= or iii. /e amended /" a mar7et participant to the extent that amendment is practica/le. 6. An order that a person or compan" /e reprimanded. 7. An order that a person resign one or more positions that the person holds as a director or o((icer o( an issuer. 8. An order that a person is prohi/ited (rom /ecoming or acting as a director or o((icer o( an" issuer. 8.% An order that a person resign one or more positions that the persons holds as a director or o((icer o( a registrant. 8.. An order that a person is prohi/ited (rom /ecoming or acting as a director or o((icer o( a registrant. 8.3 An order that a person resign one or more positions that the person holds as a director or o((icer o( an investment (und manager. 8. An order that a person is prohi/ited (rom /ecoming or acting as a director or o((icer o( an investment (und manager. 8.0 An order that a person or compan" is prohi/ited (rom /ecoming or acting as a registrant= as an investment (und manager or as a promoter. D. I( a person or compan" has not complied $ith 'ntario securities la$= an order re;uiring the person or compan" to pa" an administrative penalt" o( not more than H% million (or each (ailure to compl". %!. I( a person or compan" has not complied $ith 'ntario securities la$= an order re;uiring the person or compan" to disgorge to the )ommission an" amounts o/tained as a result o( the non2compliance. +rior to the introduction o( the purpose provisions there $as an issue a/out ho$ "ou go a/out determining that there $as= or $as not= a pu/lic interest involved in the case 3he 7e"stone o( investor protection is disclosure Aront running $hen one part" tips another a/out an intention /" another to purchase a stoc7 at a certain price the one receiving the tip can act on it= purchase the stoc7 at a lo$er price= and then sell it $hen the third person /u"s it= (or a gain= o( course 3he commission= under s.%.7 is empo$ered to ma7e orders in the pu/lic interest o 'ne o( these orders ma" consist o( a cease2trade order (or example can /e ver" damaging to a compan" $ho is su/5ect to one= or to directors and o((icers $ho are su/5ect to them )ease2trade orders are usuall" reserved (or the most severe examples /ecause it is a severe penalt" o It is also possi/le (or the 'S) to den" exemptions to either the compan" or its directors there/" limiting their a/ilit" to do things o )ompanies are a/le to get credit (or cooperation= (or example $here the" /ring an issue to the attention o( the )ommission the" are more li7el" to receive lenienc" In the securities arena it is possi/le to have criminal as $ell as civil penalties (or violations o( securities la$ 3he 'S) o(ten exercises its pu/lic interest 5urisdiction 3he regulation o( stoc7 exchanges is not at the heart o( securities regulation ?3SC (or example@ o 3he 3SC $as an S&' ?sel(2regulator" organi9ation@ (or man" "ears <ind o( li7e a mem/ers clu/ 1eeded to /u" a seat and then could trade on the exchange 3he exchange regulated mem/ers and regulated issuers listing on the exchange Issuers had to have a listing agreement setting out their responsi/ilities and re;uirements (or maintaining their listing 6

o Such as minimum num/er o( shareholders= minimum share price o I( a condition $as /reached the issuer could /e delisted 3he rules o( the exchange $ere compati/le $ith the 'S) rules and regulations 3he 'S) has a role in the exchange /ecause it has an overriding right to license exchanges o 'S) can also approve the procedures o( the 3SC Much o( this changed in .!!. $hen the 3SC demutuali9ed and /ecame a pu/lic compan" li7e an" other o 3SC is no$ listed li7e other companies= o 3SC too7 the mone" (rom its I+' and turned around and /ought the ),1C renaming it the 3SC2I ?3SC - Ienture Exchange@ o 3SC is still licensed /" the 'S) $hieh also provides procedures etc. Historicall" an exchange $as a place $here /u"ers and sellers $ould get together to trade /ut this has changed o 3here is no longer a trading (loor as ever"thing has /ecome electronic instead o &ather than having a need (or traders on the (loor to ma7e a trade happen it is possi/le to do it through a computer terminal (rom 5ust a/out an"$here at 5ust a/out an" time o 4ith this development it is no$ theoreticall" possi/le (or an"one to start an exchange an"$here this opens up the a/ilit" to trade ?and potentiall" creates pro/lems (or securities regulation@ Policy +181!1 ?Multilateral Instrument ?1I@@ o +art .= Section % ,eals $ith mar7et participants Exchanges= alternative trading s"stems ?A3S@ and ne$ mar7ets 3his 1I sa"s that A3S are exchanges i( the" meet certain criteria As a result= i( the criteria are met= the" need to /e licensed /" the securities regulators o 'ne concern $ith alternative mar7ets is the possi/ilit" (or (ragmentation $hich could lead to ine((icienc" i( trades do not clear an exchange must have s"stems in place that ensure that trades clear I,A ?Investment ,ealers Association@ is another S&' (or dealers o Its role is to oversee mar7et participants and to ensure that the" operate on the up and up o I,A also provides a (und (or individuals $ho su((er losses /ecause o( the prover/ial Jdealer gone /adK sort o( li7e an insurance (und 3he 'S) is the ma5or regulator o E((ectivel" have a director o( operations the E, o Belo$ this are a num/er o( departments o A/ove the E, is the )ommission itsel( 3he role o( the 3SC is as a trading plat(orm there are others as $ell such as the ME= A3S etc In 'ntario it is necessar" to have disclosure $henever an issuer $ants to sell securities 3here are t$o important sections o( the Act in this respect s..0 and s. 03 S.+0 6176a7 2 9o person or co#pany shall= trade in a security or act as an underwriter unless the person or compan" is registered as a dealer= or is registered as a salesperson or as a partner or as an o((icer o( a registered dealer and is acting on /ehal( o( the dealerF and the registration has /een made in accordance $ith 'ntario securities la$ and the person or compan" has received $ritten notice o( the registration (rom the ,irector and= $here the registration is su/5ect to terms and conditions= the person or compan" complies $ith such terms and conditions o S..0 is 7no$n as the registration provision need to /e registered in order to trade Ho$ever s..0 does not reall" catch distri/utions= and that is $h" $e have s.03?%@. 3his section deals $ith all trades= regardless o( $hether or not it is a distri/ution S.0 617 2 9o person or co#pany shall trade in a security on his= her or its o$n account or on /ehal( o( an" other person or compan" i( the trade $ould /e a distribution o( the securit"= unless a preliminar" prospectus and a prospectus have /een (iled and receipts have /een issued (or them /" the ,irector. o A prospectus is the /asic disclosure document in securities regulation 3ells the investor all the" need to 7no$ a/out the compan" so that the" are in a position to ma7e an in(ormed decision as to $hether or not the" $ish to purchase the o((ering o 3he general issue $ith a distri/ution is that it $ill either /e a ne$ issue coming to mar7et or other$ise the sale $ill /e (rom a control /loc7 o( the compan" o 3his section ?s.03@ is the gate$a" into distri/utions o 'ne important consideration in distri/utions is the exemptions that are availa/le S..0 applies to all trades= s.03 onl" applies to distri/utions

What is a trade? ,e(initions are (ound is s.% o( the Act 3rade= or trading includes
?a@ an" sale or disposition o( a securit" (or valua/le consideration= $hether the terms o( pa"ment /e on margin= instalment or other$ise= /ut does not include a purchase o( a securit" or= except as provided in clause ?d@= a trans(er= pledge or encum/rance o( securities (or the purpose o( giving collateral (or a de/t made in good (aith= 3he latter portion covers the giving o( securit" over a securit" is not a trade= unless it (alls under ?d@ control /loc7 A gi(t o( a securit" is not a trade /ecause need valua/le consideration 3he (act that a purchase does not constitute a trade (ollo$s through $ith the registration re;uirement do not have to /e registered to /u" a securit" o ?/@ an" participation as a trader in an" transaction in a securit" through the (acilities o( an" stoc7 exchange or ;uotation and trade reporting s"stem= o ?c@ an" receipt /" a registrant o( an order to /u" or sell a securit"= o ?d@ an" trans(er= pledge or encum/rancing o( securities o( an issuer (rom the holdings o( an" person or compan" or com/ination o( persons or companies descri/ed in clause ?c@ o( the de(inition o( Jdistri/utionK (or the purpose o( giving collateral (or a de/t made in good (aith= and o ?e@ an" act= advertisement= solicitation= conduct or negotiation directl" or indirectl" in (urtherance o( an" o( the (oregoing #se o( the $ord JincludesK means that this list is not exhaustive Have ?d@ o( the de(inition /ecause controlling shareholders are treated di((erentl" under securities la$ o 3his is /ecause the" are assumed to have 7no$ledge that others do not have can impact shares etc. o :iving o( securit" over securities /" a controlling shareholder is called a trade /ecause it is possi/le that the controlling shareholder ma" de(ault on the securit" agreement and then there $ould /e a change in control i( there $as no need (or this to /e a trade then the /an7 could sell the shares $ithout a prospectus and this ma" not /e ?most li7el" $ould not /e@ a good situation (or the other shareholders Ho$ever there are exemptions that allo$ (or controlling shareholders to give securit" over their holdings $ithout a prospectus /ut it ma" /e that those $ho get the securities through an exempt transaction are themselves precluded (rom issuing them to the mar7et $ithout a prospectus A control /loc7 is treated di((erentl" /ecause $e $ant to ensure that the control /loc7 does not (ind its $a" onto the mar7et $ithout a prospectus 3he most important part o( the de(inition o( trade is ?e@ an" act in (urtherance o( a trade o Because it is ver" /road can include tal7ing up a securit" etc. #nder the de(inition o( a trade virtuall" an"thing that has to do $ith the trans(er o( a securit" $ill /e a trade and there(ore $ill /e caught /" the 'SA and /e su/5ect to regulation /" the 'S) o

What is a Security? Is another important de(inition in the 'SA It is also a non2exhaustive listing due to the use o( the $ord JincludesK SecurityG
o o o o o ?a@ an" document= instrument or $riting commonl" 7no$n as a securit"= ?/@ an" document constituting evidence o( title to or interest in the capital= assets= propert"= pro(its= earnings or ro"alties o( an" person or compan"= ?c@ an" document constituting evidence o( an interest in an association o( legatees or heirs= ?d@ an" document constituting evidence o( an option= su/scription or other interest in or to a securit"= ?e@ an" /ond= de/enture= note or other evidence o( inde/tedness= share= stoc7= unit= unit certi(icate= participation certi(icate= certi(icate o( share or interest= preorgani9ation certi(icate or su/scription other than a contract o( insurance issued /" an insurance compan" licensed under the Insurance Act and an evidence o( deposit issued /" a /an7 listed in Schedule I or II to the Bank Act ?)anada@= /" a credit union or league to $hich the Credit Unions and Caisses Populaires Act, 1994 applies or /" a loan corporation or trust corporation registered under the Loan and Trust Corporations Act= ?(@ an" agreement under $hich the interest o( the purchaser is valued (or purposes o( conversion or surrender /" re(erence to the value o( a proportionate interest in a speci(ied port(olio o( assets= except a contract issued /" an insurance compan" licensed under the Insurance Act $hich provides (or pa"ment at maturit" o( an amount not less than three ;uarters o( the premiums paid /" the purchaser (or a /ene(it pa"a/le at maturit"= 8

?g@ an" agreement providing that mone" received $ill /e repaid or treated as a su/scription to shares= stoc7= units or interests at the option o( the recipient or o( an" person or compan"= o ?h@ an" certi(icate o( share or interest in a trust= estate or association= o ?i@ an" pro(it2sharing agreement or certi(icate= o ?5@ an" certi(icate o( interest in an oil= natural gas or mining lease= claim or ro"alt" voting trust certi(icate= o ?7@ an" oil or natural gas ro"alties or leases or (ractional or other interest therein= o ?l@ an" collateral trust certi(icate= o ?m@ an" income or annuit" contract not issued /" an insurance compan"= o ?n@ an" investment contract= o ?o@ an" document constituting evidence o( an interest in a scholarship or educational plan or trust= and o ?p@ an" commodit" (utures contract or an" commodit" (utures option that is not traded on a commodit" (utures exchange registered $ith or recogni9ed /" the )ommission under the Commodity Futures Act or the (orm o( $hich is not accepted /" the ,irector under that Act= o $hether an" o( the (oregoing relate to an issuer or proposed issuer 3his is a ver" /road de(inition= prett" much ever"thing is captured /" it ?a@ might have /een enough Some o( the portions o( this de(inition o( securit" seem to overreach and ma7e the de(inition overl" /road >oo7ing at ?e@ o( the de(inition $h" are /an7 deposits and insurance certi(icates not included o +ro/a/l" /ecause insurance companies and /an7s are alread" heavil" regulated do not need more Also /ecause ?ma"/e@ the" are occupied (ederal (ields and the province ma" have a hard time regulating them 3his carve2out is prett" narro$ in application 3his is also pro/a/l" $h" annuit" contracts not issued /" insurance companies ?m@ are covered in the de(inition the" are not su/5ect to the same regulation +art ?o@ is a recent addition to the de(inition o( securit" /ecause o( the changing nature o( the $a" people save o 3here $ere some scholarship programs that had trou/les and the 'S) $ants to add some Jsecurit"K to these programs #nder part ?p@ $e have the same issue as $ith ?e@ etc. since these mar7ets are alread" regulated $h" add on another la"er $hen it is not necessar" to protect an"one8s interests o 3he exchanges are regulated and ensure that the mar7et is operating e((icientl" protects investors A /ig ;uestion is $hat is an investment contract (rom ?n@ o Investment contract is not de(ined in the Act o As a result need to loo7 at the case la$= in particular t$o American casesG Ho$e" and Ha$aii o Howey Interrelated companies operated in Alorida '$ned a hotel= and induced guests to invest in orange groves= and to purchase service contracts through another compan" ?all related to each other@ Individuals $ould get to o$n part o( an orange grove= could choose ho$ /ig= could choose the age o( the groves etc. and then get the service compan" to tend the trees= pic7 the (ruit and mar7et it It $as not necessar" to /u" the service contract= /ut most investors did /u" it 4ithout the service contract it $as not possi/le to get at the (ruit so it $ould 5ust rot on the tree 3he ;uestion $as $hether this $as a securit" or not 3he land deal $ould not /e a securit"= it is the com/ination o( the land and the service contract that made it a securit" 3he SE) said that this $as an investment contract and laid out a test (or an investment contract 3here must /e an investment o( mone" 3here must /e a common venture 3here must /e a vie$ to a pro(it 3he pro(its have to /e solel" through the e((orts o( someone else I( all o( these criterion are satis(ied then it is an investment contract OSC v ri!adoon Scotch o )ompan" sold certi(icates to people evidencing a right to 0!!! gallons o( scotch o 3he compan" $ould store it (or them= let it age= the" $ould /ottle it= sell it= and= a(ter deducting a (ee= pa" the mone" earned to the person $ho /ought the certi(icate o 3he 'S) said that this $as a securit"= the compan" claimed it $as 5ust a sale o( $his7e" o 'S) said that i( "ou sell someone a certi(icate representing a commodit" that the" are li7el" to use themselves then that is not a securit" 3he 7e" ;uestion is $hether it is intended as an investment or not= i( not then it is o7a"= i( so then it is a securit" o 3he intention in this case $as not to consume the scotch /ut to ma7e mone" so it $as a securit" o D

 Example
Bar o( gold is it a securit" or a commodit"6 'S) sa"s it is not a securit" even though it has an investment component to o$nership 1eed to have something more= 5ust rel"ing on mar7et d"namics is not enough >oo7 at +aci(ic )oast )oin Exchange (or example o 3he S)) did not sa" the purchase o( the silver $as a securit" /ut rather it $as the $a" the $hole contract $as structured that created a securit" Pacific Coast Coin "#chan!e (SCC) o Bac7 in the %D6!8s the price o( silver too7 o(( coins had silver in them at the time /ut that changed due to the increasing price o( the metal and as a result the coins $ere $orth more than their (ace value o +))E $ould sell /ags o( silver coins 3he coins in the /ag could /e $orth more or less depending upon the spot price o( silver +eople could either /u" the /ag o( coins outright or the" could put up 30L and either /u" the rest later or sell it /ac7 to +))E (or the mar7et price and never actuall" ta7e deliver" o( the coins o +))E started selling these /ags to people in 'ntario and the 'S) said that it is a securit"= that there is no prospectus ?violates s.03@ and that +))E $as not selling through a registered dealer ?violates s..0@ #sing the Ho$e" test Is there an investment o( mone" Mes Is there is common venture no since it is 5ust a commodit" Is there a vie$ to a pro(it Mes Is the pro(it due solel" to the e((orts o( others 1o due to the mar7et (orces dictating the price o( silver on the mar7et o 3he S)) said that it $as a securit" /ecause it $as an investment contract 3he" loo7ed at the (acts /ehind +))E I( someone came in a put do$n 30L +))E $ould not segregate their /ag o( silver /ut rather $ould hedge through a com/ination o( (utures contracts and options in order to cover their ris7s 3his is the (eature that made it an investment contract I( the hedging $as not success(ul then investors could lose mone" - a lot o( it - or not get $hat the" $ere promised - the pa"out (rom +))E $henever the" $anted to cash in on their /ag o( silver ?that the" had not purchased outright@ 3he common venture $as /ecause "ou $ould onl" get "our mone" /ac7 i( +))E $as success(ul at hedging their ris7 Also the possi/ilit" o( pro(it $as due= at least in part= to the e((orts o( +))E in hedging ,id not need to /e solel" due to the e((orts o( another 5ust mostl"= or in some signi(icant portion Albino (pa!e $%&) o 4as the )E' o( &io Algom ?I thin7 it $as a su/sidiar" o( &io 3into66@ o He received $hat $as called Stoc7 Appreciation &ights the" $ere li7e options /ut no actual stoc7 $as involved. He $as granted the SA&8s at a certain price and could cash them in $henever he $anted 3here $as no a/ilit" (or the compan" to den" this It $as a term o( his emplo"ment contract 4hat he $as getting $as the di((erence /et$een the share price o( the stoc7 $hen the JoptionK $as granted and $hen he chose to exercise the JoptionK o 3hings $ere starting to go /ad (or &io Algom and he had some insider in(ormation o Based on this in(ormation he decided to cash out his SA&8s #nli7e stoc7 options $ith SA&8s Al/ino $as a/le to use the inside in(ormation to his advantage o 3he compan" had to disclose these /onuses paid to him and shareholders= and the 'S)= o/5ected o 3he 'S) had a three person panel hear the case 'ne decided that it $as o7a" /ecause it $as not a securit" 'ne decided that it $as a securit" and there(ore not o7a" 'ne decided that he did not have to determine $hether or not it $as a securit" /ecause it $as apparent that Al/ino had done something $rong that should not /e allo$ed o 4hat8s $rong $ith this situation He used in(ormation that $as not availa/le to the pu/lic to his o$n advantage It $as something that $ould sha7e reliance in the capital mar7ets Ho$ever= unli7e $ith a securit"= there $as no other part" that $as harmed /" this transaction o %!

#nless "ou consider the (ate o( shareholders $ho ultimatel" o$n the compan" and= through the pa"out= lose some portion o( their e;uit" or dividend o Aor/es this is not a securit" 3he pro/lem is that he /ene(ited $ith insider in(ormation and the 'S) does not li7e that much A/out 7 or 8 "ears a(ter this case Al/ino $as a director o( an insurance compan" that $as demutuali9ing and the 'S) threatened to $ithhold its approval so long as he remained a director the" threatened to use their s.%.7 pu/lic interest po$er to stop the demutuali9ation (rom going ahead Examples o( securities o )an a gol( clu/ mem/ership /e a securit"6 Ho$ could this ever /e a securit" 1eed to loo7 at the nature o( the thing Aaciall" it loo7s more li7e a commodit" than an"thing else 4hat i( it is easil" trans(era/le= "ou can o$n more than %= 4hat i( the" are /eing pre2sold to raise revenue (or the construction o( the course itsel( and "ou could /u" %! o( them at C dollars and sell them later (or M 4ould need to appl" Ho$e" and see $hat sha7es out 4hat are the issues in determining i( this is a securit" 3rans(era/ilit" can "ou sell (or an" price= at an" time A/ilit" to /u" more than one i( so loo7s more li7e a securit" 1ature o( the mem/ership o Is it part o$nership loo7s more li7e a securit" o Is it a license to pla" gol( more li7e a commodit" ,o "ou have to 7eep it (or a period o( time i( so loo7s more li7e a commodit" o Is a J(ootprintK license to sit in the seats at the A)) (or &aptors games a securit" )ost o( one license is H%7=0!! 3he" can /e trans(erred /ut are there limitations 1o since "ou can sell (or an" price 3he team 5ust $ants to 7no$ $hat price "ou got (or them so the" 7no$ $hat the mar7et is )an /u" more than one $ould not $ant to go to a game alone an"$a"s )an trans(er it an" time "ou $ant &aptors $ere $orried a/out it loo7ing li7e a securit" and needing a prospectus Aor/es $as involved in this one )oncluded that the" $ere not securities +ut provisions in the licenses limiting the a/ilit" to sell the seats o I( "ou scalp tic7ets then "ou could cancel the person8s tic7ets o )an8t trans(er the license (or at least three "ears Ma7e it loo7 less li7e a securit" 3eam also li7ed /ecause it $ould 7eep them o(( the mar7et (or a time 4ant the primar" reason (or /u"ing them to /e so that "ou go to $atch the games and not to ma7e a pro(it on the seats o )an shipping containers /e securities 4anted to ta7e 3E#8s and sell them to investors $ho could then deduct the ))A on the investment and at the same time get the vendor to turn around and lease them to others 3he vendor trac7s the containers= collects pa"ments etc. and remits the proceeds ?minus a (ee@ to the Jo$nersK #sing Ho$e" it loo7s a lot li7e a securit" )ould instead rent the containers /ac7 to the vendor (or a (ixed (ee and then the vendor goes out and leases them on the mar7et +erson did not li7e this advice A/out 6 months later got an 'S) sta(( /ulletin a/out it sa"ing that the" (elt that it $as a securit" and that the 'S) $ould use s.%.7 to stop it o )an a timeshare /e a securit" A/out %! "ears ago an 'S) /ulletin came out a/out timeshares It $as possi/le to ta7e "our interest in a timeshare in Alorida= (or example= and trade it (or time in another unit some$here else 'S) loo7ed at it /ut decided not to get involved But recent amendments to the )onsumer +rotection Act incorporated provisions a/out timeshares %%

4hat a/out viatical insurance policies Someone $ith a terminal illness has a li(e insurance polic" initiall" arose around AI,S $here someone had a polic"= needed treatment= could sell polic" (or immediate pa"ment &eason it arose $as /ecause it $as possi/le that $ithout treatment the li(e expectanc" $as much lo$er than $ith treatment and the pa"ment could assist in o/taining that treatment - a $in2$in Ho$ it $or7ed Someone has an insurance polic" (or H0!!=!!! )ould $ait until the" die and their /ene(iciar" $ould get the mone" 'r could sell it (or= sa" H !!=!!! no$= get treatment= and live (or longer 3he one $ho /ought the polic" could pa" the H !!=!!! toda" and get H0!!=!!! in a (e$ "ears Is this a securit" 'n its (ace it is not a securit" since it is 5ust an assignment o( an insurance polic" But $hat happens $hen "ou put %!= or .!= or %!! o( these together= pac7age them and sell them to investors so that "ou have the mone" to /u" all o( the policies o 3hen turn around and pa" out an annual amount /ased on o$nership in the overall pool over a num/er o( "ears o 3hen it loo7s an a$(ul lot li7e a securit" 3here is a continuum involved in assessing $hether something is= or is not= a securit" o At one end o( the continuum is a commodit" $hich is not a securit" and at the other end is Ho$e" $hich represents a securit" 3he ;uestions don8t arise at either end o( the continuum /ut rather in the middle $here things are not ;uite so clear )ase (rom Al/erta o :u" had a chinchilla ranch and $as selling N interests in /reeding pairs o( chinchillas 4ould then pa" out the pro(its on the sales o( chinchilla o((spring to the investors 3he AS) said that this $as a securit" o

%.

Distributions the Prelude to a Prospectus

#nder s.03?%@= $henever "ou engage in a distri/ution "ou need a prospectus ,istri/ution is another term that is de(ined in the Act Again it is a non2exhaustive listing 'istribution( where used in relation to tradin! in securities( )eans o ?a@ a trade in securities o( an issuer that have not /een previousl" issued= o ?/@ a trade /" or on /ehal( o( an issuer in previousl" issued securities o( that issuer that have /een redeemed or purchased /" or donated to that issuer= o ?c@ a trade in previousl" issued securities o( an issuer (rom the holdings o( an" control person= o ?d@ a trade /" or on /ehal( o( an under$riter in securities $hich $ere ac;uired /" that under$riter= acting as under$riter= prior to the %0th da" o( Septem/er= %D7D i( those securities continued on that date to /e o$ned /" or (or that under$riter= so acting= o ?e@ a trade /" or on /ehal( o( an under$riter in securities $hich $ere ac;uired /" that under$riter= acting as under$riter= $ithin eighteen months a(ter the %0th da" o( Septem/er= %D7D= i( the trade too7 place during that eighteen months= and o ?(@ an" trade that is a distri/ution under the regulations= o and on and a(ter the %0th da" o( March= %D8%= includes a distri/ution as re(erred to in su/sections 7. ? @= ?0@= ?6@ and ?7@= and also includes an" transaction or series o( transactions involving a purchase and sale or a repurchase and resale in the course o( or incidental to a distri/ution and Jdistri/uteK= Jdistri/utedK and Jdistri/utingK have a corresponding meaning 3he /oo7 indicates that ?/@ o( the de(inition is redundant since redeemed shares are supposed to /e cancelled under corporations la$ /ut a securit" is /roader than shares and there(ore this section is not redundant could include de/t instruments or other securities +art ?c@ is important to 7no$ as $ell use an example o Have a compan" $ith t$o shareholders= each o( $hom o$ns %!! shares 3he compan" $ants to go pu/lic and can do it in one o( t$o $a"s )an issue ne$ shares need prospectus )an su/divide the shares o( the current o$ners - sa" % million (or % - and sell hal( o( each /loc7 to the pu/lic I( it $as not (or ?c@ then it $ould not /e necessar" (or there to /e a prospectus 4ould /e a /ac7door $a" o( getting the shares onto the mar7et It is also important to 7no$ the de(inition o( control person Control person o ?a@ a person or compan" $ho holds a su((icient num/er o( the voting rights attached to all outstanding voting securities o( an issuer to a((ect materiall" the control o( the issuer= and= i( a person or compan" holds more than .! per cent o( the voting rights attached to all outstanding voting securities o( an issuer= the person or compan" is deemed= in the a/sence o( evidence to the contrar"= to hold a su((icient num/er o( the voting rights to a((ect materiall" the control o( the issuer= or o ?/@ each person or compan" in a com/ination o( persons or companies= acting in concert /" virtue o( an agreement= arrangement= commitment or understanding= $hich holds in total a su((icient num/er o( the voting rights attached to all outstanding voting securities o( an issuer to a((ect materiall" the control o( the issuer= and= i( a com/ination o( persons or companies holds more than .! per cent o( the voting rights attached to all outstanding voting securities o( an issuer= the com/ination o( persons or companies is deemed= in the a/sence o( evidence to the contrar"= to hold a su((icient num/er o( the voting rights to a((ect materiall" the control o( the issuerF )ontrolling shareholder example o )ompan" has (our large shareholders - A E .0L= B E %!L= ) E %8L= , E %!L= pu/lic o$ns the rest o 'ne o( them $ants to sell shares into the mar7et I( A $ould seem that the" $ould need a prospectus /ut that ma" not /e enough 4hat i( B= ) and , al$a"s $or7ed in tandem on the /oard and in shareholder votes 3hough each= individuall"= $ould not /e a controlling shareholder= collectivel" the" are I( this is so then i( one o( them $ants to sell it ma" e((ectivel" alter the control o( the compan" and mandate a prospectus /eing (iled #suall" in these t"pes o( circumstances it is di((icult to prove that the" are actuall" $or7ing together o 3here is usuall" no shareholder agreement= no notice (iled $ith the 'S) as per the regulations o All "ou ma" have is anecdotal evidence the" al$a"s vote the same $a" o It ma" /e necessar" (or the companies to introduce evidence re(uting the claim that the" $or7 together %3

It is also possi/le to get exemptions (rom the control /loc7 rules a/out prospectuses

'(ten= $hen companies are going to /u" a signi(icant /loc7 o( shares= the" $ill re;uest that the target compan" sign a
contract allo$ing the ac;uiring compan" access to the in(ormation needed to (ile a prospectus 'ne (inal component to the de(inition o( distri/ution is the post2am/le $hich re(ers to s.7. o( the 'SA o 3he idea /ehind this $as that in %D8% the 'SA $as changed and the 'S) did not $ant people to /e a/le to get exempt securities and then put them on the mar7et $ithout a prospectus As a result there $as a re;uirement (or people to hold the securities (or a period o( time through the Jclosed2 s"stem rulesK I( people did not a/ide /" the closed2s"stem rules then it $ould /e a distri/ution re;uiring a prospectus o In relation to s.7.? @?0@?6@?7@ the 'S) has passed a multi25urisdictional instrument MI 02%!. sa"s that these sections are not use(ul an"more and providing ne$ rules (or reselling securities ac;uired through an exempt distri/ution 3he result o( MI 02%!. is the same o I( the resale is not done under MI 02%!. then a prospectus is necessar" 4hat is a reporting issuer o Is not reall" a part o( distri/utions since onl" /ecome a reporting issuer a(ter on the mar7et o Again is de(ined in the Act o &eporting issuer goes more to continuous disclosure

Prospectus 1!1
+reliminar" prospectus is called 5ust that= preliminar" prospectus Ainal prospectus is simpl" called a prospectus 1eed a receipt (or a preliminar" prospectus and a (inal prospectus /e(ore "ou can go to mar7et 3he receipt (or the preliminar" prospectus is Jas o( rightK once "ou (ile the preliminar" prospectus "ou get the receipt 3he receipt (or the (inal prospectus ma"= or ma" not= /e issued /" the regulator Aor distri/utions o Airst ;uestion is $hat do "ou $ant to do loo7 to s.03 Also loo7 to the de(inition o( the terms in s.03 trade= securit" and distri/ution o I( these three criteria are satis(ied ?$hat "ou are tr"ing to do (its $ithin the de(initions@ then as7 Is there an exemption availa/le I( so then "ou do not need a prospectus I( not then "ou need to do one But ma" also as7 $hether "ou $ant to do a prospectus It is possi/le to get mone" in return (or e;uit" in other arenas private e;uit" etc. But there ma" /e no alternative to doing a prospectus 4h" $ould "ou not $ant to do a prospectus o Because the compan" is success(ul and has an advantage etc. that $ould /ecome pu/lic 7no$ledge and ma" a((ect the success o( the compan" o Because the compan" has a close27nit management that $ould not /e a/le to survive as a pu/lic compan" due to independent director stipulations o 3he compan" $ould have to alter its operations to meet the dictates o( the mar7etplace and that ma" not /e in its /est interests o Also one consideration is that it costs a lot o( mone" Stud" (rom 3SC in the /oo7 indicates that it costs an average o( H3.D million (or an I+' 3here are di((erent t"pes o( prospectuses o >ong2(orm prospectus prospectus in contemplation o( an I+' o Short2(orm prospectus (or reporting issuer alread" in the mar7et o Shel( prospectus $ant to ;uali(" a prospectus (or an amount /ut onl" $ant to immediatel" issue a lo$er amount= /ut can rel" on the ;uali(ied prospectus to ena/le (urther distri/utions Jo(( the shel(K have alread" /een approved and 5ust need some minor supplemental in(ormation 3hese are more JexoticK prospectuses Issues $ith prospectus timing o 4hat t"pe o( mar7et is the o((ering aimed at6 Is there a mar7et $indo$ that exists

I( "ou 7no$ this "ou can $or7 /ac7$ards (rom the date "ou $ant to enter the mar7et to map out timelines o E.g. "ou have a product that has to /e out (or &&S+ season 7no$ $hen to put it all in place Bet$een the preliminar" prospectus /eing (iled and a receipt (or a (inal prospectus it $ill /e at least %0 /usiness da"s o 4hat is going on in the compan" Is there some other pro5ect that the compan" is loo7ing at 1eed to consider $hether or not the other pro5ect $ill negativel"= or positivel"= impact the compan"8s prospects /ecause this $ill impact the data in the prospectus o Buestion is J$ill this other pro5ect create material changes that $ill need to /e incorporated into the prospectus6K Also $ant to 7no$ i( there are some expected (uture events that should /e disclosed 3his is also $here the issue o( A'AI arises Also the ;uestion o( the availa/ilit" o( (inancial in(ormation o Rule "180!1 ( part " 69ational 'nstru#ent7 ".1 :nnual %inancial State#ents o) the 'ssuer 2 Su/5ect to sections ..= .3 and 0..= an issuer shall include in its prospectus the (ollo$ing annual (inancial statements o( the issuerG %. Statements o( income= retained earnings and cash (lo$s (or o ?a@ each o( the three most recentl" completed (inancial "ears ended more than D! da"s /e(ore the date o( the prospectusF or o ?/@ i( the issuer has not completed three (inancial "ears= each completed (inancial "ear ended more than D! da"s /e(ore the date o( the prospectusF or o ?c@ i( the issuer has not completed one (inancial "ear= the (inancial period (rom the date o( (ormation to a date not more than D! da"s /e(ore the date o( the prospectus. .. A /alance sheet as at o ?a@ the last da" o( the most recentl" completed (inancial "ear= i( an"= ended more than D! da"s /e(ore the date o( the prospectusF and o ?/@ the last da" o( the immediatel" preceding (inancial "ear= i( an"F or o ?c@ i( the issuer has not completed one (inancial "ear= as at a date not more than D! da"s /e(ore the date o( the prospectus. ".+ -.ception to :nnual State#ent Re;uire#ent i) More Recent :nnual %inancial State#ents 'ncluded An issuer ma" omit its (inancial statements (or the oldest (inancial "ear other$ise re;uired under section .%= i( audited (inancial statements o( the issuer are included in the prospectus (or a (inancial "ear ended D! da"s or less /e(ore the date o( the prospectus. o According to this rule i( "ou go more than D! da"s past the end o( the (inancial "ear "ou $ill need to have audited statements (rom the 5ust completed "ear 3his presents di((iculties /ecause o( the time lag in getting audited (inancial statements /ecause auditors are cautious especiall" a(ter some o( the recent scandals that have occurred o 1eed to get the receipt (or the preliminar" prospectus prior to the expir" o( the D! da" period o It is also necessar" to use interim (inancial statements again (rom Rule "180!1 ".3 'nteri# %inancial State#ents o) the 'ssuer 2 Su/5ect to su/section .7?3@ and section 0..= an issuer shall include in its prospectus the (ollo$ing interim (inancial statements o( the issuerG %. Statements o( income= retained earnings and cash (lo$s (or the most recentl" completed interim period that ended more than 6! da"s /e(ore the date o( the prospectus and (or the compara/le period in the immediatel" preceding (inancial "ear. .. A /alance sheet as at the last da" o( the most recentl" completed interim period re(erred to in paragraph %. o Interim (inancial statements E ;uarterl" statements 3hese do not need to /e audited /ut the 'S) $ill expect a com(ort letter (rom the auditor sa"ing that the statements are not audited /ut that the" appear to ade;uatel" represent the (inancial position o( the compan" at that point in time o It is important to note the timing o( these things $ithin D! da"s o( "ear end "ou need annual= audited statements and $ithin 6! da"s o( ;uarter end "ou need interim (inancial statements 1ote that i( "ou do not get them in $ithin the time period "ou $ill have to $ait (or a $hile a(ter that to have a chance to (ile a preliminar" prospectus o 3here are also other important aspects to Rule "180!1 1".1 Procedures and Re;uire#ents )or Granting Receipts %0

?%@ An issuer shall not (ile a prospectus i( the issuer is in de(ault in (iling or delivering to the )ommission a document re;uired to /e (iled or delivered /" the issuer under 'ntario securities la$. ?.@ An issuer shall not (ile a prospectus more than D! da"s a(ter the date o( the receipt (or the preliminar" prospectus. 10.1 -.e#ption 2 3he ,irector ma" grant an exemption (rom the provisions o( this &ule= in $hole or in part= su/5ect to such conditions or restrictions as ma" /e imposed in the exemption. ,irector $ill usuall" onl" allo$ (or this $here it is 5ust slightl" over the deadline - such as %! da"s and the compan" has /een diligentl" $or7ing to get it in o 3his usuall" $ill onl" arise in situations $here mar7et d"namics have put the s;uee9e to the compan" in one $a" or another o -.a#ple Mear end is ,ecem/er 3% 1eed a receipt (or the preliminar" prospectus /" March 3% or $ill have to include .!!6 audited statements 4ill need to have a receipt issued $ithin 6! da"s o( an" ;uarter end 'ne issue $ith prospectuses is that man" companies moving to$ards a distri/ution ma" not /e used to preparing ;uarterl" (inancial statements and ma" not have the s"stems in place to do so o Also the issue o( lag /et$een the ;uarter end and the time $hen the statements /ecome availa/le due to accounting realities Mou onl" need an interim statement ending at the end o( the applica/le ;uarter o E.g. i( it is past six months then "ou onl" need a hal(2"ear statement and not one (or the (irst ;uarter and hal(2"ear 4ith audited "earl" statements and a "ear end o( ,ecem/er 3% "ou have until March 3% plus 6! da"s to get the receipt (or the preliminar" prospectus 'nce "ou have (iled a preliminar" prospectus then $hat S.0"617 2 A preliminar" prospectus shall su/stantiall" compl" $ith the re;uirements o( 'ntario securities la$ respecting the (orm and content o( a prospectus= except that the report or reports o( the auditor or accountant re;uired /" the regulations need not /e included. o ,o not need an audit report= /ut do need the (inancial statements S.0"6+7 2 A preliminar" prospectus ma" exclude in(ormation $ith respect to the price to the under$riter and o((ering price o( an" securities and other matters dependent upon or relating to such prices o ,o not need the price /ecause the preliminar" prospectus is used to drum up interest and it ma" not /e possi/le to 7no$ the price prior to going out and (inding $hat level o( interest exists in the mar7et (or the product Also /ecause the mar7et ma" change /et$een the time o( the preliminar" prospectus and the (inal prospectus o &eall" $hat the preliminar" prospectus is a/out is soliciting interest in the securit" and the determination o( $hat price $ould /e appropriate 'nce the receipt is issued the under$riters $ill go out into the mar7et and J/uild the /oo7K on the o((ering /" soliciting interest in the issue and surve"ing the mar7et In a short (orm prospectus o 4ill /e cleared rather ;uic7l" /ecause o( the alread" availa/le in(ormation in the pu/lic domain o So under$riters $ill sometimes have given guarantees a/out the a/ilit" to sell the issue at a set price 3he" ma" even do a /ought deal o Have this /ecause it is sometimes easier to gauge the mar7et in response to an alread" listed compan" 'nce "ou (ile a preliminar" prospectus "ou get the receipt (or it S.00 2 3he ,irector shall issue a receipt (or a preliminar" prospectus (orth$ith upon the (iling thereo( S.03617 2 A prospectus shall provide (ull= true and plain disclosure o( all material (acts relating to the securities issued or proposed to /e distri/uted and shall compl" $ith the re;uirements o( 'ntario securities la$ 4hat is a material (act de(initions in s.% Material fact * when used in relation to securities issued or proposed to be issued( )eans a fact that would reasonably be e#pected to have a si!nificant effect on the )ar+et price or value of the securities S.3! 2 Ever" prospectus shall contain a statement o( the rights given to a purchaser /" sections 7% and %3! o S.11 - rescission rights cooling o(( period o( %! da"s o S.1 ! - civil lia/ilit" provisions Misrepresentation and remedies &ights o( action against issuer= under$riter and directors ?$ith the latter t$o having access to the due diligence de(ence@ %6

 S.08617 2 Su/5ect to su/section ?3@ o( this section and su/section 63 ?.@= and su/5ect to an" $aiver or variation consented to in
$riting /" the ,irector= a prospectus (iled under su/section 03 ?%@ or su/section 6. ?%@ shall contain a certi(icate in the (ollo$ing (orm= signed /" the chie( executive o((icer= the chie( (inancial o((icer= and= on /ehal( o( the /oard o( directors= an" t$o directors o( the issuer= other than the (oregoing= dul" authori9ed to sign= and an" person or compan" $ho is a promoter o( the issuer The ore!oin! constitutes ull, true and plain disclosure o all material acts relatin! to the securities o ered "y this prospectus as re#uired "y Part $% o the &ecurities Act and the re!ulations thereunder' S.086+7 2 Su/5ect to su/section ?3@ o( this section and su/section 63 ?.@= a prospectus (iled under su/section 03 ?.@ shall contain a certi(icate in the (ollo$ing (orm= signed /" the chie( executive o((icer= the chie( (inancial o((icer= and= on /ehal( o( the /oard o( directors= an" t$o directors o( the issuer= other than the (oregoing= dul" authori9ed to sign= and an" person or compan" $ho is a promoter o( the issuer The ore!oin! constitutes ull, true and plain disclosure o all material acts relatin! to the securities pre(iously issued "y the issuer as re#uired "y Part $% o the &ecurities Act and the re!ulations thereunder . S.0$617 2 Su/5ect to su/section 63 ?.@= $here there is an under$riter= a prospectus shall contain a certi(icate in the (ollo$ing (orm= signed /" the under$riter or under$riters $ho= $ith respect to the securities o((ered /" the prospectus= are in a contractual relationship $ith the issuer or securit" holder $hose securities are /eing o((ered /" the prospectus To the "est o our kno)led!e, in ormation and "elie , the ore!oin! constitutes ull, true and plain disclosure o all material acts relatin! to the securities o ered "y this prospectus as re#uired "y Part $% o the &ecurities Act and the re!ulations thereunder' #nder$riter is also de(ined in the Act <nder*riter 2 means a person or compan" $ho= as principal= agrees to purchase securities $ith a vie$ to distri/ution or $ho= as agent= o((ers (or sale or sells securities in connection $ith a distri/ution and includes a person or compan" $ho has a direct or indirect participation in an" such distri/ution= /ut does not include= o ?a@ a person or compan" $hose interest in the transaction is limited to receiving the usual and customar" distri/utor8s or seller8s commission pa"a/le /" an under$riter or issuer= o ?/@ a mutual (und that= under the la$s o( the 5urisdiction to $hich it is su/5ect= accepts its shares or units (or surrender and resells them= o ?c@ a compan" that= under the la$s o( the 5urisdiction to $hich it is su/5ect= purchases its shares and resells them= or o ?d@ a /an7 listed in Schedule I= II or III to the Bank Act ?)anada@ $ith respect to securities descri/ed in paragraph % o( su/section 30 ?.@ or to such /an7ing transactions as are designated /" the regulations As principal the under$riter assumes the ris7 o( the transaction ?#nder$riter '((ering@ As agent under$riter ma7es /est e((orts /ut the ris7 remains $ith the compan" ?Best E((orts '((ering@ Ainal part o( the de(inition direct or indirect o ,oes not include those $ho $ould 5ust ;uali(" (or a sellers commission pa"a/le /" the under$riter or issuer 3ells us that there are several parties that ma" /e involved in the deal ?4ater(all in ,istri/utions@ 3here are under$riters in contractual privit" o Either in a principal or agent role 3he" in turn ma" get others to come in as su/2under$riters ?direct and indirect participants@ $ho share some o( the ris7 and in turn get some o( the commission o 3hese are re(erred to as the Ban7ing :roup mem/ers )ould also get others to help sell the deal /ut the" assume none o( the ris7 and get a portion o( the commission ?/ut less than Ban7ing :roup mem/ers@ o )alled Selling :roup Should the 'S) allo$ A'AI in a prospectus o Aorecasts /" their ver" nature are unrelia/le o But the" ma" /e material in spite o( unrelia/ilit" the" ma" /e the most material in(ormation that the compan" has at that time o Ho$ does the 'S) deal $ith this o S.3! o) the Regulations ?%@ In this section= Jdistri/uting (irmK means a registrant that is an under$riter $ith respect to a distri/ution and includes the issuer o( the securities /eing distri/uted i( the issuer is registered as a securit" issuerF J(orecastK means a $ritten estimate o( the most pro/a/le results o( operations o( an issuer= alone or together $ith one or more o( its a((iliates= that contains an" or all o(= ?a@ an estimate o( earnings or a range o( earnings= ?/@ an estimate o( the most pro/a/le (inancial position= ?c@ an estimate o( changes in (inancial position= %7

(or one or more periods that are (uture periods or are periods not completed $hen the estimate is made= /ut does not include an estimate= ?d@ that is prepared in the ordinar" course o( /usiness and $ithout re(erence to a speci(ic distri/ution o( securities= and ?e@ that appears in a compendium o( estimates relating to a num/er o( issuers or in a pu/lication that is distri/uted regularl" to investors or prospective investors= $ho are not selected /ecause o( their potential interest in a speci(ic issue o( securities. &.&.'. %DD!= &eg. %!%0= s. 6! ?%@. ?.@ 3he ,irector ma" permit the inclusion o( a (orecast in a prospectus and= $here the ,irector permits the inclusion o( a (orecast= ?a@ the (orecast shall /e identi(ied as such in the prospectusF and ?/@ the prospectus shall include the $ritten comments o( a pu/lic accountant concerning the accountant8s revie$ o( the (orecast. &.&.'. %DD!= &eg. %!%0= s. 6! ?.@. ?3@ 1o distri/uting (irm= during the course o( a distri/ution o( securities (or $hich a prospectus is re;uired to /e (iled under the Act= shall disseminate a (orecast $ith respect to the issuer o( those securities= unless the (orecast is set out in the prospectus and $hat is disseminated /" the distri/uting (irm consists solel" o( that (orecast or a reasona/le extract there(rom or summar" thereo(. 'S) has "et to get around to /rining A'AI into modern times 3he director ma" permit A'AI s.6!?.@ /ut it $ould /e necessar" to get the permission o( the ,irector (irst i( "ou $ant to include A'AI $ould need to pre2(ile the prospectus and get it pre2cleared o I( "ou have A'AI in the prospectus "ou must have a pu/lic accountant comment ?'S) +olic" 8@ +olic" 8 predates the rule ma7ing po$er o( the 'S) 1o one can distri/ute a (orecast i( it is not in the prospectus $as a response to companies deciding not to include them /ut to disseminate them nonetheless +olic" 8 - page .673 o( Statute Boo7 o S. .. and .3 set time2limits (or (orecasts Aorecasts are unrelia/le and the longer "our (orecast the more unrelia/le it is o Mou can (orecast out to the end o( the current "ear and one additional "ear Aorecast has to compl" $ith :AA+ and /e /ased on the most li7el" set o( assumptions a/out the (uture Rule "180!1 - +art %3 - &e;uirements as to Ailing o 4hat "ou need to (ile the prospectus o 'nce it is (iled the ,irector shall issue a receipt - s.00 o( the 'SA o But can /e rescinded o S.38 2 4here it appears to the ,irector that a preliminar" prospectus is de(ective in that it does not su/stantiall" compl" $ith the re;uirements o( 'ntario securities la$ as to (orm and content= the ,irector ma"= $ithout giving notice= order that the trading permitted /" su/section 60 ?.@ in the securit" to $hich the preliminar" prospectus relates shall cease until a revised preliminar" prospectus satis(actor" to the ,irector is (iled and (or$arded to each recipient o( the de(ective preliminar" prospectus according to the record maintained under section 67 1eed to /e a/le to stop the use o( the preliminar" prospectus /ecause it is used to solicit support (or the o((ering and i( it is de(ective then the support ma" also /e de(ective ?or deceptive@ 4hat happens a(ter the preliminar" prospectus has /een (iled in 'ntario o I( all "ou $ant to do is issue securities in 'ntario then that is all "ou need to do o I( "ou $ant to issue in other 5urisdictions "ou $ill need to (ile there as $ell I( "ou $ant to go national "ou $ill need to (ile in all provinces and the territories as $ell 'nce "ou have (iled in all provinces does ever" province get a chance to comment on it o :enerall" no $ould ta7e too long o Have 9ational 'nstru#ent " 8+!1 - Mutual &eliance &evie$ S"stem ?M&&S@ Elect one province as the lead and that one revie$s the preliminar" prospectus and comments on it $ill go through the prospectus $ord (or $ord ?3his ta7es %! /usiness da"s@ )ould get comments on language etc )ould get comments on technical issues or /eing too promotional commission $ill as7 (or in(ormation to /ac7 up promotional comments )ould also ;uestion the veracit" o( comments or rationale /ehind statements o 4ould then have to re$rite some portions o( the preliminar" prospectus 'nce done the principal 5urisdiction $ill send its comment sheet to the other provinces (or comments as $ell 3he" have 0 da"s to respond and ma7e additional comments I( an" o( the other 5urisdictions disli7e the $a" "ou respond the" can opt out o( M&&S %8

o o

4ould mean that the principal 5urisdiction could not o((er a national receipt 'ther$ise= i( all 5urisdictions agree= the principal 5urisdiction can issue a national receipt It is not necessar" (or the commissions to meet the %! and 0 da" deadlines= the" onl" need to ma7e /est e((orts In M&&S most o( the commissions recommend the (iling o( a /lac72line prospectus $here all o( the changes are underlined Because $hat i( "ou changed something else $ould "ou then need to go /ac7 and get it approved again6 3he" ma" $ant more disclosure depending upon $hat "ou changed

Preli#inary Prospectus +reliminar" prospectus is the (irst version o( the (inal document that $ill accompan" a pu/lic o((ering o( securities 3he supporting documentation (or a prospectus (iling t"picall" includes a resolution o( the Board authori9ing the (iling= the
under$riting agreement= (inancial statements and certi(ication notes /" senior o((icers

S.08617 8 Su/5ect to su/section ?3@ o( this section and su/section 63 ?.@= and su/5ect to an" $aiver or variation consented to in
$riting /" the ,irector= a prospectus (iled under su/section 03 ?%@ or su/section 6. ?%@ shall contain a certi(icate in the (ollo$ing (orm= signed /" the chie( executive o((icer= the chie( (inancial o((icer= and= on /ehal( o( the /oard o( directors= an" t$o directors o( the issuer= other than the (oregoing= dul" authori9ed to sign= and an" person or compan" $ho is a promoter o( the issuerG o The ore!oin! constitutes ull, true and plain disclosure o all material acts relatin! to the securities o ered "y this prospectus as re#uired "y Part $% o the &ecurities Act and the re!ulations thereunder . S.086+7 8 Su/5ect to su/section ?3@ o( this section and su/section 63 ?.@= a prospectus (iled under su/section 03 ?.@ shall contain a certi(icate in the (ollo$ing (orm= signed /" the chie( executive o((icer= the chie( (inancial o((icer= and= on /ehal( o( the /oard o( directors= an" t$o directors o( the issuer= other than the (oregoing= dul" authori9ed to sign= and an" person or compan" $ho is a promoter o( the issuerG o The ore!oin! constitutes ull, true and plain disclosure o all material acts relatin! to the securities pre(iously issued "y the issuer as re#uired "y Part $% o the &ecurities Act and the re!ulations thereunder . Although called preliminar"= the prospectus is the issuer8s near to (inal (orm that it $ill use in a distri/ution to the pu/lic once the revie$ has /een completed and an" necessar" revisions are made= the (inal prospectus is (iled and a receipt issued 3he preliminar" prospectus ma" contain a caution that it is not (inal= ma" not /e completed and ma" have to /e amended 3here are speci(ied re;uirements (or the (orm and content o( a preliminar" prospectus A preliminar" prospectus must su/stantiall" compl" $ith the rules governing a (inal prospectus o But it is not re;uired to compl" $ith things such as price to /e paid to the under$riter or the list price o( the securities o S.0"6+7 2 A preliminar" prospectus ma" exclude in(ormation $ith respect to the price to the under$riter and o((ering price o( an" securities and other matters dependent upon or relating to such prices o Also do not need the auditor8s report /ecause the (inancial in(ormation must /e updated /" the (inal receipt date o S.0"617 2 A preliminar" prospectus shall su/stantiall" compl" $ith the re;uirements o( 'ntario securities la$ respecting the (orm and content o( a prospectus= except that the report or reports o( the auditor or accountant re;uired /" the regulations need not /e inc 'nce the preliminar" prospectus is (iled the director o( the securities commission must issue a receipt (or it S.00 2 3he ,irector shall issue a receipt (or a preliminar" prospectus (orth$ith upon the (iling thereo( +rospectus must provide (ull= true and plain disclosure o( all material (acts and must compl" $ith statutor" re;uirements S.03617 2 A prospectus shall provide (ull= true and plain disclosure o( all material (acts relating to the securities issued or proposed to /e distri/uted and shall compl" $ith the re;uirements o( 'ntario securities la$ 3he prospectus must /e accompanied /" such (inancial statements= reports= or other documents as are re;uired /" statute and regulations S.036+7 2 3he prospectus shall contain or /e accompanied /" such (inancial statements= reports or other documents as are re;uired /" this Act or the regulations A(ter the preliminar" prospectus is (iled there is a mandator" $aiting period o ,uring this period the activities o( the issuer are restricted in terms o( communicating $ith potential investors o 3he $aiting period is the time /et$een $hen the receipt (or the preliminar" and (inal prospectus is issued o Securities cannot /e sold until a receipt is issued (or the (inal prospectus 3he $aiting period allo$s time (or the regulators to consider $hether the prospectus complies $ith the statutor" and regulator" re;uirements ,aitin! Period - s.30617 8 means the interval= $hich shall /e at least ten da"s= /et$een the issuance /" the ,irector o( a receipt (or a preliminar" prospectus relating to the o((ering o( a securit" and the issuance /" the ,irector o( a receipt (or the prospectus %D

 &egulators engage in selective revie$ o( preliminar" prospectuses the" do not revie$ all o( them
3he" do an initial screening to determine i( the" $ill revie$ them at all +rospectuses pursuant to an I+' receive a (ull revie$ as do those $hich raise matters $here a (ull revie$ $ould /e /ene(icial 4here the regulator (eels that the preliminar" prospectus is de(ective in that it does not su/stantiall" compl" $ith securities la$ as to (orm and content= the director ma" order cease trading in the prospectus until it is corrected S.38 2 4here it appears to the ,irector that a preliminar" prospectus is de(ective in that it does not su/stantiall" compl" $ith the re;uirements o( 'ntario securities la$ as to (orm and content= the ,irector ma"= $ithout giving notice= order that the trading permitted /" su/section 60 ?.@ in the securit" to $hich the preliminar" prospectus relates shall cease until a revised preliminar" prospectus satis(actor" to the ,irector is (iled and (or$arded to each recipient o( the de(ective preliminar" prospectus according to the record maintained under section 67 o Activities $hich are restricted during the $aiting period include advertising &eG )am/ior put an ad in the paper sa"ing that gold $as a hedge against in(lation= $e8re a gold compan"= there(ore $e8re a hedge against in(lation so "ou should invest in us )ommission (ound this to /e a violation o( the Act /ut did not issue a cease trade order since the compan" had stopped the ads= and placed an notice to the e((ect that this $as a /reach in the 'S) Bulletin o Some communication is o7a" it is a matter o( /alancing= need to /e care(ul= can8t go Jrah2rahK /ut can extol the virtue o( the compan" to some extent can test (or interest= /ut can8t solicit 9ational 'nstru#ent "180!1 - +art - Ainancial Statement ,isclosure (or the Issuer o ".1 Annual Ainancial Statements o( the Issuer 2 Su/5ect to sections ..= .3 and 0..= an issuer shall include in its prospectus the (ollo$ing annual (inancial statements o( the issuerG o 1. Statements o( income= retained earnings and cash (lo$s (or ?a@ each o( the three most recentl" completed (inancial "ears ended more than D! da"s /e(ore the date o( the prospectusF or ?/@ i( the issuer has not completed three (inancial "ears= each completed (inancial "ear ended more than D! da"s /e(ore the date o( the prospectusF or ?c@ i( the issuer has not completed one (inancial "ear= the (inancial period (rom the date o( (ormation to a date not more than D! da"s /e(ore the date o( the prospectus. o +. A /alance sheet as at ?a@ the last da" o( the most recentl" completed (inancial "ear= i( an"= ended more than D! da"s /e(ore the date o( the prospectusF and ?/@ the last da" o( the immediatel" preceding (inancial "ear= i( an"F or ?c@ i( the issuer has not completed one (inancial "ear= as at a date not more than D! da"s /e(ore the date o( the prospectus. o ".+ Exception to Annual Statement &e;uirement i( More &ecent Annual Ainancial Statements Included - An issuer ma" omit its (inancial statements (or the oldest (inancial "ear other$ise re;uired under section .%= i( audited (inancial statements o( the issuer are included in the prospectus (or a (inancial "ear ended D! da"s or less /e(ore the date o( the prospectus. Ever" prospectus also must contain a statement o( rights provided to the prospective purchaser S.3! 2 Ever" prospectus shall contain a statement o( the rights given to a purchaser /" sections 7% and %3! - M Ma!ne# case o &eliance on external pro(essional advice - la$"ers= accountants= other advisors= is a good things - and can go a long $a" in proving a due diligence de(ence o 3he test (or materialit" is o/5ective and is one o( mar7et impact an investor $ants to 7no$ (acts that $ould reasona/l" /e expected to signi(icantl" a((ect the mar7et price or value o( the securities o Is important to ensure that there is true independence $hen "ou have a special committee o 1eed to ensure that "ou can veri(" the in(ormation provided /" management don8t ta7e at (ace value o Must do $hat8s reasona/le in the circumstances o/viousl" $ill var" $ith the circumstances +rospectuses must (ollo$ the contents o( the (orm as laid out in the Act Rule "180!1 S. .+ ( Style o) Prospectus o ?%@ Except as other$ise provided in a re;uired (orm o( prospectus or the regulations= the in(ormation contained in a prospectus shall /e in narrative (orm. o ?.@ A prospectus shall include descriptive headings. o ?3@ A prospectus shall include a ta/le o( contents. o o .!

? @ Except (or in(ormation that appears in a summar"= in(ormation re;uired under more than one item o( a re;uired (orm o( prospectus need not /e repeated. o ?0@ ,espite su/section ?%@= a prospectus ma" contain graphs= photographs= maps= art$or7 or other (orms o( illustration= i( relevant to the /usiness o( the issuer or the distri/ution and not misleading. %or# "180!1%1 Page 883 o) 5ook 1ot ever"thing in the (orm $ill /e necessar" (or ever" o((ering $ill depend Highlights o( the (orm things li7el" to /e included o 'te# 1 2 )over page guidelines o 'te# 1.+ 2 &ed in7 re;uirements ?red herring@ 2 noting it /eing incomplete ?%..@ o 'te# " 2 )orporate structure chart o 'te# 0 2 Histor" o( the development o( the /usiness Business trends 3 "ear histor" 3he theor" is that the prospectus disclosure is made (or the (inanciall" sophisticated investor or his sophisticated advisor o 'te# 3 2 1arrative ,escription o( the /usiness itsel( ?in language people might understand@ o 'te# 1! - ,escription o( the Securities ,istri/uted 3he more complicated a securit" that is /eing o((ered= the more detailed a description $ill /e re;uired o 'te# 1 - +rior Sales Highs and lo$s o( trading o( the securit" Has there /een volatilit" in the sale price o 'te# 10 2 :uidelines (or stating principal shareholder ,escri/e the o$nership structure In(ormation a/out the principle shareholder 4ho is /ehind the compan" 3his could /e relevant to the value o( the securities o 'te# 13 2 In(ormation a/out the directors )on(licts o( interest +ersonal /usiness histor" o 'te# 11 2 ,isclosure o( executive compensation 4ho gets paid the most 4hat is the s"stem o( pa"out*compensation Must sho$ that the" are compensated in a (ashion that is consistent $ith shareholder value o 'te# 1$ 2 +lan o( distri/ution 4ho are the under$riters 4hat is the agreement o 'te# +! 2 &is7 Aactors 3he more (ulsome "ou can get "our ris7 (actors= the /etter )lients might $ant not to include things that aren8t as li7el" to /e ris7s /ut it is good to include ever"thing= 5ust to /e sa(e o 'te# +1 2 +eople $ho are selling the securit" (or "ou $ill ta7e the summar" o( "our prospectus ?(ound at (ront@ and use it as a selling tool o 4ill send the $hole prospectus once someone sho$s some interest Oust /ecause the re;uirements o( the (orm have /een met does not relieve the o/ligations o( (ull= true and plain disclosure &emem/er the civil lia/ilit" provisions under s.%3! It is possi/le to include (orecasts in a prospectus o

%&%' ( )or*ard looking )inancial in)or#ation S.3! o) regulations - ?%@ In this section=
o o Jdistri/uting (irmK means a registrant that is an under$riter $ith respect to a distri/ution and includes the issuer o( the securities /eing distri/uted i( the issuer is registered as a securit" issuerF J(orecastK means a $ritten estimate o( the most pro/a/le results o( operations o( an issuer= alone or together $ith one or more o( its a((iliates= that contains an" or all o(= ?a@ an estimate o( earnings or a range o( earnings= ?/@ an estimate o( the most pro/a/le (inancial position= .%

?c@ an estimate o( changes in (inancial position= (or one or more periods that are (uture periods or are periods not completed $hen the estimate is made= /ut does not include an estimate= ?d@ that is prepared in the ordinar" course o( /usiness and $ithout re(erence to a speci(ic distri/ution o( securities= and ?e@ that appears in a compendium o( estimates relating to a num/er o( issuers or in a pu/lication that is distri/uted regularl" to investors or prospective investors= $ho are not selected /ecause o( their potential interest in a speci(ic issue o( securities o ?.@ 3he ,irector ma" permit the inclusion o( a (orecast in a prospectus and= $here the ,irector permits the inclusion o( a (orecast= ?a@ the (orecast shall /e identi(ied as such in the prospectusF and ?/@ the prospectus shall include the $ritten comments o( a pu/lic accountant concerning the accountant8s revie$ o( the (orecast o ?3@ 1o distri/uting (irm= during the course o( a distri/ution o( securities (or $hich a prospectus is re;uired to /e (iled under the Act= shall disseminate a (orecast $ith respect to the issuer o( those securities= unless the (orecast is set out in the prospectus and $hat is disseminated /" the distri/uting (irm consists solel" o( that (orecast or a reasona/le extract there(rom or summar" thereo( I( an issuer is putting A'AI into a prospectus the" $ill need to compl" $ith +olic" 8 Policy "8 page +31 Aorecasts are unrelia/le and the longer "ou (orecast into the (uture= the less relia/le the" /ecome )ommission sa"s that "ou can (orecast out (or the rest o( the current "ear and one "ear therea(ter o Aorecast must compl" $ith generall" accepted accounting procedures o 4hat "ou have to do is discover and glean the most li7el" set o( circumstances or assumptions to support "our (orecast 4hat are the assumptions that are going to have to /e in there Must /e a/le to 5usti(" the assumptions i.e. in(lation= gro$th= I( all the re;uirements are met= "ou8ll get "our A'AI in the prospectus Mou have to get it as close to right as possi/le It /ecomes material o 4hat a/out a dealer giving advice 3he" are allo$ed to do so /ut the" should not /e producing $ritten (orecasts 4hat is SE,A& o #se it to electronicall" (ile prospectus $ith the commission :eographic limitations I( "ou onl" $ant to trade in 'ntario= "ou onl" need to (ile there o 'ther$ise= must (ile in each 5urisdiction o I( "ou $anted to do a national o((ering= must (ire in all provinces and territories o 4ill all 5urisdictions comment on "our prospectus generall" not 9ational Policy " 8+!1 MRRS 6#utual reliance re/ie* policy7 o A national polic" sa"ing that all the commissions shouldn8t revie$ a prospectus separatel" o S"stem that allo$s a principal regulator to ma7e a revie$ o Mou must designate a principle revie$er o 'nl" certain commissions have su((icient sta(( to do the revie$ ?can8t use territories= +EI= 1e$(oundland@ o Must select the 5urisdiction $here "ou have "our head o((ice unless there is a ver" good reason to do other$ise o +rincipal 5urisdiction does the initial revie$ o 3he" are to get "ou prelim comments $ithin %! $or7ing da"s )hec7 it (or (orm &ead it (or perceptual comment o An" other commission has another (ive $or7ing da"s to ma7e their o$n comments on top o( the comments that the principle 5urisdiction has made o I( an" other 5urisdiction doesn8t li7e the $a" "ou respond their comments= the" can opt out o( the M&&S o 3hen the principal 5urisdiction can8t issue a national M&&S receipt Ailing a /lac7 line prospectus o Aor changing in(ormation in preliminar" prospective o Aile it /e(orehand to allo$ commission to consider disclosure in it to assure that "ou are read" to go ..

 S.03617 2 A prospectus shall provide (ull= true and plain disclosure o( all material (acts relating to the securities issued or
proposed to /e distri/uted and shall compl" $ith the re;uirements o( 'ntario securities la$ S.00 2 3he ,irector shall issue a receipt (or a preliminar" prospectus (orth$ith upon the (iling thereo(. S.38 2 4here it appears to the ,irector that a preliminar" prospectus is de(ective in that it does not su/stantiall" compl" $ith the re;uirements o( 'ntario securities la$ as to (orm and content= the ,irector ma"= $ithout giving notice= order that the trading permitted /" su/section 60 ?.@ in the securit" to $hich the preliminar" prospectus relates shall cease until a revised preliminar" prospectus satis(actor" to the ,irector is (iled and (or$arded to each recipient o( the de(ective preliminar" prospectus according to the record maintained under section 67 3here is a gap in time /et$een the (iling o( the preliminar" prospectus and the receipt (or the (inal prospectus 3his gap $ill /e at least %0 da"s - loo7 to M&&S (or the times - %! da"s (or the principal 5urisdiction to ma7e comments and 0 da"s (or the others to ma7e comments 'nce "ou get this "ou then have the Jall clearK to go (or$ard $ith the (inal prospectus 3his %0 da" gap is the /are minimum - 3 $ee7s - though it is more li7el" that it $ill /e - 6 $ee7s 4hat can "ou do $hile the 'S) is loo7ing over and vetting the preliminar" prospectus o #sing s.03 it $ould appear that there is not too much that "ou could /e doing 3his is /ecause the de(inition o( trade is so /road - includes prett" much ever"thing But there is some room to $or7 provided under the statute S.306+7 2 ,espite section 03= /ut su/5ect to +art CIII= it is permissi/le during the $aiting period= o ?a@ to distri/ute a notice= circular= advertisement or letter to or other$ise communicate $ith an" person or compan" identi("ing the securit" proposed to /e issued= stating the price thereo(= i( then determined= the name and address o( a person or compan" (rom $hom purchases o( the securit" ma" /e made and containing such (urther in(ormation as ma" /e permitted or re;uired /" the regulations= i( ever" such notice= circular= advertisement= letter or other communication states the name and address o( a person or compan" (rom $hom a preliminar" prospectus ma" /e o/tainedF o ?/@ to distri/ute a preliminar" prospectusF and o ?c@ to solicit expressions o( interest (rom a prospective purchaser i(= prior to such solicitation or (orth$ith a(ter the prospective purchaser indicates an interest in purchasing the securit"= a cop" o( the preliminar" prospectus is (or$arded to him= her or it. I( $hat "ou are doing does not (it under s.60?.@ then it is li7el" that it is prohi/ited 4hat is the J$aiting periodK spo7en o( in s.60?.@ o S.30617 - $aiting period means the interval= $hich shall /e at least ten da"s= /et$een the issuance /" the ,irector o( a receipt (or a preliminar" prospectus relating to the o((ering o( a securit" and the issuance /" the ,irector o( a receipt (or the prospectus. 3here is also s.66 and s.67 S.33 2 An" dealer distri/uting a securit" to $hich section 60 applies shall= in addition to the re;uirements o( clause 60 ?.@ ?c@= send a cop" o( the preliminar" prospectus to each prospective purchaser $ho= $ithout solicitation= indicates an interest in purchasing the securit" and re;uests a cop" o( such preliminar" prospectus S.31 2 An" dealer distri/uting a securit" to $hich section 60 applies shall maintain a record o( the names and addresses o( all persons and companies to $hom the preliminar" prospectus has /een (or$arded o 4h" this re;uirement /ecause i( the prospectus is changed "ou need to ma7e sure that those $ho have it are apprised o( the changes to it replace the prospectus o( those $ho originall" received one 3o this end the under$riters 7eep the prospectuses num/ered so that the" 7no$ $ho got it and can replace them i( necessar" 4hat can8t "ou do during the $aiting period6 o )annot enter into a contract to sell securities o )annot do an"thing not permitted /" s.60?.@ o )annot Jgroom the mar7etK 3r"ing to use an" other activit" than the preliminar" prospectus to mar7et the o((ering Ca)bior o Ailed the prospectus ?preliminar"@ and at the same time placed ads in the paper sa"ing that gold and gold stoc7s $ere an e((ective hedge against in(lation o 'S) held hearings and (ound this to /e a violation o( 60?.@ - an attempt to improve the mar7et Said that the" $ould hold the prospectus (or a month to allo$ (or the e((ect o( the grooming to $or7 its $a" through the s"stem Also reprimanded the la$ (irms involved /ecause it said that the" should have 7no$n that this $as a violation Also said that this $ould have /een su((icient /asis to use the 'S)8s s.%.7 pu/lic interest 5urisdiction and to not provide a receipt (or the (inal prospectus .3

 )ompanies can do a roadsho$ $here the" go out and tal7 to people a/out the o((ering and provide the in(ormation that is in
the preliminar" prospectus to them 4hat is allo$ed in the $aiting period is al$a"s a /it o( a /alancing act don8t $ant to step too (ar or else "ou could /e in trou/le /ut $ant to do as much as "ou can to sell the product to the mar7et 4hat does s.60?.@ allo$ "ou to do o >oo7 at the under$riters Have the three levels those in contractual privit"= those $ho share some ris7= and those $ho sell 4h" do the under$riters in contractual privit" $ant to share the commission 'ne reason is to share the ris7 o( the deal not /eing sold o Also I,A has a rule that the amount o( under$riting that can /e done /" an under$riter is relative to its regulator" capital so as the deals get larger the" /" necessit" re;uire more under$riters to /e involved 3he under$riters organi9e the road2sho$s in an attempt to drum up interest in the o((ering 3a7e the executive o((icers o( the issuer to meet $ith some o( their institutional clients in an attempt to J/uild the /oo7K o :oing to clients and as7ing ho$ much o( the o((ering the" $ould li7e at di((erent prices in an attempt to gauge the strength o( the mar7et (or the issue o 3here is o(ten a /elie( that the shares should Jtrade2upK once the" are issued and so man" times the" $ill $ant to o((er them at a price that $ill ensure that clients get to ma7e a ;uic7 pro(it on the o((ering o 4hen the clients sa" that the" $ill /u" so man" shares at each price it is not a contract /et$een the under$riter and the client /ut 5ust an indication o( interest )lient could /ac7 out= or not /u" so man" ho$ever i( the" do this there is a li7elihood that in later deals the" $ill either a@ not get the shares at all= or /@ get (e$er than the" $anted meaning the" $ill have to go on to the mar7et to get the rest 3his attempt to /uild the /oo7 is one o( the reasons that the preliminar" prospectus does not include price or the num/er o( shares /eing o((ered or the expected earnings (rom the o((ering Important (or securities la$"ers to determine $hat is going to /e said= presented at the road2sho$ in order to ma7e sure that it does not run a(oul o( s.60?.@ 4ant to ensure that the comments (rom the 'S) are received during the $aiting period so that "ou can ensure that the timing is o7a" (or the o((ering i( "ou get the comments /ac7 too late the time ma" /e o(( (or that particular deal 'ne issue $ith deals is that "ou do not $ant to 5ump the ;ueue move in (ront o( another deal - /ecause i( "ou do that "ou ma" either a@ piss o(( someone at the commission - or get someone in trou/le - or /@ anno" the other issuers that expected to come out ahead o( "ou could impact the mar7et 4hat happens i( "ou are in the $aiting period and something drastic happens o Aor example it is an o((er (or a mining compan" and the mine goes do$n (or some reason Have to tell the mar7et a/out the changes that have occurred But $hat o/ligation is there to tell the mar7et - s.07 S.01617 2 Su/5ect to su/section ?.@= $here a material adverse change occurs a(ter a receipt is o/tained (or a preliminar" prospectus (iled in accordance $ith su/section 03 ?%@ and /e(ore the receipt (or the prospectus is o/tained or= $here a material change occurs a(ter the receipt (or the prospectus is o/tained /ut prior to the completion o( the distri/ution under such prospectus= an amendment to such preliminar" prospectus or prospectus= as the case ma" /e= shall /e (iled as soon as practica/le and in an" event $ithin ten da"s a(ter the change occurs. o Have %! da"s to (ile the amendment at the outside 1eed to (ile the amended prospectus including the certi(icates stating that it is (ull= true and plain disclosure

Material ,hange 4hat is a material change loo7 to the de(initions again

o ?a@ $hen used in relation to an issuer other than an investment (und= means= ?i@ a change in the /usiness= operations or capital o( the issuer that $ould reasona/l" /e expected to have a signi(icant e((ect on the mar7et price or value o( an" o( the securities o( the issuer= or ?ii@ a decision to implement a change re(erred to in su/clause ?i@ made /" the /oard o( directors or other persons acting in a similar capacit" or /" senior management o( the issuer $ho /elieve that con(irmation o( the decision /" the /oard o( directors or such other persons acting in a similar capacit" is pro/a/le= and ?/@ $hen used in relation to an issuer that is an investment (und= means= ?i@ a change in the /usiness= operations or a((airs o( the issuer that $ould /e considered important /" a reasona/le investor in determining $hether to purchase or continue to hold securities o( the issuer= or .

?ii@ a decision to implement a change re(erred to in su/clause ?i@ made= ?A@ /" the /oard o( directors o( the issuer or the /oard o( directors o( the investment (und manager o( the issuer or other persons acting in a similar capacit"= ?B@ /" senior management o( the issuer $ho /elieve that con(irmation o( the decision /" the /oard o( directors or such other persons acting in a similar capacit" is pro/a/le= or ?)@ /" senior management o( the investment (und manager o( the issuer $ho /elieve that con(irmation o( the decision /" the /oard o( directors o( the investment (und manager o( the issuer or such other persons acting in a similar capacit" is pro/a/le Material (act is a much /roader de(inition than material change could /e something internal or external to the compan" $hereas the material change is something internal to the compan" .err v 'anier /eather o ,anier had included A'AI in its prospectus 1othing happened $ith the /usiness= operations or capital o( the compan" It $as 5ust that spring $as $arm and people did not /u" as man" coats as usual 3his happened during the distri/ution period )ompan" concluded t$o things 3his onl" meant that people $ould dela" their purchases o( leather coats 3his $as not a material change o )ourt o( Appeal agreed $ith them said that there is a distinction /et$een a material (act and material change But did this not impact the /usiness o( the compan" 3he 'S) did not li7e this position ?o( the )ourt o( Appeal@ 3SC rules sa" that "ou need to disclose material in(ormation even /roader than material (act or material change o Another case li7e this is +e9im 4h" the distinction in s.07 (or material adverse change in the preliminar" prospectus period and material change in the distri/ution period o Because it is assumed that an" positive material change in the preliminar" prospectus period $ill /e disclosed since it is li7el" to assist $ith the selling o( the issue S.016 7 2 An amendment to a preliminar" prospectus re(erred to in su/section ?%@ shall= (orth$ith a(ter it has /een (iled= /e (or$arded to each recipient o( the preliminar" prospectus according to the record maintained under section 67 o S.67 deals $ith the list o( people to $hom the preliminar" prospectus has /een delivered Basic components o( the under$riting agreement o J$e as principal agree to purchase these securities (or a closing in three $ee7s time. 4e agree to pa" C*share (or a total o( M shares= minus our commissionK 3here are usuall" also a /unch o( conditions attached to these agreements #suall" the under$riters $ill $ant to have the closing - $hen the" have to pa" the issuer - three $ee7s or so in the (uture to allo$ (or time to sell the deal o I( the $hole deal has not /een sold the" $ill li7el" also $ant the issuer to underta7e to help them in selling the rest o( the deal It is not necessar" to update (inancial statements /et$een the preliminar" and (inal prospectus Rule "180!1 o Part 1".16+7 onl" have D! da"s to get the (inal prospectus in a(ter the receipt (or the preliminar" prospectus )an /e extended /" the ,irector /ut li7el" not going to happen and $ill not happen unless there is some good reason= and usuall" (or not longer than a 7 da" extension ?/ut could get %!@ o Part 1 . - re;uirements (or (iling (inal prospectus ?p. 88% o( Boo7@ 1eed to have expert8s opinions Auditors statement signed - or com(ort letter (or interim reports o 3hese are important (or the civil lia/ilit" provisions o( the Act >a$"er8s tax opinion telling investors the tax conse;uences o( the investment Engineer8s report (or oil and gas issues o +roven and pro/a/le reserves 'nce the prospectus is (iled S.31617 2 Su/5ect to su/section ?.@ o( this section and su/section 63 ? @= the ,irector shall issue a receipt (or a prospectus (iled under this +art unless it appears to the ,irector that it is not in the pu/lic interest to do so S.316+7 2 3he ,irector shall not issue a receipt (or a prospectus or an amendment to a prospectus i( it appears to the ,irector that= .0

the prospectus or an" document re;uired to /e (iled $ith it= ?i@ does not compl" in an" su/stantial respect $ith an" o( the re;uirements o( this Act or the regulations= ?ii@ contains an" statement= promise= estimate or (or$ard2loo7ing in(ormation that is misleading= (alse or deceptive= or ?iii@ contains a misrepresentationF o ?/@ an unconsciona/le consideration has /een paid or given or is intended to /e paid or given (or an" services or promotional purposes or (or the ac;uisition o( propert"F o ?c@ the aggregate o(= ?i@ the proceeds (rom the sale o( the securities under the prospectus that are to /e paid into the treasur" o( the issuer= and ?ii@ the other resources o( the issuer= is insu((icient to accomplish the purpose o( the issue stated in the prospectusF o ?d@ the issuer cannot reasona/l" /e expected to /e (inanciall" responsi/le in the conduct o( its /usiness /ecause o( the (inancial condition o(= ?i@ the issuer= ?ii@ an" o( the issuer8s o((icers= directors= promoters= or control persons= or ?iii@ the investment (und manager o( the issuer or an" o( the investment (und manager8s o((icers= directors or control personsF o ?e@ the /usiness o( the issuer ma" not /e conducted $ith integrit" and in the /est interests o( the securit" holders o( the issuer /ecause o( the past conduct o(= ?i@ the issuer= ?ii@ an" o( the issuer8s o((icers= directors= promoters= or control persons= or ?iii@ the investment (und manager o( the issuer or an" o( the investment (und manager8s o((icers= directors or control personsF o ?(@ a person or compan" that has prepared or certi(ied an" part o( the prospectus= or that is named as having prepared or certi(ied a report or valuation used in connection $ith the prospectus= is not accepta/leF o ?g@ an escro$ or pooling agreement in the (orm that the ,irector considers necessar" or advisa/le $ith respect to the securities has not /een entered intoF or o ?h@ ade;uate arrangements have not /een made (or the holding in trust o( the proceeds pa"a/le to the issuer (rom the sale o( the securities pending the distri/ution o( the securities Enter into an under$riting agreement $hen the (inal prospectus is read" o &emem/er the three levels o( under$riters 3hose in contractual privit"= /an7ing group and selling group 3he (irst group is the one that enters into the contract $ith the issuer 3he" in turn $ill give allotments to the /an7ing group and selling group mem/ers o Selling group $ill 5ust tr" to sell the securities It is at this stage that s.03 is engaged the distri/ution /egins #nder$riters $ill go to the Jgre" circleK orders clients $ho expressed an interest /" circling ho$ man" securities the" $ill purchase at a set price 3he under$riters $ill tr" to get these orders con(irmed o 3he selling group $ill go to their retail customers and tr" to get orders as $ell o All o( these are the hard contracts (or the purchase o( the securities 3here is also a rescission period o S.116+7 2 An agreement o( purchase and sale re(erred to in su/section ?%@ is not /inding upon the purchaser= i( the dealer (rom $hom the purchaser purchases the securit" receives $ritten or telegraphic notice evidencing the intention o( the purchaser not to /e /ound /" the agreement o( purchase and sale not later than midnight on the second da"= exclusive o( Saturda"s= Sunda"s and holida"s= a(ter receipt /" the purchaser o( the latest prospectus and an" amendment to the prospectus Also the under$riting agreement $ill contain a clause stating that i( there is a material adverse change /e(ore the close o( the deal usuall" three $ee7s (rom the date o( the contract then the under$riters ma" $al7 a$a" (rom the deal and not close it o It is also possi/le that the closing ma" /e extended to allo$ (or a (ree9e /et$een the time that a material adverse change occurs and the amended prospectus is read" (or deliver" to customers 3he shares are issued on the closing date But $hat i( there are %! million shares to /e sold and onl" 7 million are sold /" the closing o 4hat can the under$riter do then loo7 to Rule "180!1 o .6

?a@

S.11.16 7 2 ,espite su/section ?%@= i( securities are distri/uted (or cash under a prospectus= the price o( the securities ma" /e decreased (rom the initial o((ering price disclosed in the prospectus and= a(ter such a decrease= changed (rom time to time to an amount not greater than the initial o((ering price= $ithout (iling an amendment to the prospectus to re(lect the change= i( ?a@ the securities are distri/uted through one or more under$riters that have agreed to purchase all o( the securities at a speci(ied priceF ?/@ the proceeds to /e received /" the issuer or selling securit" holders or /" the issuer and selling securit" holders are disclosed in the prospectus as /eing (ixedF and ?c@ the under$riters have made a reasona/le e((ort to sell all o( the securities distri/uted under the prospectus at the initial o((ering price disclosed in the prospectus. 3he under$riters cannot increase the price a/ove the initial o((ering price on the prospectus $ithout having a ne$ prospectus created o 4hat the" ma" do i( the price rises a/ove the o((ering price is that the" ma" sa" that the" are out o( distri/ution and ta7e the securities (or the house account the" could then sell them at the mar7et price But the 'S) does not reall" li7e this /ecause there could /e a signi(icant /loc7 o( shares going on the mar7et $ithout= in essence= having a prospectus It is possi/le that the under$riters could lose mone" on the distri/ution= or receive a lesser commission o 3his is the ris7 that the" ta7e $hen the" do a distri/ution But the" need to ta7e this ris7 /ecause i( all the" ever did $as o((erings that made them mone"= and re(used to do ones $here the" did not ma7e mone" the" $ould su((er harm to their reputation 4hat t"pes o( clauses $ould /e in an under$riting agreement the agreement is signed on the date o( the (inal prospectus /ecause the under$riters $ant to have the deal moving (or$ard as soon as possi/le a(ter the" have gone out and solicited interest in the o((ering o Statement that the under$riter $ill /u" the shares as principal this is a (irm under$riting )ould also have a /est e((orts o((ering $here the under$riter /u"s as agent and ma7es /est e((orts to sell the securities o 3he price o( the securities and the closing date o Statement that the compan" represents that the prospectus contains (ull= true and plain disclosure ?satis(ies the s.00 re;uirement@ 3he" $ant this /ecause people get sued over this issue #nder$riters $ill also $ant to include a statement that the compan" indemni(ies them (rom an" suit on the /asis o( a (ailure to adhere to s.00 But is this valid no )anadian case la$ /ut there is #S case la$ :lo/us &ealt" o Issue is $hether or not an under$riter can /e indemni(ied $here the" have a statutor" protection o( due diligence the onl" $a" that the" could /e lia/le $ould /e i( the" (ailed to satis(" the due diligence re;uirements o Issue in the case $as $hether such indemnit" clauses $ould /e contrar" to pu/lic polic" $here the under$riter had a due diligence de(ence o )ourt said that it $as contrar" to pu/lic polic" &egardless o( this "ou still see the indemnit" clause as under$riters see7 to protect themselves la$"ers= in their opinions= $ill sa" that the" have no opinion as to $hether or not these t"pes o( clauses $ould /e valid #nder$riters $ill also $ant a clause sa"ing that the" can see7 contri/ution (rom the issuer (or an" damage claim or a$ard 4ill $ant contri/ution in the relative percentage o( the deal e.g. i( the under$riters onl" get 3L commission the" $ill onl" $ant to /e lia/le (or 3L o( an" damage a$ard But this ma" also /e against pu/lic polic" $here the due diligence de(ence exists Again there is no case la$ on point o #nder$riters $ill $ant a commitment (rom the compan" to print commercial ;ualit" copies o( the prospectus and have them delivered to distri/ution points so that customers can get them #nder$riters need to get the prospectus and get it to customers so that the" can have the rescission period pass and 7no$ $hat t"pes o( (irm commitments the" have o 4ill $ant a clause sa"ing that i( an" event occurs that might reasona/l" /e interpreted as a material change the compan" must disclose it and discuss $ith the under$riters to determine i( a ne$ prospectus is $arranted I( one is needed then there $ill /e a clause that the compan" $ill (ile an amended prospects and once a receipt is issued the compan" prepare ne$ prospectuses and get them to the distri/ution points so that customers can get ne$ prospectuses /ecause under$riter $ill have to stop selling (or a $hile o .7

#nder$riter $ill also have a clause sa"ing that the" $ill in(orm the compan" $hen the" are out o( distri/ution /ecause until this happens the compan" is o/ligated to in(orm the under$riter o( changes and to amend the prospectus and print copies o( the amended prospectus o 3here $ill also /e outs in the under$riting agreement 'ne $ill /e that i( there is a material change that a((ects the o((ering the under$rites can $al7 Another $ill /e the mar7et out clause $hich is some$hat contentious I( the under$riter determines that economic= mar7et or political conditions are such that the o((ering $ill not /e success(ul the" can $al7 a$a" Ho$ever this ma" not happen o(ten /ecause o( the reputation o( the under$riters $ill not $ant to /e 7no$n (or doing this /ecause then other potential issuers ma" not $ant to deal $ith that under$riter again &eason (or this clause is that it could /e that to go ahead $ith the o((ering $ill cause signi(icant harm to the under$riters B+ case $here the mar7et (or oil had changed and the under$riters had no mar7et out and had to go through $ith the deal and lost H%!! million com/ined 3his clause does not mean that under$riters are not prepared to ta7e a loss it is 5ust that the" do not $ant to have to /e in a position to lose ever"thing $ant some protection (or themselves 3here is no re;uirement to provide a prospectus to those $ho /ought /e(ore an amendment to the prospectus $as implemented 3he under$riter $ants to /e out o( distri/ution /e(ore the deal closes that $a" the" have no securities le(t and no ris7 le(t either I( the" are not out o( distri/ution /" the time the deal closes the" $ill /e in the situation $here the" have an old prospectus under $hich the" cannot sell securities S.3+ 61.17 2 1o distri/ution o( a securit" to $hich su/section 03 ?%@ applies shall continue a(ter the lapse date= unless a ne$ prospectus that complies $ith this +art is (iled and a receipt (or the ne$ prospectus is o/tained (rom the ,irector 4hat is a lapse date6 S.3+617 2 $ith re(erence to a securit" that is /eing distri/uted under su/section 03 ?%@ or this section= the date that is %. months a(ter the date o( the most recent prospectus relating to the securit" In order to avoid having securities unsold at the closing date= and in order to get out o( distri/ution the under$riter ma" decide to /u" the remaining securities (or the Jhouse accountK and 5ust put them on the shel( $here the" can then sell them later o But the 'S) and other regulators do not li7e this /ecause is that not 5ust the same as /eing in distri/ution= 5ust a /it o( tric7er" o

-.otic prospectus )or#s #p until no$ $e have /een dealing $ith long2(orm prospectuses /ut there are other $a"s to get the product to mar7et as $ell
o Aor/es re(ers to these are more exotic methods o Have the short (orm prospectus ?+'+ ?prompt2o((ering propsectus@@ and shel( prospectus Even though the (orm ma" /e a /it di((erent the re;uirements o( s.03 still appl" to the o((erings under +'+ and shel( prospectuses Ho$ do these $or7 instead6 4ho is entitled to use short (orm prospectuses o 9ational policy ""81!1 o S.+.+ 2 Basic Buali(ication )riteria 2 An issuer is ;uali(ied to (ile a prospectus in the (orm o( a short (orm prospectus (or a distri/ution o( an" o( its securities in the local 5urisdiction= i( the (ollo$ing criteria are satis(iedG o ?a@ the issuer is an electronic (iler under 1I %32%!%F o ?/@ the issuer is a reporting issuer in at least one 5urisdiction o( )anadaF o ?c@ the issuer has (iled $ith the securities regulator" authorit" in each 5urisdiction in $hich it is a reporting issuer all periodic and timel" disclosure documents that it is re;uired to have (iled in that 5urisdiction ?i@ under applica/le securities legislation= ?ii@ pursuant to an order issued /" the securities regulator" authorit"= or ?iii@ pursuant to an underta7ing to the securities regulator" authorit"F o ?d@ the issuer has= in at least one 5urisdiction in $hich it is a reporting issuer= ?i@ current annual (inancial statements= and ?ii@ a current AIAF o ?e@ the issuer8s e;uit" securities are listed and posted (or trading on a short (orm eligi/le exchange and the issuer is not an issuer ?i@ $hose operations have ceased= or ?ii@ $hose principal asset is cash= cash e;uivalents= or its exchange listing. .8

S.+. 2 Alternative Buali(ication )riteria (or Issuers o( Approved &ating 1on2)onverti/le Securities ?%@ An issuer is ;uali(ied to (ile a prospectus in the (orm o( a short (orm prospectus (or a distri/ution o( nonconverti/le securities in the local 5urisdiction= i( the (ollo$ing criteria are satis(iedG ?a@ the issuer is an electronic (iler under 1I %32%!%F ?/@ the issuer is a reporting issuer in at least one 5urisdiction o( )anadaF ?c@ the issuer has (iled $ith the securities regulator" authorit" in each 5urisdiction in $hich it is a reporting issuer all periodic and timel" disclosure documents that it is re;uired to have (iled in that 5urisdiction o ?i@ under applica/le securities legislation= o ?ii@ pursuant to an order issued /" the securities regulator" authorit"= or o ?iii@ pursuant to an underta7ing to the securities regulator" authorit"F ?d@ the issuer has= in at least one 5urisdiction in $hich it is a reporting issuer= o ?i@ current annual (inancial statements= and o ?ii@ a current AIAF ?e@ the securities to /e distri/uted o ?i@ have received an approved rating on a provisional /asis= o ?ii@ are not the su/5ect o( an announcement /" an approved rating organi9ation= o( $hich the issuer is or ought reasona/l" to /e a$are= that the approved rating given /" the organi9ation ma" /e do$n2graded to a rating categor" that $ould not /e an approved rating= and o ?iii@ have not received a provisional or (inal rating lo$er than an approved rating (rom an" approved rating organi9ation. ?.@ +aragraph ?%@?e@ does not appl" to an issuer (iling a short (orm prospectus that is a /ase shel( prospectus under 1I 2%!.. S.+." 2 Alternative Buali(ication )riteria (or Issuers o( :uaranteed 1on2)onverti/le ,e/t Securities= +re(erred Shares and )ash Settled ,erivatives ?%@ An issuer is ;uali(ied to (ile a prospectus in the (orm o( a short (orm prospectus (or a distri/ution o( nonconverti/le de/t securities= non2converti/le pre(erred shares or non2converti/le cash settled derivatives in the local 5urisdiction= i( the (ollo$ing criteria are satis(iedG ?a@ a credit supporter has provided (ull and unconditional credit support (or the securities /eing distri/uted= ?/@ at least one o( the (ollo$ing is trueG o ?i@ the credit supporter satis(ies the criteria in paragraphs ...?a@= ?/@= ?c@ and ?d@ i( the $ord JissuerK is replaced $ith Jcredit supporterK $herever it occursF o ?ii@ the credit supporter is a #.S. credit supporter and the issuer is incorporated or organi9ed under the la$s o( )anada or a 5urisdiction o( )anadaF ?c@ unless the credit supporter satis(ies the criteria in paragraph ...?e@ i( the $ord JissuerK is replaced $ith Jcredit supporterK $herever it occurs= at the time the preliminar" short (orm prospectus is (iled o ?i@ the credit supporter has outstanding non2converti/le securities that ?A@ have received an approved rating= ?B@ have not /een the su/5ect o( an announcement /" an approved rating organi9ation= o( $hich the issuer is or ought reasona/l" to /e a$are= that the approved rating given /" the organi9ation ma" /e do$n2graded to a rating categor" that $ould not /e an approved rating= and ?)@ have not received a rating lo$er than an approved rating (rom an" approved rating organi9ation= and o ?ii@ the securities to /e issued /" the issuer ?A@ have received an approved rating on a provisional /asis= ?B@ have not /een the su/5ect o( an announcement /" an approved rating organi9ation= o( $hich the issuer is or ought reasona/l" to /e a$are= that the approved rating given /" the organi9ation ma" /e do$n2graded to a rating categor" that $ould not /e an approved rating= and ?)@ have not received a provisional or (inal rating lo$er than an approved rating (rom an" approved rating organi9ation. ?.@ Su/paragraph ?%@?c@?ii@ does not appl" to an issuer (iling a short (orm prospectus that is a /ase shel( prospectus under 1I 2%!.. S.+.0 2 Alternative Buali(ication )riteria (or Issuers o( :uaranteed )onverti/le ,e/t Securities or +re(erred Shares An issuer is ;uali(ied to (ile a prospectus in the (orm o( a short (orm prospectus (or a distri/ution o( converti/le de/t securities or converti/le pre(erred shares in the local 5urisdiction= i( the (ollo$ing criteria are satis(iedG .D

?a@ the de/t securities or the pre(erred shares are converti/le into securities o( a credit supporter that has provided (ull and unconditional credit support (or the securities /eing distri/utedF ?/@ the credit supporter satis(ies the criteria in section ... i( the $ord JissuerK is replaced $ith Jcredit supporterK $herever it occurs. AIA - Annual In(ormation Aorm o Is a continuous disclosure (iling that each reporting issuer must do $hich update their stor" (rom the prospectus telling the stor" o( the compan" (or the past "ear Each reporting issuer must (ile one annuall" #ntil "ou have an AIA - have /een in /usiness (or one "ear as a reporting issuer - "ou are precluded (rom doing a +'+ o((ering It is possi/le to have de/t o((erings on non2converti/le pre(erred shares so long as the" are investment grade i( the" are not listed o 3he" need to /e rated /" investment rating agencies ?such as Mood"8s etc.@ o )ould also have the de/t or non2converti/le pre(erred shares guaranteed /" someone $ho is +'+ eligi/le I( the +'+ criteria are satis(ied then "ou are +'+ eligi/le "ou can start the short (orm prospectus o Short (orm o( a prospectus 3al7s a/out the securities to /e sold A/out $ho the under$riters are going to /e and a/out the plan o( distri/ution Also tal7s a/out $hat the proceeds $ill /e used (or Most o( this is similar to $hat "ou $ould see in a normal long2(orm prospectus But "ou $ill also see the AIA in(ormation included in the short2(orm prospectus 4ill also have a claim a/out J(ull= true= and plain disclosureK= and incorporated into it $ill /e re(erence to other documents $hich /" in(erence $ill include the AIA 4ill have the certi(icate in the prospectus 5ust as in the regular prospectus )learl" this is a less time consuming and presuma/l" cheaper process than doing a long2(orm prospectus Because much o( the slog has alread" /een done - especiall" the AIA in(ormation Another reason $h" +'+ is /etter Rule " 8+!1 o 0. Re/ie* Period )or Short %or# Prospectuses o ?%@ 3he principal regulator $ill use its /est e((orts to revie$ materials relating to a preliminar" short (orm prospectus and issue a co))ent letter within three wor+in! days o( the date o( the preliminar" M&&S decision document. Each non2 principal regulator $ill= $ithin three $or7ing da"s o( the date o( the preliminar" M&&S decision document= use its /est e((orts toG ?a@ advise the principal regulator o( an" material concerns $ith the materials that= i( le(t unresolved= $ould cause the non2principal regulator to opt out o( the M&&SF or ?/@ indicate in the SE,A& PAiling StatusP screen that it is clear to receive (inal materials= i( there are no outstanding applications that have /een (iled $ith the non2principal regulators. o ?.@ ,espite the (oregoing= i(= in the opinion o( the principal regulator= a proposed distri/ution /" $a" o( short (orm prospectus is too complex to /e revie$ed ade;uatel" $ithin the prescri/ed time periods= the principal regulator ma" determine that the time periods applica/le to long (orm prospectuses should appl"= and the principal regulator $ill= $ithin one $or7ing da" o( the (iling o( the preliminar" short (orm prospectus= so noti(" the (iler and the non2principal regulators. 3he (iler is encouraged to su/mit a pre2(iling to resolve an" issues that ma" cause a dela" in the prescri/ed time periods 3his is /ene(icial /ecause o( instead o( three $ee7s - %! da"s (or principal regulator and 0 da"s (or others= "ou are loo7ing at (our da"s o Su/mit on Monda" and go to mar7et on Arida" o Also sometimes the" $ill not even /other to loo7 at the short2(orm prospectusQ Because o( the speed o( the turnaround on a short2(orm prospectus it is possi/le that an under$riter $ill 5ust go out and actuall" purchase the deal outright $ill 5ust /u" all o( the securities on Monda"= 7no$ing that on Arida" the" $ill /e a/le to start selling them o 3his is the true J/ought dealK Some sa" that a true under$riting deal - $here under$riters /u" as principal is the /ought deal /ut this is actuall" it under$riter pa"s over the cash and ta7es the securities 7no$ing that $ithin a matter o( da"s the" $ill start /eing paid /ac7 4ill do this especiall" $ith senior issuers - ones $ith solid mar7et histor" and $ith solid issue 'ne ;uestion that arises $ith +'+ o((erings is ho$ the under$riters 7no$ that there is a mar7et isn8t it ris7" to /u" the deal $ithout 7no$ing that "ou have it sold o 2ook to 9ational 'nstru#ent ""81!1 ( speci)ically Part 1 3!

1.1 Solicitations o) -.pressions o) 'nterest 2 3he prospectus re;uirement does not appl" to solicitations o( expressions o( interest /e(ore the (iling o( a preliminar" short (orm prospectus (or securities to /e ;uali(ied (or distri/ution under a short (orm prospectus in accordance $ith this Instrument= i( ?a@ the issuer has entered into an en(orcea/le agreement $ith an under$riter $ho has= or under$riters $ho have= agreed to purchase the securities= ?/@ the agreement re(erred to in paragraph ?a@ has (ixed the terms o( the distri/ution and re;uires that the issuer (ile a preliminar" short (orm prospectus (or the securities and o/tain (rom the regulator a receipt= dated as o( a date that is not more than (our /usiness da"s a(ter the date that the agreement is entered into= (or the preliminar" short (orm prospectus= ?c@ the issuer has issued and (iled a ne$s release announcing the agreement immediatel" upon entering into the agreement= ?d@ upon issuance o( a receipt (or the preliminar" short (orm prospectus= a cop" o( the preliminar" short (orm prospectus is sent to each person or compan" $ho has expressed an interest in ac;uiring the securities= and ?e@ except as provided in paragraph ?a@= no agreement o( purchase and sale (or the securities is entered into until the short (orm prospectus has /een (iled and a receipt o/tained. 4h" is there a rule that "ou need to disclose that there is a deal coming do$n the pipe6 o Because the deal is usuall" selling at a discount to the mar7et price and someone $ho alread" o$ns shares and is /eing solicited to /u" ne$ ones ma" sell their current shares on the mar7et in order to ma7e a gain /ut not lose an" shares overall 3his is not reall" (air is analogous to tipping and need to o((set this to ma7e it (airer o 'ne $a" to get around some o( this is to agree to private placements prior to going to the mar7et especiall" $ith some o( the larger institutional investors that the under$riter ma" have a long histor" o( $or7ing $ith +rivate placements are usuall" /ig deals (or /ig /loc7s o( shares (or /ig pla"ers such as /an7s= insurance companies and pension (unds o In short (orm prospectus - and the under$riting agreements that go along $ith them - under$riters still $ill insist on the same outs as $ith traditional agreements All /ought deals are done under +'+ prospectuses /ut not all +'+ prospectuses are /ought deals +rovided there is nothing novel in the o((ering it $ill go through the 'S) $ithin three da"s Aor all intents and purposes the short2(orm prospectus process is the same thing as the long2(orm $ith some minor variations Shel( prospectuses are a /it di((erent than either Are (ound under 1I 2%!. #se a shel( prospectus to ;uali(" a securit" to /e o((ered to the mar7et over a period o( time 4ill usuall" ;uali(" securities that "ou $ill stic7 on the shel( and go to the mar7et $ith them $hen "ou need to raise mone" o Aor example $ill ;uali(" H% /illion in securities and go to mar7et (rom time to time in tranches o( H%!! million or H.!! million 3o do a shel( "ou need to /e +'+ eligi/le o Still have to meet the same criteria o A shel( prospectus is good (or up to .0 months - no longer o 3here are t$o t"pes o( shel( prospectuses 4here "ou are clearing a prospectus (or securities o( a t"pe Aor example unsecured medium term notes o( 72%! "ears at Ban7 +rime o H% /illion in total and plan on selling them (rom time to time to under$riters o As "ou need mone" "ou go to the mar7et in tranches and see7 H%!! million at a time o All "ou need to do is to (ile a pricing supplement pricing the o((ering= (ile $ith the commission and o(( "ou go )ould even do a variet" o( di((erent t"pes o( securities such as a com/ination o( long and medium term notes 3hese t"pes o( shel( prospectuses are o(ten used (or companies that need cash (rom time to time (or either capital investment or ac;uisitions /ut the" are 5ust not sure $hen the" $ill need the cash this $a" the" can get to the mar7et ;uic7l" and raise the mone" that the" need )an do a shel( (or a continuous o((ering &ather than a transaction /" transaction /asis 4hat is this o )ontemplates a shel( (or something that $ill continuousl" /e in the mar7et o Instead o( using an under$riter an issuer can o((er securities directl" to the mar7et 3%

#se short2(orm prospectus Have a maximum amount the" $ant to raise Sa" $hat the nature o( the securit" is ,escri/e $hat the use o( the proceeds is going to /e But $hat a/out the plan o( distri/ution 3here is no under$riter= there is no pricing supplement /*c it is o((ered at mar7et price I( common shares "ou cannot o((er more than %!L o( outstanding shares Ma" not /e allo$ed to distri/ute exotic products such as derivatives 'ne issue $ith shel(s is ho$ "ou go a/out "our due diligence $hen a compan" (iles a prospectus ever" t$o "ears. o ,o "ou do it $hen the" (ile the short (orm - /ut such a short period o( time /e(ore the prospectus is approved o Ho$ can "ou do diligence $hen transactions are done a/sent a prospectus - securities can go to mar7et at an" time o +resents some di((icult ;uestions

,i/il liability )or prospectus disclosure S.03617 2 A prospectus shall provide (ull= true and plain disclosure o( all material (acts relating to the securities issued or
proposed to /e distri/uted and shall compl" $ith the re;uirements o( 'ntario securities la$ A certi(icate must /e signed on /ehal( o( the issuer - s.08 S.08617 2 Su/5ect to su/section ?3@ o( this section and su/section 63 ?.@= and su/5ect to an" $aiver or variation consented to in $riting /" the ,irector= a prospectus (iled under su/section 03 ?%@ or su/section 6. ?%@ shall contain a certi(icate in the (ollo$ing (orm= si!ned by the chief e#ecutive officer= the chief financial officer= and= on /ehal( o( the /oard o( directors= any two directors of the issuer= other than the (oregoing= dul" authori9ed to sign= and an" person or compan" $ho is a promoter o( the issuerG o The ore!oin! constitutes ull, true and plain disclosure o all material acts relatin! to the securities o ered "y this prospectus as re#uired "y Part $% o the &ecurities Act and the re!ulations thereunder' 3he under$riter also has an o/ligation to sign a certi(icate S.0$617 2 Su/5ect to su/section 63 ?.@= $here there is an under$riter= a prospectus shall contain a certi(icate in the (ollo$ing (orm= signed /" the under$riter or under$riters $ho= $ith respect to the securities o((ered /" the prospectus= are in a contractual relationship $ith the issuer or securit" holder $hose securities are /eing o((ered /" the prospectusG o To the "est o our kno)led!e, in ormation and "elie , the ore!oin! constitutes ull, true and plain disclosure o all material acts relatin! to the securities o ered "y this prospectus as re#uired "y Part $% o the &ecurities Act and the re!ulations thereunder S.06 and s.0D connect $ith s.%3!?%@ $hich is the civil lia/ilit" clause in the 'SA S.1 !617 2 4here a prospectus= together $ith an" amendment to the prospectus= contains a misrepresentation= a purchaser $ho purchases a securit" o((ered /" the prospectus during the period o( distri/ution or during distri/ution to the pu/lic has= $ithout regard to $hether the purchaser relied on the misrepresentation= a right o( action (or damages against= o ?a@ the issuer or a selling securit" holder on $hose /ehal( the distri/ution is madeF sellin! security holder )eans the control bloc+ holder o ?/@ each under$riter o( the securities $ho is re;uired to sign the certi(icate re;uired /" section 0DF these are the underwriters in contractual privity o ?c@ ever" director o( the issuer at the time the prospectus or the amendment to the prospectus $as (iledF includes all directors( not 0ust those who si!ned the certificate o ?d@ ever" person or compan" $hose consent to disclosure o( in(ormation in the prospectus has /een (iled pursuant to a re;uirement o( the regulations /ut onl" $ith respect to reports= opinions or statements that have /een made /" themF and e#pert opinions but e#perts only liable for the e#pertised portion of the report o ?e@ ever" person or compan" $ho signed the prospectus or the amendment to the prospectus other than the persons or companies included in clauses ?a@ to ?d@= could have pro)oters liable( C"O and C1O could be personally liable o or= $here the purchaser purchased the securit" (rom a person or compan" re(erred to in clause ?a@ or ?/@ or (rom another under$riter o( the securities= the purchaser ma" elect to exercise a right o( rescission against such person= compan" or under$riter= in $hich case the purchaser shall have no right o( action (or damages against such person= compan" or under$riter 3he purchaser has the choice to pursue damages or rescission - postam/le 4hat is a misrepresentation o ?a@ an untrue statement o( material (act= or 3.

?/@ an omission to state a material (act that is re;uired to /e stated or that is necessar" to ma7e a statement not misleading in the light o( the circumstances in $hich it $as made All material (acts must /e disclosed so a (ailure to disclose a material (act is a misrepresentation under the 'SA the second part o( ?/@ Misrepresentation under securities la$ is much /roader than under contract la$ o Includes omissions and (ailures to do things 3his is not a misrepresentation under contract la$ o Also a misrepresentation under contract la$ does not necessaril" lead to damages 1eed negligence= or (raudulent misrepresentation S.1 ! 61!7 2 3he right o( action (or rescission or damages con(erred /" this section is in addition to and $ithout derogation (rom an" other right the purchaser ma" have at la$. o 3he rights under the Securities Act are in addition to those under common contract la$ so it is still open to one to use common contract la$ remedies as $ell Is it possi/le to have no s.%3! right to rescission /ut to have one at common la$ o Mes /*c under$riter under s.%3! ma" have due diligence de(ence o 3he due diligence de(ence is open to all people under s.%3! except (or the issuer S.1 !607 2 1o person or compan"= other than the issuer or selling securit" holder= is lia/le under su/section ?%@ $ith respect to an" part o( the prospectus or the amendment to the prospectus not purporting to /e made on the authorit" o( an expert and not purporting to /e a cop" o( or an extract (rom a report= opinion or statement o( an expert unless he= she or it= o ?a@ (ailed to conduct such reasona/le investigation as to provide reasona/le grounds (or a /elie( that there had /een no misrepresentationF or o ?/@ /elieved there had /een a misrepresentation. In addition the amount that an under$riter is potentiall" lia/le (or is limited /" s.%3! S.1 !637 2 1o under$riter is lia/le (or more than the total pu/lic o((ering price represented /" the portion o( the distri/ution under$ritten /" the under$riter S.1 !6$7 2 In no case shall the amount recovera/le under this section exceed the price at $hich the securities $ere o((ered to the pu/lic o But= loo7ing at <err v ,anier= does this mean that the o((ering price is the starting point (or damages= or does it mean that the o((ering price is the cap (or damages6 In civil lia/ilit" the lia/ilit" is 5oint and several S.1 !687 2 All or an" one or more o( the persons or companies speci(ied in su/section ?%@ are 5ointl" and severall" lia/le= and ever" person or compan" $ho /ecomes lia/le to ma7e an" pa"ment under this section ma" recover a contri/ution (rom an" person or compan" $ho= i( sued separatel"= $ould have /een lia/le to ma7e the same pa"ment provided that the court ma" den" the right to recover such contri/ution $here= in all the circumstances o( the case= it is satis(ied that to permit recover" o( such contri/ution $ould not /e 5ust and e;uita/le. o &e(lect /ac7 on #S cases a/out $hether or not indemnit" is en(orcea/le ?:lo/us &ealt"@ o Best course o( action is still to sue all potential de(endants /ecause the $orst case scenario is that "ou sue onl" one and the" end up $ith a de(ence that "ou cannot overcome and "ou $in nothing Also need to /e a$are o( the issue o( the cap on the under$riters portion o( an" a$ard ?s.%3!?6@@ .err v 'anier (Ontario Court of Appeal) o )ompan" $as attempting to go pu/lic o Had tried on a couple o( occasions o 3he" included a (orecast in their prospectus o Earlier attempts to go pu/lic had /een a/orted /ecause o( issues $ith (orecasts o 4ent pu/lic at H%%..0 in Ma" $ith a (orecast (or 3 months= /ut $eather $as unseasona/l" $arm and the" $ere not selling man" coats and $ere missing targets. 'n Oune th the" announced the" $ere /ehind (orecast and the stoc7 dropped to H8.D! (rom H%%.60. B" the end o( the (orecast period the" $ere onl" H%!!7 /ehind the (orecast so the overall impact $as negligi/le /ut it too7 "ears (or the mar7et price to re/ound o Investors sued on the /asis o( improper disclosure - trial 5udge said a material (act $as missing and the investors $on at trial Said that the compan" did not reasona/l" /elieve its o$n (orecast at the time o( the closing o( the deal and that the" should have disclosed this Said there is an implied representation that management /elieves their (orecasts and that the" need to disclose $hen the" do not /elieve them But a (orecast is not a (act cannot /e= is simpl" an opinion I( this is right then a (orecast $ould need to /e in ever" prospectus o 'verturned at court o( Appeal o 33

Said that the trial 5udge $as $rong (or a couple o( reasons ,id not thin7 that a (orecast must /e /oth /elieva/le /" management and o/5ectivel" /elieved /" management o #ntil <err v ,anier ever"one thought that the /usiness 5udgment rule applied "ou could /e $rong so long as "ou a/ided /" the director8s dut" o( care Extends the 5udgment rule to possi/l" protect directors decisions under securities la$ Some sa" that the dut" o( care has no role in securities la$ /ut it is uncertain o ,ut" to amend a prospectus (lo$s (rom a material change and not changes in material (acts Material (acts go in a prospectus Material changes do not )ourt o( (irst instance said that a material (act $as not disclosed /ut the )ourt o( Appeal said this $as incorrect o Said that those $ho had alread" purchased need not /e given an amended prospectus /*c prospectus $as good $hen the securities $ere purchased o 'ne potential outcome o( the original decision $ould have /een that due diligence $ould have had to have /een done at the date o( closing and not at the date o( the (inal prospectus $ould have /een a mess )ourt o( Appeal said there $as no material change said that management /elieved the (orecast had should /e given the /ene(it o( the /usiness 5udgment rule ,anier is an important case /ecause it a((irms that the prospectus doesen8t have to /e good as o( the date o( the closing o( the deal Also /ecause o( the conclusion a/out $hat a pro5ection is o Is not a (act= 5ust an opinion In calculating damages the original 5udge said that the starting point $as the o((ering price o( the securities since the )ourt o( Appeal overturned the decision it never dealt $ith this issue /ut it doesn8t seem to ma7e a $hole lot o( sense )ourt also said that "ou needed to give enough time (or the ne$s to $or7 its $a" through the stoc7 mar7et Also said that i( there $ere other things going on "ou needed to ta7e account o( them as $ell such as a mar7et crash this ties in $ith s.%3!?7@ S.1 !617 2 In an action (or damages pursuant to su/section ?%@= the de(endant is not lia/le (or all or an" portion o( such damages that the de(endant proves do not represent the depreciation in value o( the securit" as a result o( the misrepresentation relied upon.

Due diligence de)ences S.1 !6 7 2 1o person or compan"= other than the issuer or selling securit" holder= is lia/le under su/section ?%@ i( he= she or it
proves= o ?a@ that the prospectus or the amendment to the prospectus $as (iled $ithout his= her or its 7no$ledge or consent= and that= on /ecoming a$are o( its (iling= he= she or it (orth$ith gave reasona/le general notice that it $as so (iledF o ?/@ that= a(ter the issue o( a receipt (or the prospectus and /e(ore the purchase o( the securities /" the purchaser= on /ecoming a$are o( an" misrepresentation in the prospectus or an amendment to the prospectus he= she or it $ithdre$ the consent thereto and gave reasona/le general notice o( such $ithdra$al and the reason there(orF o ?c@ that= $ith respect to an" part o( the prospectus or the amendment to the prospectus purporting to /e made on the authorit" o( an expert or purporting to /e a cop" o( or an extract (rom a report= opinion or statement o( an expert= he= she or it had no reasona/le grounds to /elieve and did not /elieve that there had /een a misrepresentation or that such part o( the prospectus or the amendment to the prospectus did not (airl" represent the report= opinion or statement o( the expert or $as not a (air cop" o( or extract (rom the report= opinion or statement o( the expertF o ?d@ that= $ith respect to an" part o( the prospectus or the amendment to the prospectus purporting to /e made on his= her or its o$n authorit" as an expert or purporting to /e a cop" o( or an extract (rom his= her or its o$n report= opinion or statement as an expert /ut that contains a misrepresentation attri/uta/le to (ailure to represent (airl" his= her or its report= opinion or statement as an expert= ?i@ the person or compan" had= a(ter reasona/le investigation= reasona/le grounds to /elieve and did /elieve that such part o( the prospectus or the amendment to the prospectus (airl" represented his= her or its report= opinion or statement= or ?ii@ on /ecoming a$are that such part o( the prospectus or the amendment to the prospectus did not (airl" represent his= her or its report= opinion or statement as an expert= he= she or it (orth$ith advised the )ommission 3

and gave reasona/le general notice that such use had /een made and that he= she or it $ould not /e responsi/le (or that part o( the prospectus or the amendment to the prospectusF or o ?e@ that= $ith respect to a (alse statement purporting to /e a statement made /" an o((icial person or contained in $hat purports to /e a cop" o( or extract (rom a pu/lic o((icial document= it $as a correct and (air representation o( the statement or cop" o( or extract (rom the document= and he= she or it had reasona/le grounds to /elieve and did /elieve that the statement $as true. S.1 !6"7 2 1o person or compan"= other than the issuer or selling securit" holder= is lia/le under su/section ?%@ $ith respect to an" part o( the prospectus or the amendment to the prospectus purporting to /e made on his= her or its o$n authorit" as an expert or purporting to /e a cop" o( or an extract (rom his= her or its o$n report= opinion or statement as an expert unless he= she or it= o ?a@ (ailed to conduct such reasona/le investigation as to provide reasona/le grounds (or a /elie( that there had /een no misrepresentationF or o ?/@ /elieved there had /een a misrepresentation s.1 !607 21o person or compan"= other than the issuer or selling securit" holder= is lia/le under su/section ?%@ $ith respect to an" part o( the prospectus or the amendment to the prospectus not purporting to /e made on the authorit" o( an expert and not purporting to /e a cop" o( or an extract (rom a report= opinion or statement o( an expert unless he= she or it= o ?a@ (ailed to conduct such reasona/le investigation as to provide reasona/le grounds (or a /elie( that there had /een no misrepresentationF or o ?/@ /elieved there had /een a misrepresentation )omments on ,ue ,iligence ,e(ences o 4hat is reasona/le investigation is not the same (or ever"one MBM Magnex= Enscott= Bar2)riss 4ill depend upon $ho the person is= $hat the person 7no$s= their position= their education= their experience= their expertise= ho$ close the" are to the prospective process 'nes $ith greater 7no$ledge $ill /e held to a higher standard o MBM - under$riter*director held to a higher standard than other directors 4ho "ou are $ill determine $hat is expected o( "ou o Experienced directors $ill /e held to higher standards o I( "ou get a hint o( a pro/lem and do not (ollo$ up "ou $ill /e held to a higher standard MBM o 'ther people can do due diligence (or "ou ?to an extent@ MBM >a$"ers can do due diligence= under$riters can do it as $ell But it depends on their relationship as to ho$ much "ou can rel" on them In MBM the (act that the under$riter $as a director should have led one to have as7ed more ;uestions a/out the level o( diligence underta7en o )annot $holl" a/dicate responsi/ilit" (or diligence to others At a minimum must ma7e in;uiries did $e do our diligence and can $e rel" on it6 o &easona/le investigation is some$hat in(ormed /" $hat others do I( there is a standard in the industr" "ou should at least meet it At the same time "ou don8t reall" $ant to /e the one to esta/lish a more onerous one Because $ill /e expected to meet it in the (uture 3here are tight time limitations (or pursuing remedies under the 'SA S.1 8 2 #nless other$ise provided in this Act= no action shall /e commenced to en(orce a right created /" this +art more than= o ?a@ in the case o( an action (or rescission= %8! da"s a(ter the date o( the transaction that gave rise to the cause o( actionF or o ?/@ in the case o( an" action= other than an action (or rescission= the earlier o(= ?i@ %8! da"s a(ter the plainti(( (irst had 7no$ledge o( the (acts giving rise to the cause o( action= or ?ii@ three "ears a(ter the date o( the transaction that gave rise to the cause o( action 'ne issue is $hether or not "ou 7eep "our diligence (iles once "ou are done o Some sa" "es some sa" no Issue arises /ecause it could /ite "ou in the ass i( "ou missed something /ut on the other hand $hat i( "ou sho$ed up in court $ithout it #S (irms shred it /ecause o( this (ear

-.e#pt transactions 4hat happens $hen an issuer does not $ant to do a prospectus
30

 A(ter all it is expensive= time consuming etc. 3hat is the purvie$ o( exemptions 4hat is the (actual /asis (or exempt transactions
Especiall" since there is the strong /elie( in the need (or disclosure &emem/er the t$o competing purposes o( the Act % - is the need to protect the investing pu/lic . - is to (oster competitive and e((icient mar7ets It is (or the second reason that $e have exempt transactions 4hat t"pes o( exempt transactions are there o +rivate placements 3he purchaser does not need disclosure 3he purchaser is an accredited investor such as a /an7= insurance compan"= $ealth" person etc. $ho 7no$s enough to protect themselves and does not need disclosure A(ter all disclosure is a /it paternalistic at its core o Benign securities such as government /onds $here the ris7s are negligi/le= i( the" exist at all o Hardship exemptions 4here ma7ing a prospectus $ould /e in(easi/le (or the issuer in the circumstances Aor example the (amil" store $here "ou $ant to provide o$nership sta7es to children )alled the private issuer exemption o Issuer related exemptions 3he issuer is issuing securities to those $ho alread" have a relationship to it and there(ore there is reall" no need to demand that it ma7e an" (urther disclosure to them Such as o((ering shares to emplo"ees= o((icers etc Also rights o((erings $here the compan" o((ers shares at a discount to current shareholders 3here are a /unch o( prospectus exemptions in s.7. and 73 o( the 'SA and a /unch o( registration exemptions in s.3 and 30 o( the 'SA /ut these $ere put into the Act prior to the 'S) /eing given rule ma7ing authorit". 3hese have no$ /een displaced /" a com/ination o( Rule "080!1 and 1ational Instrument "081!3 o 1ational Instrument 02%!6 is the ma5or one /ut there are some portions o( it that 'ntario did not li7e so it $ent $ith &ule 020!% in addition o :ccredited 'n/estor o o o o o o o o o o o o o ,e(ined in the &ule ?a@ a )anadian (inancial institution= or a Schedule III /an7= ?/@ the Business ,evelopment Ban7 o( )anada incorporated under the Business *e(elopment Bank o Canada Act ?)anada@= ?c@ a su/sidiar" o( an" person re(erred to in paragraphs ?a@ or ?/@= i( the person o$ns all o( the voting securities o( the su/sidiar"= except the voting securities re;uired /" la$ to /e o$ned /" directors o( that su/sidiar"= ?d@ a person registered under the securities legislation o( a 5urisdiction o( )anada as an adviser or dealer= other than a person registered solel" as a limited mar7et dealer under one or /oth o( the &ecurities Act ?'ntario@ or the &ecurities Act ?1e$(oundland and >a/rador@= ?e@ an individual registered or (ormerl" registered under the securities legislation o( a 5urisdiction o( )anada as a representative o( a person re(erred to in paragraph ?d@= ?(@ the :overnment o( )anada or a 5urisdiction o( )anada= or an" cro$n corporation= agenc" or $holl" o$ned entit" o( the :overnment o( )anada or a 5urisdiction o( )anada= ?g@ a municipalit"= pu/lic /oard or commission in )anada and a metropolitan communit"= school /oard= the )omitR de gestion de la taxe scolaire de l8Sle de MontrRal or an intermunicipal management /oard in BuR/ecF ?h@ an" national= (ederal= state= provincial= territorial or municipal government o( or in an" (oreign 5urisdiction= or an" agenc" o( that government= ?i@ a pension (und that is regulated /" either the '((ice o( the Superintendent o( Ainancial Institutions ?)anada@ or a pension commission or similar regulator" authorit" o( a 5urisdiction o( )anada= ?5@ an individual $ho= either alone or $ith a spouse= /ene(iciall" o$ns= directl" or indirectl"= (inancial assets having an aggregate reali9a/le value that /e(ore taxes= /ut net o( an" related lia/ilities= exceeds H% !!! !!!= ?7@ an individual $hose net income /e(ore taxes exceeded H.!! !!! in each o( the . most recent calendar "ears or $hose net income /e(ore taxes com/ined $ith that o( a spouse exceeded H3!! !!! in each o( the . most recent calendar "ears and $ho= in either case= reasona/l" expects to exceed that net income level in the current calendar "ear= ?l@ an individual $ho= either alone or $ith a spouse= has net assets o( at least H0 !!! !!!= 36

?m@ a person= other than an individual or investment (und= that has net assets o( at least H0 !!! !!! as sho$n on its most recentl" prepared (inancial statements= o ?n@ an investment (und that distri/utes or has distri/uted its securities onl" to ?i@ a person that is or $as an accredited investor at the time o( the distri/ution= ?ii@ a person that ac;uires or ac;uired securities in the circumstances re(erred to in sections ..%! T+inimum amount in(estmentU= and ..%D TAdditional in(estment in in(estment undsU= or ?iii@ a person descri/ed in paragraph ?i@ or ?ii@ that ac;uires or ac;uired securities under section ..%8 TIn(estment und rein(estmentU= o ?o@ an investment (und that distri/utes or has distri/uted securities under a prospectus in a 5urisdiction o( )anada (or $hich the regulator or= in BuR/ec= the securities regulator" authorit"= has issued a receipt= o ?p@ a trust compan" or trust corporation registered or authori9ed to carr" on /usiness under the Trust and Loan Companies Act ?)anada@ or under compara/le legislation in a 5urisdiction o( )anada or a (oreign 5urisdiction= acting on /ehal( o( a (ull" managed account managed /" the trust compan" or trust corporation= as the case ma" /e= o ?;@ a person acting on /ehal( o( a (ull" managed account managed /" that person= i( that person ?i@ is registered or authori9ed to carr" on /usiness as an adviser or the e;uivalent under the securities legislation o( a 5urisdiction o( )anada or a (oreign 5urisdiction= and ?ii@ in 'ntario= is purchasing a securit" that is not a securit" o( an investment (undF o ?r@ a registered charit" under the Income Ta, Act ?)anada@ that= in regard to the trade= has o/tained advice (rom an eligi/ilit" adviser or an adviser registered under the securities legislation o( the 5urisdiction o( the registered charit" to give advice on the securities /eing traded= o ?s@ an entit" organi9ed in a (oreign 5urisdiction that is analogous to an" o( the entities re(erred to in paragraphs ?a@ to ?d@ or paragraph ?i@ in (orm and (unction= o ?t@ a person in respect o( $hich all o( the o$ners o( interests= direct= indirect or /ene(icial= except the voting securities re;uired /" la$ to /e o$ned /" directors= are persons that are accredited investors= o ?u@ an investment (und that is advised /" a person registered as an adviser or a person that is exempt (rom registration as an adviser= or o ?v@ a person that is recogni9ed or designated /" the securities regulator" authorit" or= except in 'ntario and BuR/ec= the regulator as ?i@ an accredited investor= or ?ii@ an exempt purchaser in Al/erta or British )olum/ia a(ter this Instrument comes into (orceF Most o( the accredited investor exemptions deal $ith people $ho can either loo7 a(ter themselves or can a((ord to hire someone $ho can loo7 a(ter their mone" (or them It is also necessar" to do some investigation into accredited investors cannot accept their claims at (ace value /ut rather must loo7 /e"ond their claim to determine $hether or not the" meet the criteria o Mini#u# 'n/est#ent :#ount -.e#ption +.1! o) "081!3 2 ?%@ 3he dealer registration re;uirement does not appl" in respect o( a trade in a securit" to a person i( ?a@ that person purchases as principal= ?/@ the securit" has an ac;uisition cost to the purchaser o( not less than H%0! !!! paid in cash at the time o( the trade= and ?c@ the trade is in a securit" o( a single issuer. ?.@ 3he prospectus re;uirement does not appl" to a distri/ution o( a securit" in the circumstances re(erred to in su/section ?%@. ?3@ 3his section does not appl" to a trade in a securit" to a person i( that person is created or used solel" to purchase or hold securities in reliance on this exemption (rom the dealer registration re;uirement or the prospectus re;uirement. 4h" have a rule li7e this /ecause i( "ou have H%0!7 ma"/e "ou can $eigh the ris7s o It ma" /e possi/le to use this exemption (or an investment (und $here not all o( the investors are accredited investors It is not necessar" to use the same exemption (or ever"one can mix and match them in order to (it people into the mix o 5enign Securities

S...3 - ..37 o( 1I 02%!6 S.+. "6+7 2 3he dealer registration re;uirement does not appl" in respect o( a trade in a de/t securit"
o o ?a@ o( or guaranteed /" the :overnment o( )anada or the government o( a 5urisdiction o( )anada= ?/@ o( or guaranteed /" a government o( a (oreign 5urisdiction i( the de/t securit" has an approved credit rating (rom an approved credit rating organi9ation= 37

?c@ o( or guaranteed /" an" municipal corporation in )anada= or secured /" or pa"a/le out o( rates or taxes levied under the la$ o( a 5urisdiction o( )anada on propert" in the 5urisdiction and to /e collected /" or through the municipalit" in $hich the propert" is situated= o ?d@ o( or guaranteed /" a )anadian (inancial institution or a Schedule III /an7= other than de/t securities that are su/ordinate in right o( pa"ment to deposits held /" the issuer or guarantor o( those de/t securities= o ?e@ in 'ntario= o( an" school /oard in 'ntario or o( a corporation esta/lished under section . 8?%@ o( the -ducation Act ?'ntario@= o ?(@ o( the )omitR de gestion de la taxe scolaire de l8Sle de MontrRal= or o ?g@ o( or guaranteed /" a permitted supranational agenc" i( ?i@ the de/t securities are pa"a/le in the currenc" o( )anada or the #nited States o( America= and ?ii@ $ith respect to those securities= all documents or other in(ormation re;uired /" the regulator= or in British )olum/ia= 'ntario and in BuR/ec= the securities regulator" authorit"= are (iled $ith the regulator or securities regulator" authorit"= as the case ma" /e. s.+. "6 7 2 3he prospectus re;uirement does not appl" to a distri/ution o( a securit" in the circumstances re(erred to in su/section ?.@ S.+. 0617 2 3he dealer registration re;uirement does not appl" in respect o( a trade in a negotia/le promissor" note or commercial paper maturing not more than one "ear (rom the date o( issue= i( the note or commercial paper traded o ?a@ is not converti/le or exchangea/le into or accompanied /" a right to purchase another securit" other than a securit" descri/ed in this section= and o ?/@ has an approved credit rating (rom an approved credit rating organi9ation. s.+. 06+7 2 3he prospectus re;uirement does not appl" to a distri/ution o( a securit" in the circumstances re(erred to in su/section ?%@ +. 3 617 In this section= Js"ndicated mortgageK means a mortgage in $hich . or more persons participate= directl" or indirectl"= as a lender in a de/t o/ligation that is secured /" a mortgage. S.+. 36+7 Su/5ect to su/section ? @= the dealer registration re;uirement does not appl" in respect o( a trade in a mortgage on real propert" in a 5urisdiction /" a person $ho is registered or licensed= or exempted (rom registration or licensing= under mortgage /ro7erage or mortgage dealer legislation o( that 5urisdiction. S.+. 36 7 3he prospectus re;uirement does not appl" to a distri/ution o( a securit" in the circumstances re(erred to in su/section ?.@. S.+. 36"7 In British )olum/ia= Manito/a= BuR/ec and Sas7atche$an= su/sections ?.@ and ?3@ do not appl" to a s"ndicated mortgage. +. 1 617 3he dealer registration re;uirement does not appl" in respect o( a trade in a securit" evidencing inde/tedness secured /" or under a securit" agreement provided (or under personal propert" securit" legislation o( a 5urisdiction providing (or the ac;uisition o( personal propert" i( the securit" is not o((ered (or sale to an individual. S.+. 16+7 2 3he prospectus re;uirement does not appl" to a distri/ution o( a securit" in the circumstances re(erred to in su/section ?%@. ,i((erence /et$een /enign securities and accredited investors is that $ith /enign securities it is the securit" itsel( that is exempt and $ith accredited investor it is the transaction that is exempt does not matter $ho /u"s it 'ther that the ++SA one s...37 ?chattel paper@ $hich cannot /e sold to an individual o

=ardship -.e#ptions

3hese are important ones 3he main one here is the private issuer exemption 4ho is a private issuer S.+."617 o( 1I 02%!6
In this section= Jprivate issuerK means an issuer ?a@ that is not a reporting issuer or an investment (und= ?/@ $hose securities= other than non2converti/le de/t securities= ?i@ are su/5ect to restrictions on trans(er that are contained in the issuer8s constating documents or securit" holders8 agreements= and ?ii@ are /ene(iciall" o$ned= directl" or indirectl"= /" not more than 0! persons= not including emplo"ees and (ormer emplo"ees o( the issuer or its a((iliates= provided that each person is counted as one /ene(icial o$ner unless the person is created or used solel" to purchase or hold securities o( the issuer in $hich case each /ene(icial o$ner or each /ene(iciar" o( the person= as the case ma" /e= must /e counted as a separate /ene(icial o$ner= and ?c@ that has distri/uted securities onl" to persons descri/ed in this section. +rivate issuer is not a reporting issuer is usuall" a private compan" o Must have restrictions on the sale o( shares in the compan" 38 o

 4ho can "ou sell to under this exemption6

S.+."6+7 o) 9' "081!3 3he dealer registration re;uirement does not appl" in respect o( a trade in a securit" o( a private issuer to a person $ho purchases the securit" as principal and is ?a@ a director= o((icer= emplo"ee= (ounder or control person o( the issuer= ?/@ a spouse= parent= grandparent= /rother= sister or child o( a director= executive o((icer= (ounder or control person o( the issuer= ?c@ a parent= grandparent= /rother= sister or child o( the spouse o( a director= executive o((icer= (ounder or control person o( the issuer= ?d@ a close personal (riend o( a director= executive o((icer= (ounder or control person o( the issuer= ?e@ a close /usiness associate o( a director= executive o((icer= (ounder or control person o( the issuer= ?(@ a spouse= parent= grandparent= /rother= sister or child o( the selling securit" holder or o( the selling securit" holder8s spouse= ?g@ a securit" holder o( the issuer= ?h@ an accredited investor= ?i@ a person o( $hich a ma5orit" o( the voting securities are /ene(iciall" o$ned /"= or a ma5orit" o( the directors are= persons descri/ed in paragraphs ?a@ to ?h@= ?5@ a trust or estate o( $hich all o( the /ene(iciaries or a ma5orit" o( the trustees or executors are persons descri/ed in paragraphs ?a@ to ?h@= or ?7@ a person that is not the pu/lic. o 4h" have accredited investor in the de(inition6 Because i( "ou sell outside o( the private issuer exemption "ou are no longer a private issuer o 4hat 7inds o( restrictions are there on sales loo7 to the companion polic" Ariends must /e a/le to assess trust$orthiness= must 7no$ "ou (or a long time )annot /e a close personal (riend o( a close personal (riend )lose /usiness associate must also /e a/le to assess capacit" and trust$orthiness 'ne issue is $ho is a person $ho is not the pu/lic 1ever give an opinion on this /ecause it is impossi/le to 7no$ (or certain $hat this is 2 v Piep!rass o >oo7 not to $ho "ou sold to /ut $ho "ou o((ered it to i( "ou o((ered it to sale to the pu/lic then the person "ou sold it to is the pu/lic 3he person8s relationship to the compan" must /e su((icient to supplant good disclosure $ithout that "ou $ill need to have a prospectus 'ntario has $al7ed a$a" (rom the (riends and (amil" exemption in 1I 02%!6 ?s...0 /egins JExcept in 'ntarioV..@ o Because 'ntario thought that it $as too /ig o( a loophole allo$ing too man" things through Instead o( the JAriends and Aamil"K exemption o( s...0 'ntario has s...7 S.+.1617 In 'ntario= the dealer registration re;uirement does not appl" in respect o( a trade in a securit" to a person $ho purchases the securit" as principal and is ?a@ a (ounder o( the issuer= ?/@ an a((iliate o( a (ounder o( the issuer= ?c@ a spouse= parent= /rother= sister= grandparent or child o( an executive o((icer= director or (ounder o( the issuer= or ?d@ a person that is a control person o( the issuer. o ?.@ In 'ntario= the prospectus re;uirement does not appl" to a distri/ution o( a securit" in the circumstances re(erred to in su/section ?%@. 'ne other exemption o( some note is ..3! o( 1I 02%!6 o Man" sa" that this one is not ver" use(ul /ut it allo$s (or a (it $here nothing else $ill do o S.+. ! ?%@ 3he dealer registration re;uirement does not appl" in respect o( a trade /" an issuer in a securit" o( its o$n issue i( the trade is an isolated trade and is not made ?a@ in the course o( continued and successive transactions o( a li7e nature= and ?/@ /" a person $hose usual /usiness is trading in securities. o ?.@ 3he prospectus re;uirement does not appl" to a distri/ution o( a securit" in the circumstances re(erred to in su/section ?%@. 3his exemption is availa/le onl" to the issuer and not to the control holder Is onl" availa/le (or an isolated trade o 3D

And onl" availa/le intermittentl" such period o( time as is su((icient to ensure that it is trul" isolated and unconnected S.".3 o) Policy State#ent "081!3 But i( "ou use ..3! (or a private issuer the" $ill no longer /e a private issuer private issuer can onl" use private issuer exemption But "ou can lin7 ..3! $ith accredited investor and min purchase transactions Hardship exemption availa/le onl" in 'ntario loo7 to &ule 020!% o :overnment Incentive Securities usuall" see these (or (inancing oil and gas 5uniors $ho need to raise cash (rom time to time ?used to see these (or (ilm industr" tax credit programs until the (ederal government got rid o( the tax /rea7s@ o S.+.1 o) Rule "080!1 2 ?%@ 3he dealer registration re;uirement does not appl" to a trade /" an issuer or a promoter o( an issuer in a securit" o( the issuer that is a government incentive securit"= i( ?a@ in the aggregate in all 5urisdictions in )anada= not more than 70 prospective purchasers are solicited resulting in sales to not more than 0! purchasers= ?/@ /e(ore entering into an agreement o( purchase and sale= the prospective purchaser has /een supplied $ith an o((ering memorandum that includes in(ormation ?i@ identi("ing ever" o((icer and director o( the issuer= ?ii@ identi("ing ever" promoter o( the issuer= ?iii@ giving the particulars o( the pro(essional ;uali(ications and associations during the (ive "ears /e(ore the date o( the o((ering memorandum o( each o((icer= director and promoter o( the issuer that are relevant to the o((ering= ?iv@ indicating each o( the directors that $ill /e devoting his or her (ull time to the a((airs o( the issuer= and ?v@ descri/ing the right o( action re(erred to in section %3!.% o( the Act that is applica/le in respect o( the o((ering memorandum= ?c@ the prospective purchaser has access to su/stantiall" the same in(ormation concerning the issuer that a prospectus (iled under the Act $ould provide and= ?i@ /ecause o( net $orth and investment experience or /ecause o( consultation $ith or advice (rom a person that is not a promoter o( the issuer and that is an adviser or dealer registered under the Act= is a/le to evaluate the prospective investment on the /asis o( in(ormation a/out the investment presented to the prospective purchaser /" the issuer or selling securit" holder= or ?ii@ is an executive o((icer or director o( the issuer or o( an a((iliate o( the issuer or a spouse or child o( a director or executive o((icer o( the issuer or o( an a((iliate o( the issuer= ?d@ the o((er and sale o( the securit" is not accompanied /" an advertisement and no selling or promotional expenses have /een paid or incurred (or the o((er and sale except (or pro(essional services or (or services per(ormed /" a dealer registered under the Act= and ?e@ the promoter= i( an"= has not acted as a promoter o( an" other issue o( securities under this exemption $ithin the calendar "ear. o ?.@ Aor the purpose o( determining the num/er o( purchasers or prospective purchasers under paragraph ?%@?a@= a corporation= partnership= trust or other entit" is counted as one purchaser or prospective purchaser unless the entit" has /een created= or is /eing used= primaril" (or the purpose o( purchasing a securit" o( the issuer= in $hich event each /ene(icial o$ner o( an e;uit" securit" o( the entit" or each /ene(iciar" o( the entit"= as the case ma" /e= is counted as a separate purchaser or prospective purchaser. o ?3@ 3he prospectus re;uirement does not appl" to a distri/ution o( a securit" in the circumstances re(erred to in su/section ?%@. 3his rule seems rather di((icult to (ollo$ and di((icult to meet the re;uirements o( it is o Seems to have /een a sop to the oil and gas industr" and since 'ntario chose not to go $ith the (riends and (amil" exemption this is in there /ut perhaps the" $ill amend it to ma7e it more in line $ith the other provinces in the near (uture

'ssuer relationship e.e#ptions

'r no need to 7no$ exemptions

o 3hese individuals have a su((icient relationship $ith the issuer that the" do not have a need (or (urther disclosure 3here are a num/er o( these -#ployee e.e#ptions

Aor stoc7e purchase plans= stoc7 accumulation plans= or stoc7 option plans
o In each o( these situations "ou are issuing securities !

In the case o( options "ou issue t$o securities and need t$o exemptions 'ne $hen the option is issued 'ne $hen the option is exercised Rule "081!3 8 +.+" ?%@ Su/5ect to section ...0 TUnlisted reportin! issuer e,ceptionU= the dealer registration re;uirement does not appl" in respect o( o ?a@ a trade /" an issuer in a securit" o( its o$n issue= or o ?/@ a trade /" a control person o( an issuer in a securit" o( the issuer or in an option to ac;uire a securit" o( the issuer= o $ith o ?c@ an emplo"ee= executive o((icer= director or consultant o( the issuer= o ?d@ an emplo"ee= executive o((icer= director or consultant o( a related entit" o( the issuer= or o ?e@ a permitted assign o( a person re(erred to in paragraphs ?c@ or ?d@ i( participation in the trade is voluntar". o ?.@ Aor the purposes o( su/section ?%@= a person re(erred to in paragraph ?c@= ?d@ or ?e@ includes a trustee= custodian or administrator acting as agent (or that person (or the purpose o( (acilitating a trade. o ?3@ 3he dealer registration re;uirement does not appl" in respect o( an act /" a related entit" o( an issuer in (urtherance o( a trade re(erred to in su/section ?%@. o ? @ 3he prospectus re;uirement does not appl" to a distri/ution o( a securit" in the circumstances re(erred to in su/section ?%@. o <nder*riter e.e#ption

Because the under$riter o(ten $ill /u" the securities /e(ore the prospectus is even issued '(ten this is vie$ed as more o( a limitation than an exemption since the under$riter got the securities under an exemption
and there is no su/se;uent rule cleansing them to allo$ (or their resale then the" must /e sold under a prospectus so goes the thin7ing o( the )ommissions +. ?%@ - 3he dealer registration re;uirement does not appl" in respect o( a trade in a securit" /et$een a person and a purchaser acting as an under$riter or /et$een or among persons acting as under$riters. ?.@ 3he prospectus re;uirement does not appl" to a distri/ution o( a securit" in the circumstances re(erred to in su/section ?%@. Rights &))erings

S.+.1617 2 3he dealer registration re;uirement does not appl" in respect o( a trade /" an issuer in a right granted /" the issuer
to purchase a securit" o( its o$n issue to a securit" holder o( the issuer i( o ?a@ the issuer has given the regulator or= in BuR/ec= the securities regulator" authorit"= prior $ritten notice stating the date= amount= nature and conditions o( the trade= including the approximate net proceeds to /e derived /" the issuer on the /asis o( the additional securities /eing (ull" ta7en up= o ?/@ except in British )olum/ia= the regulator or= in BuR/ec= the securities regulator" authorit"= has not o/5ected in $riting to the trade $ithin %! da"s o( receipt o( the notice re(erred to in paragraph ?a@ or= i( the regulator or securities regulator" authorit" o/5ects to the trade= the issuer has delivered to the regulator or securities regulator" authorit" in(ormation relating to the securities that is satis(actor" to and accepted /" the regulator or securities regulator" authorit"= and o ?c@ the issuer has complied $ith the applica/le re;uirements o( 1ational Instrument 02%!% .i!hts / erin!s. ?.@ 3he prospectus re;uirement does not appl" to a distri/ution o( a securit" in the circumstances re(erred to in su/section ?%@. "081!14Rights &))erings - sa"s that i( "ou $ant to do a rights o((ering "ou have to do stripped do$n disclosure o $ill o/5ect to the rights o((ering i( "ou increase the pool o( common shares too much o 4ill o/5ect i( it /ene(its one large shareholder too much E.g. i( one shareholder o$ns 3!L o( the compan" and "ou o((er rights at DDL o( current mar7et price in an attempt to increase the pu/lic (loat /" .!L $ith a residual right to the ma5or shareholder to pic72up the rest #nli7el" that man" $ill su/scri/e to the rights o((ering so li7el" that the ma5or shareholder could end up $ith a ma5orit" o( the compan" o Is a 1'21' in the e"es o( regulators ,on/ersions4Purchases

Aor example $hen "ou are granted an option that onl" means that later on "ou get the JoptionK to /u" a securit" ho$ do
"ou convert it /ecause that is a trade in a securit" o +."+ 617 3he dealer registration re;uirement does not appl" in respect o( a trade /" an issuer i( ?a@ the issuer trades a securit" o( its o$n issue to a securit" holder o( the issuer in accordance $ith the terms and conditions o( a securit" previousl" issued /" that issuer= or?/@ su/5ect to su/section ?.@= the issuer trades a %

securit" o( a reporting issuer held /" it to a securit" holder o( the issuer in accordance $ith the terms and conditions o( a securit" previousl" issued /" that issuer. ?.@ Aor a trade under su/section ?%@?/@= ?a@ the issuer must give the regulator or= in BuR/ec= the securities regulator" authorit"= prior $ritten notice stating the date= amount= nature and conditions o( the trade= and ?/@ except in British )olum/ia= the regulator or= in BuR/ec the securities regulator" authorit"= must not o/5ect in $riting to the trade $ithin %! da"s o( receipt o( the notice re(erred to in paragraph ?a@ or= i( the regulator or securities regulator" authorit" o/5ects to the trade= the issuer must deliver to the regulator or securities regulator" authorit" in(ormation relating to the securities that is satis(actor" to and accepted /" the regulator or securities regulator" authorit". ?3@ 3he prospectus re;uirement does not appl" to a distri/ution o( a securit" in the circumstances re(erred to in su/section ?%@.

DR'PS ( Di/idend Rein/est#ent Plans

+.+ 617 Su/5ect to su/sections ?3@ and ?0@= the dealer registration re;uirement does not appl" in respect o( the (ollo$ing trades
/" an issuer= or /" a trustee= custodian or administrator acting (or or on /ehal( o( the issuer= to a securit" holder o( the issuer i( the trades are permitted /" a plan o( the issuerG o ?a@ a trade in a securit" o( the issuer8s o$n issue i( dividends or distri/utions out o( earnings= surplus= capital or other sources pa"a/le in respect o( the issuer8s securities are applied to the purchase o( the securit" that is o( the same class or series as the securities to $hich the dividends or distri/utions out o( earnings= surplus= capital or other sources is attri/uta/le= and o ?/@ su/5ect to su/section ?.@= a trade in a securit" o( the issuer8s o$n issue i( the securit" holder ma7es optional cash pa"ments to purchase the securit" o( the issuer that is o( the same class or series o( securities descri/ed in paragraph ?a@ that trade on a mar7etplace. ?.@ 3he aggregate num/er o( securities issued under the optional cash pa"ment re(erred to in su/section ?%@?/@ must not exceed= in an" (inancial "ear o( the issuer during $hich the trade ta7es place= .L o( the issued and outstanding securities o( the class to $hich the plan relates as at the /eginning o( the (inancial "ear. ?3@ A plan that permits the trades descri/ed in su/section ?%@ must /e availa/le to ever" securit" holder in )anada to $hich the dividend or distri/ution is availa/le. ? @ Su/5ect to su/sections ?3@ and ?0@= the prospectus re;uirement does not appl" to a distri/ution o( a securit" in the circumstances re(erred to in su/section ?%@. ?0@ 3his section does not appl" to a trade in a securit" o( an investment (und.

&eporting
o o 'S) sa"s that some exempt transactions have to /e reported 3his is (ound in part 6 o( rule 02%!6 Some accredited investor transactions Isolated transactions ?..3!@ Minimum purchase transactions ?..%!@ 'S) simpl" $ants to 7no$ $ho /ought= ho$ much the" /ought= $hat price the" paid and $hat exemption the" purchased under

&))ering Me#orandu# <ind o( a strange topic does not reall" line up all that $ell under securities la$ +ro/lem is that onl" one exemption deals $ith o((ering memorandum onl" need to have an o((ering memorandum (or one
exemption o :overnment incentive securities the oil and gas exemption in 'ntario Because 'ntario did not li7e the loosened (amilies exemption Eligi/le investor is de(ined in rule "081!3 o ?a@ a person $hose ?i@ net assets= alone or $ith a spouse= in the case o( an individual= exceed H !! !!!= ?ii@ net income /e(ore taxes exceeded H70 !!! in each o( the . most recent calendar "ears and $ho reasona/l" expects to exceed that income level in the current calendar "ear= or ?iii@ net income /e(ore taxes= alone or $ith a spouse= in the case o( an individual= exceeded H%.0 !!! in each o( the . most recent calendar "ears and $ho reasona/l" expects to exceed that income level in the current calendar "ear= .

?/@ a person o( $hich a ma5orit" o( the voting securities are /ene(iciall" o$ned /" eligi/le investors or a ma5orit" o( the directors are eligi/le investors= o ?c@ a general partnership o( $hich all o( the partners are eligi/le investors= o ?d@ a limited partnership o( $hich the ma5orit" o( the general partners are eligi/le investors= o ?e@ a trust or estate in $hich all o( the /ene(iciaries or a ma5orit" o( the trustees or executors are eligi/le investors o ?(@ an accredited investor= o ?g@ a person descri/ed in section ..0 TFamily, riends and "usiness associatesU= or o ?h@ a person that has o/tained advice regarding the suita/ilit" o( the investment and= i( the person is resident in a 5urisdiction o( )anada= that advice has /een o/tained (rom an eligi/ilit" adviserF In provinces other than 'ntario "ou can sell to an eligi/le investor in amounts o( over H%!=!!! $ithout a prospectus o 'ntario did not li7e this $h" then have the prospectus re;uirements in the (irst place Part 3 o) Rule "080!1 o 6.. 2 &ight o( action (or damages and right o( rescission - ?%@ 3he rights re(erred to in section %3!.% o( the Act appl" in respect o( an o((ering memorandum delivered to a prospective purchaser. ?.@ ,espite su/section ?%@= the rights re(erred to in section %3!.% o( the Act do not appl" in respect o( an o((ering memorandum delivered to a prospective purchaser in connection $ith a distri/ution made in reliance on the exemption (rom the prospectus re;uirement in section ..3 o( 1I 02%!6 TAccredited in(estorU i( the prospective purchaser is ?a@ a )anadian (inancial institution or a Schedule III /an7= ?/@ the Business ,evelopment Ban7 o( )anada incorporated under the Business *e(elopment Bank o Canada Act ?)anada@= or ?c@ a su/sidiar" o( an" person re(erred to in paragraphs ?a@ and ?/@= i( the person o$ns all o( the voting securities o( the su/sidiar"= except the voting securities re;uired /" la$ to /e o$ned /" directors o( that su/sidiar". o 6.3 ,escription o( rights in o((ering memorandum 2 I( a selling securit" holder delivers an o((ering memorandum to a prospective purchaser in connection $ith a distri/ution to $hich the rights re(erred to in section %3!.% o( the Act appl"= the rights must /e descri/ed in the o((ering memorandum. o 6. 2 ,eliver" o( o((ering memorandum - I( an o((ering memorandum is provided to a prospective purchaser= the seller must deliver to the )ommission a cop" o( the o((ering memorandum or an" amendment to a previousl" delivered o((ering memorandum $ithin %! da"s o( the date o( the distri/ution. '((ering memorandum applies to private issuers= accredited investors= (ounders= control persons= min purchasers= and government incentive securities &ules appl"ing to an 'M must /e delivered to a prospective purchaser o ,oes not sa" that "ou need to deliver o 3he section also does not de(ine an o((ering memorandum )+ to the &ule sa"s that "ou need to loo7 at &ule % 20!% $hich is the catch2all (or de(initions o( terms that are not de(ined else$here o '((ering Memorandum +urports to descri/e the /usiness +repared (or deliver" to investors 1ot current in(ormation o I( "ou deliver an 'M "ou are into the s.%3!.% civil lia/ilit" provisions 3he onl" time that "ou have to use the 'M provisions is $hen "ou do a government incentive securities o((ering 'ther$ise $h" $ould "ou ever $ant to use one /ecause o( the potential (or lia/ilit" +ro/a/l" not going to use one unless "ou have to I( "ou can use alread" availa/le in(ormation instead then "ou $ill /ecause i( "ou are going to (ace lia/ilit" "ou are going to /e much more diligent a/out the in(ormation "ou put out there and ho$ "ou go a/out putting it together I( it is possi/le to put together a pac7age o( alread" availa/le in(ormation instead o( preparing something speci(icall" (or investors then "ou $ill do it o #sing things such as continuous disclosure= AIA )an loo7 to the )+ (or guidance on $hat t"pes o( in(ormation $ould and $ould not /e prepared (or investors 'S) sa"s that generall" in(ormation that is prepared in contemplation o( soliciting investment S.0.%?.@ o( 020!%?)+@ on p.%336 I( "ou are using one o( the exemptions and "ou use an 'M then "ou $ill sort o( (all into civil lia/ilit" except government incentive securities $here "ou have to use the 'M o

 S.1 !.1617 2 4here an o((ering memorandum contains a misrepresentation= a purchaser $ho purchases a securit" o((ered /"
the o((ering memorandum during the period o( distri/ution has= $ithout regard to $hether the purchaser relied on the misrepresentation= the (ollo$ing rightsG o %. 3he purchaser has a right o( action (or damages against the issuer and a selling securit" holder on $hose /ehal( the distri/ution is made. o .. I( the purchaser purchased the securit" (rom a person or compan" re(erred to in paragraph %= the purchaser ma" elect to exercise a right o( rescission against the person or compan". I( the purchaser exercises this right= the purchaser ceases to have a right o( action (or damages against the person or compan". .!! = c. 3%= Sched. 3 = s. 7. o ?.@ 2 1o person or compan" is lia/le under su/section ?%@ i( he= she or it proves that the purchaser purchased the securities $ith 7no$ledge o( the misrepresentation o ?3@ 2 In an action (or damages pursuant to su/section ?%@= the de(endant is not lia/le (or all or an" portion o( the damages that the de(endant proves do not represent the depreciation in value o( the securit" as a result o( the misrepresentation relied upon o ? @ 2 Su/5ect to su/section ?0@= all or an" one or more o( the persons or companies speci(ied in su/section ?%@ are 5ointl" and severall" lia/le= and ever" person or compan" $ho /ecomes lia/le to ma7e an" pa"ment under this section ma" recover a contri/ution (rom an" person or compan" $ho= i( sued separatel"= $ould have /een lia/le to ma7e the same pa"ment= unless the court rules that= in all the circumstances o( the case= to permit recover" o( the contri/ution $ould not /e 5ust and e;uita/le o ?0@ 2 ,espite su/section ? @= an issuer shall not /e lia/le $here it is not receiving an" proceeds (rom the distri/ution o( the securities /eing distri/uted and the misrepresentation $as not /ased on in(ormation provided /" the issuer= unless the misrepresentation= ?a@ $as /ased on in(ormation that $as previousl" pu/licl" disclosed /" the issuerF ?/@ $as a misrepresentation at the time o( its previous pu/lic disclosureF and ?c@ $as not su/se;uentl" pu/licl" corrected or superseded /" the issuer prior to the completion o( the distri/ution o( the securities /eing distri/uted o ?6@ 2 In no case shall the amount recovera/le under this section exceed the price at $hich the securities $ere o((ered o ?7@ 2 3he right o( action (or rescission or damages con(erred /" this section is in addition to and $ithout derogation (rom an" other right the purchaser ma" have at la$ o ?8@ 2 3his section applies onl" $ith respect to an o((ering memorandum $hich has /een (urnished to a prospective purchaser in connection $ith a distri/ution o( a securit" under an exemption (rom section 03 o( the Act that is speci(ied in the regulations (or the purposes o( this section &emem/er the de(inition o( misrepresentation in the 'SA An under$riter $ho /u"s the securities (or resale is not lia/le (or a misrepresentation under this section o Had the legislature intended this to /e the case the" $ould have mentioned this - note 027!0 3he selling shareholder E control /loc7 holder 'n the civil lia/ilit" (ront the 'M is held to a similar standard as the prospectus o But it is not revie$ed as a prospectus is there seems to /e a /it heavier /urden on the issuer in this circumstance I( "ou choose to use an 'M the 'S) (ro$ns on using an preliminar" 'M and then a (inal 'M unless the preliminar" 'M also includes mention o( the civil lia/lilti" provisions o( s.%3!.% o Rule "080!16,P7 s.0.3 617 3he )ommission cautions against the practice o( providing preliminar" o((ering material to a prospective purchaser /e(ore (urnishing a J(inalK o((ering memorandum unless the o((ering material contains a description o( the rights re(erred to in section %3!.% o( the Act in situations $hen the rights appl". o ?.@ 3he onl" material delivered to a prospective purchaser in connection $ith a distri/ution made in reliance on an exemption re(erred to in section 6.% o( the &ule should /eG ?a@ a Jterm sheetK ?representing a s7eletal outline o( the (eatures o( a distri/ution $ithout dealing extensivel" $ith the /usiness and a((airs o( the issuer o( the securities /eing distri/uted@= and ?/@ an o((ering memorandum descri/ing the rights re(erred to in section %3!.% o( the Act availa/le to purchasers and compl"ing in all other respects $ith 'ntario securities legislation. 3he s"stem (or an 'M is much /etter than it used to /e o #sed to /e that the exemptions $ere onl" availa/le i( "ou descri/ed the civil lia/ilities etc. or else investors could $al7 a$a" (rom the deal at an" time at all no$ there are limits to this a/ilti" Oones case in the /oo7 In this area $e are normall" tal7ing a/out people $ho are not /ig enough to go pu/lic $ith an I+' /ut $ho are too /ig to go to (riends etc (or mone" the" are loo7ing (or venture capital etc. I( "ou use an 'M "ou need prospectus t"pe disclosure /ut $h" not do a prospectus o Because ma" not /e /ig enough to go pu/lic o ,on8t have all o( the prospectus rules

o o

Ma" not have all o( the same t"pes o( under$riting (ees ,on8t have directors and o((icers lia/ilit"

Resale Restrictions &eall" $hat these are is the 'S) sa"ing that J$e gave "ou the a/ilit" to do exempt distri/utions in order to get the securities
out there in the (irst place /ecause o( $ho "ou $ere e.g. a /an7= pension (und etc. o +ro/lem arises $hen these people tr" to sell 3his is not a distri/ution $ithout resale rules there $ould /e no restrictions on these Essentiall" the restriction is that once "ou receive securities through a distri/ution the onl" $a" that "ou are going to /e allo$ed to ta7e them and move them is $hen there is good in(ormation out in the mar7et 3his usuall" happens a(ter a prospectus has /een (iled and the compan" has /ecome a reporting issuer Rule "081!+ ( Resale Policy ?page %%D%@ o S.+.+ the rules (or 'ntario that are listed in Appendix ) do not appl" ?these are rules 7.? @=?0@=?6@= and ?7@ o( the 'SA 3hese $ere the old provisions under the 'SA o I( "ou /reach the resale rules then "ou are doing a distri/ution o( securities and all o( the restrictions that appl" to distri/utions $ill appl" 3here are three t"pes o( distri/utions 1e$l" issued securities Sales (rom a control /loc7 &esale o( exempt securities o 3here are t$o sections o( 1I 02%!. that deal $ith resale restrictions s...0 and ..6 o S...0 is the more restrictive o( the t$o since there is a minimum hold period on the securities o +. Section +.0 :pplies 2 I( a securit" $as distri/uted under an" o( the provisions listed in Appendix ,= the (irst trade o( that securit" is su/5ect to section ..0. )lauses 7.?%@?a@= ?/@= ?c@= ?d@= ?l@= ?m@= ?p@ and ?;@ o( the &ecurities Act ?'ntario@ and su/clause 7.?%@?(@?iii@ o( the &ecurities Act ?'ntario@ i( the right to purchase= convert or exchange $as previousl" ac;uired under one o( the a/ove2listed exemptions under the &ecurities Act ?'ntario@= or an exemption (rom the prospectus re;uirement that speci(ies that the (irst trade is su/5ect to section ..0 o( MI 02%!. 3hese are the exemptions that could sort o( /e used (or /ac72door under$riting )ould /lo$ securities out the /ac7 door in large /loc7 to large investors= get them to the mar7et through exemptions and $ithout the resale restrictions could amount to under$riting $ithout limitations It is possi/le to sell $ithin the (our month period /" using another exemption o +." Section +.3 :pplies 2 I( a securit" $as distri/uted under an" o( the provisions listed in Appendix E= the (irst trade o( that securit" is su/5ect to section ..6. )lauses 7.?%@?(@= ?i@ i( not included in Appendix A= ?5@= ?7@ and ?n@ o( the &ecurities Act ?'ntario@= except (or a trade made under 7.?%@?(@?iii@ o( the &ecurities Act ?'ntario@ that isG ?i@ included in Appendix , or A o( this InstrumentF or ?ii@ contemplated /" section 6.0 o( 'ntario Securities )ommission &ule 020!% -,empt *istri"utions and sections ..%= ...= ..3 and .. o( MI 02%!0 or an exemption (rom the prospectus re;uirement that speci(ies that the (irst trade is su/5ect to section ..6 o( MI 02%!. o S.+.0 o) 9' "081!+ %@ #nless the conditions in su/section ?.@ are satis(ied= a trade that is speci(ied /" section ..3 or other securities legislation to /e su/5ect to this section is a distri/ution. ?.@ Su/5ect to su/section ?3@= (or the purposes o( su/section ?%@ the conditions areG %. 3he issuer is and has /een a reporting issuer in a 5urisdiction o( )anada (or the (our months immediatel" preceding the trade. .. At least (our months have elapsed (rom the distri/ution date. 3. I( the distri/ution date is on or a(ter March 3!= .!! and o ?a@ the issuer is a reporting issuer on the distri/ution date= the certi(icate representing the securit" carries a legend= or an o$nership statement issued under a direct registration s"stem or other electronic /oo72entr" s"stem accepta/le to the regulator /ears a legend restriction notation= statingG 0

P#nless permitted under securities legislation= the holder o( this securit" must not trade the securit" /e(ore Tinsert the date that is 4 months and a day a ter the distri"ution dateU.P 'r o ?/@ the issuer is not a reporting issuer on the distri/ution date= the certi(icate representing the securit" carries a legend= or an o$nership statement issued under a direct registration s"stem or other electronic /oo72entr" s"stem accepta/le to the regulator /ears a legend restriction notation= statingG P#nless permitted under securities legislation= the holder o( this securit" must not trade the securit" /e(ore the date that is months and a da" a(ter the later o( ?i@ Tinsert the distri"ution dateU= and ?ii@ the date the issuer /ecame a reporting issuer in an" province or territor".P . 3he trade is not a control distri/ution. 0. 1o unusual e((ort is made to prepare the mar7et or to create a demand (or the securit" that is the su/5ect o( the trade. 6. 1o extraordinar" commission or consideration is paid to a person or compan" in respect o( the trade. 7. I( the selling securit" holder is an insider or o((icer o( the issuer= the selling securit" holder has no reasona/le grounds to /elieve that the issuer is in de(ault o( securities legislation. ?3@ Item 3.?a@ o( su/section ?.@ does not appl" to a trade o( an underl"ing securit" i( the certi(icate representing the underl"ing securit" or the o$nership statement issued under a direct registration /oo72entr" s"stem or other electronic s"stem accepta/le to the regulator= is issued at least (our months a(ter the distri/ution date o S.+.3 o) 9' "081!+ ?%@ #nless the conditions in su/section ?3@ are satis(ied= a trade that is speci(ied /" section .. or other securities legislation to /e su/5ect to this section is a distri/ution. ?.@ 3he (irst trade o( securities issued /" a private compan" or private issuer made a(ter the issuer has ceased to /e a private compan" or private issuer is a distri/ution unless the conditions in su/section ?3@ are satis(ied. ?3@ Aor the purposes o( su/sections ?%@ and ?.@= the conditions areG %. 3he issuer is and has /een a reporting issuer in a 5urisdiction o( )anada (or the (our months immediatel" preceding the trade. .. 3he trade is not a control distri/ution. 3. 1o unusual e((ort is made to prepare the mar7et or to create a demand (or the securit" that is the su/5ect o( the trade. . 1o extraordinar" commission or consideration is paid to a person or compan" in respect o( the trade. 0. I( the selling securit" holder is an insider or o((icer o( the issuer= the selling securit" holder has no reasona/le grounds to /elieve that the issuer is in de(ault o( securities legislation. Because o( the need (or the issuer to /ecome a reporting issuer /e(ore the investor can sell the securities $e see the inclusion in contracts o( clauses that allo$ investors to (orce companies to go to the mar7et to /ecome reporting issuers $ithout such clauses it is practicall" impossi/le (or such investors to sell their securities unless the" use one o( the exemptions 4hat happens i( an investor ac;uires exempt securities under one o( the exemptions to $hich the (our month hold period applies under s...0 and then moves them to another investor using another exemption $ithin that (our month period does a ne$ (our month period /egin or does the original one continue 3he original one continues the polic" reason is to de(eat /ac72door under$riting and to continue to tac7 on periods does not (urther this goal in an" $a" S.%.8 o( 02%!.)+ ?p. %.% @ "#a)ple o ,o a private placement o( converti/le de/entures and on da" D! the investor converts into shares 3here is a hold period on the converti/le de/entures does the period o( the hold continue or does it restart (rom the date o( the conversion Same as a/ove it runs straight through (or the same reason S.+.1! 2 Exemption (or a 3rade in an #nderl"ing Securit" i( the )onverti/le Securit"= Exchangea/le Securit" or Multiple )onverti/le Securit" is Buali(ied /" a +rospectus 2 Section +.3 does not appl" to a trade in an underl"ing securit" issued or trans(erred under the terms o( a converti/le securit"= exchangea/le securit" or multiple converti/le securit" i( o ?a@ a receipt $as o/tained (or a prospectus ;uali("ing the distri/ution o( the converti/le securit"= exchangea/le securit" or multiple converti/le securit"F o ?/@ the trade is not a control distri/utionF and o ?c@ the issuer o( the underl"ing securit" is a reporting issuer at the time o( the trade. 6

 #nder the resale polic" $hat "ou are tr"ing to do is to sa" that the resale o( securities is not a distri/ution unless "ou cleanse
the securities in some $a" o 3he general $a" to cleanse the securities - and there(ore to ma7e it so that the resale is not a distri/ution - is (or the issuer to /ecome a reporting issuer 4ith an 'M the 7e" ;uestion is $hat are "ou tr"ing to accomplish that $ill drive "our ans$er o( $hether or not "ou need an 'M or not

,ontrol Distributions 3his is the third t"pe o( distri/ution 3he sale o( securities (rom a control /loc7 is a distri/ution
o Example $as B)E8s a/orted sale o( a portion o( 3elesat $ent to mar7et to gauge support /ut pulled the deal and $ent private instead 3his t"pe o( deal is called a secondar" o((ering Another $a" to do a control distri/ution is through a private placement 3o an accredited investor A third $a" is to use s.".1 o) rule "081!3 ?3@ 2 3he prospectus re;uirement does not appl" to a control /loc7 distri/ution /" an eligi/le institutional investor o( a reporting issuer8s securities i( ?a@ the eligi/le institutional investor o ?i@ has (iled the reports re;uired under the earl" $arning re;uirements or (iles the reports re;uired under +art o( 1I 6.2%!3= o ?ii@ does not have 7no$ledge o( an" material (act or material change $ith respect to the reporting issuer that has not /een generall" disclosed= o ?iii@ does not receive in the ordinar" course o( its /usiness and investment activities 7no$ledge o( an" material (act or material change $ith respect to the reporting issuer that has not /een generall" disclosed= and o ?iv@ either alone or together $ith an" 5oint actors= does not possess e((ective control o( the reporting issuer= ?/@ there are no directors or o((icers o( the reporting issuer $ho $ere= or could reasona/l" /e seen to have /een= selected= nominated or designated /" the eligi/le institutional investor or an" 5oint actor= ?c@ the control /loc7 distri/ution is made in the ordinar" course o( /usiness or investment activit" o( the eligi/le institutional investor= ?d@ securities legislation $ould not re;uire the securities to /e held (or a speci(ied period o( time i( the trade $as not a control /loc7 distri/ution= ?e@ no unusual e((ort is made to prepare the mar7et or to create a demand (or the securities= and ?(@ no extraordinar" commission or consideration is paid in respect o( the control /loc7 distri/ution ? @ 2 An eligi/le institutional investor that ma7es a distri/ution in reliance on su/section ?3@ must (ile a letter $ithin %! da"s a(ter the distri/ution that descri/es the date and si9e o( the distri/ution= the mar7et on $hich it $as made and the price at $hich the securities /eing distri/uted $ere sold A (ourth $a" is (or them to use s.+.8 o) rule "081!+ ?%@ 3he prospectus re;uirement does not appl" to a control distri/ution= or a distri/ution /" a lender= pledgee= mortgagee or other encum/rancer (or the purpose o( li;uidating a de/t made in good (aith /" selling or o((ering (or sale a securit" pledged= mortgaged or other$ise encum/ered in good (aith as collateral (or the de/t i( the securit" $as ac;uired /" the lender= pledgee= mortgagee or other encum/rancer in a control distri/ution= i( the conditions in su/section ?.@ are satis(ied. ?.@ Aor the purposes o( su/section ?%@= the conditions areG %. 3he issuer is and has /een a reporting issuer in a 5urisdiction o( )anada (or the (our months immediatel" preceding the trade. .. 3he selling securit" holder= or the lender= pledgee= mortgagee or other encum/rancer i( the distri/ution is (or the purpose o( li;uidating a de/t= has held the securities (or at least (our months. 3. 1o unusual e((ort is made to prepare the mar7et or to create a demand (or the securit" that is the su/5ect o( the trade. . 1o extraordinar" commission or consideration is paid to a person or compan" in respect o( the trade. 0. 3he selling securit" holder has no reasona/le grounds to /elieve that the issuer is in de(ault o( securities legislation. 7

o o

?3@ 3he selling securit" holder= or the lender= pledgee= mortgagee or other encum/rancer i( the distri/ution is (or the purpose o( li;uidating a de/t= under su/section ?.@ must ?a@ sign Aorm 02%!.A% no earlier than one /usiness da" /e(ore the (orm is (iledF ?/@ (ile Aorm 02%!.A% on SE,A& at least seven da"s /e(ore the (irst trade o( the securities that is part o( the distri/utionF and ?c@ (ile= $ithin three da"s a(ter the completion o( an" trade= an insider report prepared in accordance $ith either Aorm 002%!.A. or Aorm 002%!.A6 under 1ational Instrument 002%!. &ystem or -lectronic *isclosure "y Insiders 0&-*I1' ? @ A Aorm 02%!.A% (iled under su/section ?3@ expires thirt" da"s (rom the date the (orm $as (iled. ?0@ I( a person or compan" (iled a Aorm 02%!.A3 or a rene$al Aorm 02%!.A3 under (ormer MI 02%!. /e(ore March 3!= .!! = the person or compan" is not su/5ect to su/section ?3@ until 3! da"s a(ter the date the Aorm 02 %!.A3 or the rene$al Aorm 02%!.A3 $as (iled. 4h" do $e have this exemption to allo$ some (lexi/ilit" to control persons throughout the process $e put restrictions on their a/ilit" to go to mar7et and there should /e some a/ilit" (or them to access the mar7ets $hen the" need this is a recognition o( that need )ontrolling shareholders usuall" use this exemption $hen the" have a need (or li;uidit" at some point

,ontinuous disclosure obligations

3hese are o/ligations on the reporting issuer once the" are alread" active in the mar7et 4e demand good disclosure (rom companies prior to allo$ing them to issue their securities to the mar7et /ut once securities
are on the mar7et the sale o( those securities are no longer distri/utions

)ontinuous disclosure puts o/ligations on companies to maintain disclosure to 7eep the mar7et in(ormed a/out developments
in the operation o( the compan" so that the mar7et is in(ormed and so that the price o( the securities can re(lect this in(ormation 4ho do these o/ligations appl" to reporting issuers 4hat is a reporting issuer is de(ined in the 'SA o ?a@ that has issued voting securities on or a(ter the %st da" o( Ma"= %D67 in respect o( $hich a prospectus $as (iled and a receipt there(or o/tained under a predecessor o( this Act or in respect o( $hich a securities exchange ta7e2over /id circular $as (iled under a predecessor o( this Act= o ?/@ that has (iled a prospectus and (or $hich the ,irector has issued a receipt under this Act= o ?/.%@ that has (iled a securities exchange ta7e2over /id circular under this Act /e(ore ,ecem/er % = %DDD= o ?c@ an" o( $hose securities have /een at an" time since the %0th da" o( Septem/er= %D7D listed and posted (or trading on an" stoc7 exchange in 'ntario recogni9ed /" the )ommission= regardless o( $hen such listing and posting (or trading commenced= o ?d@ to $hich the Business Corporations Act applies and $hich= (or the purposes o( that Act= is o((ering its securities to the pu/lic= o ?e@ that is the compan" $hose existence continues (ollo$ing the exchange o( securities o( a compan" /" or (or the account o( such compan" $ith another compan" or the holders o( the securities o( that other compan" in connection $ith= ?i@ a statutor" amalgamation or arrangement= or ?ii@ a statutor" procedure under $hich one compan" ta7es title to the assets o( the other compan" that in turn loses its existence /" operation o( la$= or under $hich the existing companies merge into a ne$ compan"= or o ?(@ that is designated as a reporting issuer in an order made under su/section % ?%%@F 4h" $ould "ou ever have a compan" that onl" (iled a prospectus and o/tained a receipt o &emem/er the need (or resale restrictions need compan" to /e a reporting issuer I( not a reporting issuer investors cannot sell securities Also i( the compan" is o( a su/stantial si9e the" ma" $ant to have set themselves up so that at some later point it time the" are in a position to do a +'+ or shel( o((ering 4hat are the o/ligations under the continuous disclosure rules o )ontinuous (inancial statement disclosure Rule 0181!+ s.".1 ( "." ".1617 8 Su/5ect to su/section .8?6@= a reporting issuer must (ile annual (inancial statements that include ?a@ an income statement= a statement o( retained earnings= and a cash (lo$ statement (or o ?i@ the most recentl" completed (inancial "earF and o ?ii@ the (inancial "ear immediatel" preceding the most recentl" completed (inancial "ear= i( an"F ?/@ a /alance sheet as at the end o( each o( the periods re(erred to in paragraph ?a@F and ?c@ notes to the (inancial statements ?.@ annual (inancial statements must /e audited ".+ - the audited (inancial statements re;uired to /e (iled under .% must /e (iled ?a@ in the case o( a reporting issuer other than a venture issuer= on or /e(ore the earlier o( o ?i@ the D!th da" a(ter the end o( its most recentl" completed (inancial "earF and o ?ii@ the date o( (iling= in a (oreign 5urisdiction= annual (inancial statements (or its most recentl" completed (inancial "earF or ?/@ in the case o( a venture issuer= on or /e(ore the earlier o( o ?i@ the %.!th da" a(ter the end o( its most recentl" completed (inancial "earF and o ?ii@ the date o( (iling= in a (oreign 5urisdiction= annual (inancial statements (or its most recentl" completed (inancial "ear. ". 6+7 2 Su/5ect to su/sections .7? @= .8?7@ and= .8?8@= and .%!?3@= the interim (inancial statements re;uired to /e (iled under su/section ?%@ must include ?a@ a /alance sheet as at the end o( the interim period and a /alance sheet as at the end o( the immediatel" preceding (inancial "ear= i( an"F D

?/@ an income statement= a statement o( retained earnings and a cash (lo$ statement= all (or the "ear2to2 date interim period= and comparative (inancial in(ormation (or the corresponding interim period in the immediatel" preceding (inancial "ear= i( an"F ?c@ (or interim periods other than the (irst interim period in a reporting issuer8s (inancial "ear= an income statement and cash (lo$ statement (or the three month period ending on the last da" o( the interim period and comparative (inancial in(ormation (or the corresponding period in the preceding (inancial "ear= i( an"F and ?d@ notes to the (inancial statements. ". 6 7 2 ?a@ I( an auditor has not per(ormed a revie$ o( the interim (inancial statements re;uired to /e (iled under su/section ?%@= the interim (inancial statements must /e accompanied /" a notice indicating that the (inancial statements have not /een revie$ed /" an auditor. ?/@ I( a reporting issuer engaged an auditor to per(orm a revie$ o( the interim (inancial statements re;uired to /e (iled under su/section ?%@ and the auditor $as una/le to complete the revie$= the interim (inancial statements must /e accompanied /" a notice indicating that the auditor $as una/le to complete a revie$ o( the interim (inancial statements and the reasons $h" the auditor $as una/le to complete the revie$. ?c@ I( an auditor has per(ormed a revie$ o( the interim (inancial statements re;uired to /e (iled under su/section ?%@ and the auditor has expressed a reservation in the auditor8s interim revie$ report= the interim (inancial statements must /e accompanied /" a $ritten revie$ report (rom the auditor. "." 2 3he interim (inancial statements re;uired to /e (iled under su/section .3?%@ must /e (iled ?a@ in the case o( a reporting issuer other than a venture issuer= on or /e(ore the earlier o( o ?i@ the 0th da" a(ter the end o( the interim periodF and o ?ii@ the date o( (iling= in a (oreign 5urisdiction= interim (inancial statements (or a period ending on the last da" o( the interim periodF or ?/@ in the case o( a venture issuer= on or /e(ore the earlier o( o ?i@ the 6!th da" a(ter the end o( the interim periodF and o ?ii@ the date o( (iling= in a (oreign 5urisdiction= interim (inancial statements (or a period ending on the last da" o( the interim period. 3here must also /e Management ,iscussion and Anal"sis o( the (inancial results o Part 0 o) Rule 0181!+ o 1eed (or /oth interim and annual (inancial statements o 3his is needed /ecause the (inancial statements are onl" static and the M,WA is necessar" to provide some sort o( contextual anal"sis to the /usiness - provide some loo7 at ho$ the /usiness is doing and anal"9e the num/ers (or investors 'ne /ig issue recentl" has /een a tendenc" (or auditors to /e o((ering numerous services to companies and some /lurring o( traditional /oundaries /et$een auditors and management Have come up $ith ne$ policies to tr" to avert Enron*4orld)om t"pe scenarios &ule 0%2%%! dealing $ith audit committees o 1eed an audit committee comprised o( independent directors etc o Must have at least three directors= must /e independent o Each mem/er o( the committee must /e (inanciall" literate amount o( (inancial 7no$ledge $ill depend upon the compan" the more complex the (inancial statements the greater the amount o( 7no$ledge the director $ill need to have o )ommittee is expected to revie$ and approve (inancial statements and recommend annual report to the Board the" can accept interim on /ehal( o( the /oard /ut onl" recommend the annual to the /oard o )ommittee manages the relationship /et$een the management and the auditors to avoid Enron and 4orld)om t"pe scenarios o 3he committee pre2approves and recommends to the /oard the compensation o( he auditors o 3he committee pre2approves an" contract to the auditors (or non2audit services Rule 01811! $as a response to Enron et al and an attempt to protect investors etc But $hat happens $hen management does not give the auditors the proper in(ormation /ecause a(ter all the auditors are limited to anal"9ing the in(ormation that the" have availa/le /e(ore them Mou $ant the )E' and )A' to certi(" the in(ormation so that the" are lia/le (or it Rule 0+81!$ o &e;uires them to issue a certi(icate in respect o( each ;uarterl" and annual (inancial statement that states that the in(ormation is to the /est o( their 7no$ledge correct 3he" are not certi("ing that the statements are correct 5ust that to the /est o( their 7no$ledge the in(ormation is correct the" do not 7no$ the" are $rong 0!

But in the )+ it sa"s that a $rong certi(ication could lead to penalties including criminal charges 3his is $hat has people scared 'nce an issuer /ecomes a reporting issuer it then has ongoing disclosure o/ligations i( it $ishes to have its securities continue to trade on the mar7ets

Periodic ,ontinuous Disclosure 3he Bac7/one o( +eriodic )ontinuous ,isclosureG

o o o o 9ational 'nstru#ent 0181!+ Annual Ainancial Statements Buarterl" Ainancial Statements M,WA Management ,iscussion and Anal"sis 9' 0181!+%1 page 10 Aorm % 'ther (orms o( +eriodic )ontinuous ,isclosure AIA Annual In(ormation Aorm 9' 0181!+%+ page 10"8 Aorm . &etelling o( the /usiness stor" o( the compan" &e;uired under +art 0 o( 0%2%!. on Aorm A. ?page 100+@ 3he Aorm states $hat is re;uired ?incl. changes= ris7s= capital structure@ +rox" )ircular ,isclosure 9' 0181!+ ( Part $ page 10!1 ?%@ I( management o( a reporting issuer gives notice o( a meeting to its registered holders o( voting securities= management must= at the same time as or /e(ore giving that notice= send to each registered holder o( voting securities $ho is entitled to notice o( the meeting a (orm o( prox" (or use at the meeting. ?.@ Su/5ect to section D..= a person or compan" that solicits proxies (rom registered holders o( voting securities o( a reporting issuer must= o ?a@ in the case o( a solicitation /" or on /ehal( o( management o( a reporting issuer= send an in(ormation circular $ith the notice o( meeting to each registered securit"holder $hose prox" is solicitedF or o ?/@ in the case o( an" other solicitation= concurrentl" $ith or /e(ore the solicitation= send an in(ormation circular to each registered securit"holder $hose prox" is solicited. ?3@ In BuR/ec= su/sections ?%@ and ?.@ appl"= adapted as re;uired= to a meeting o( holders o( de/t securities o( an issuer that is a reporting issuer in BuR/ec= $hether called /" management o( the reporting issuer or /" the trustee o( the de/t securities. &e;uired o( an"one $ho solicits proxies (or a shareholders meeting Applies /e"ond management ?to A1M'1E $ho solicits@ 1ot ever" issuer must (ile prox" circular disclosure Aor example= de/enture issuers= non2voting shares issuers I( "ou don8t issue one= the in(o that $ould normall" /e re;uired on one $ould go on AIA )ontains in(o $ith respect to voting in directors*mgmt Statement o( Executive )ompensation 9' 0181!+%3 page 1081 Item %% - )ompensation o( ,irectors Item D - &eport on Executive )ompensation including in(ormation on stoc7 options= stoc7 ac;uisition Item 7 - termination o( executives= emplo"ment contracts etc. Also consider $ith 082.!% ?a ne$ corporate governance polic"@ ?5elo*@ Part 11 o) 0181!+ An" other doc that "ou have sent to other shareholders XXXIncl. Annual &eport Part 1+ o) 0181!+ An" doc that is out o( ordinar" course o( /usiness o( the compan" and ma" /e material to shareholders E.g. voting trusts agreements= shareholders agreements 'S) lets companies &edact sensitive in(o ?7eep con(idential= e((ectivel"@ 0%

o o

 9' 088+!1 ( ,orporate Go/ernance Guidelines

o S.1.1 8 3his +olic" provides guidance on corporate governance practices $hich have /een (ormulated toG Y achieve a /alance /et$een providing protection to investors and (ostering (air and e((icient capital mar7ets and con(idence in capital mar7etsF Y /e sensitive to the realities o( the greater num/ers o( small companies and controlled companies in the )anadian corporate landscapeF Y ta7e into account the impact o( corporate governance developments in the #.S. and around the $orldF and Y recogni9e that corporate governance is evolving S.1.+ - the polic" applies to all reporting issuers other than investment (unds S. .1 2 3he /oard should have a ma5orit" o( independent directors S. .+ 8 3he chair o( the /oard should /e an independent director S. . 2 3he independent directors should hold regularl" scheduled meetings at $hich non2independent directors and mem/ers o( management are not in attendance S. ." 2 3he /oard should adopt a $ritten mandate in $hich it explicitl" ac7no$ledges responsi/ilit" (or the ste$ardship o( the issuer S. .0 - 3he /oard should develop clear position descriptions (or the chair o( the /oard and the chair o( each /oard committee S. .3 - 3he /oard should ensure that all ne$ directors receive a comprehensive orientation S. .1 - 3he /oard should provide continuing education opportunities (or all directors= so that individuals ma" maintain or enhance their s7ills and a/ilities as directors= as $ell as to ensure their 7no$ledge and understanding o( the issuerZs /usiness remains current S. .8 - 3he /oard should adopt a $ritten code o( /usiness conduct and ethics ?a code@. 3he code should /e applica/le to directors= o((icers and emplo"ees o( the issuer. 3he code should constitute $ritten standards that are reasona/l" designed to promote integrit" and to deter $rongdoing S. .$ - 3he /oard should /e responsi/le (or monitoring compliance $ith the code S. .1! - 3he /oard should appoint a nominating committee composed entirel" o( independent directors S. .10 - 3he /oard should appoint a compensation committee composed entirel" o( independent directors S. .18 2 3he /oard= its committees and each individual director should /e regularl" assessed regarding his= her or its e((ectiveness and contri/ution

o o o o o o o o o o o o o

Material ,hange Disclosure '/5ectiveG E;uivalenc" o( access to this in(o (or ever"one in the mar7et . AreasG s. 70 o( the Act= +art 7 o( 0%2%!. 9' 0181!+ ( part 1
?%@ Su/5ect to su/section ?.@= i( a material change occurs in the a((airs o( a reporting issuer= the reporting issuer must ?a@ immediatel" issue and (ile a ne$s release authori9ed /" an executive o((icer disclosing the nature and su/stance o( the changeF and ?/@ as soon as practica/le= and in an" event $ithin %! da"s o( the date on $hich the change occurs= (ile a Aorm 0%2%!.A3 +aterial Chan!e .eport $ith respect to the material change. o ?.@ Su/section ?%@ does not appl" i(= ?a@ in the opinion o( the reporting issuer= and i( that opinion is arrived at in a reasona/le manner= the disclosure re;uired /" su/section ?%@ $ould /e undul" detrimental to the interests o( the reporting issuerF or ?/@ the material change consists o( a decision to implement a change made /" senior management o( the reporting issuer $ho /elieve that con(irmation o( the decision /" the /oard o( directors is pro/a/le= and senior management o( the reporting issuer has no reason to /elieve that persons $ith 7no$ledge o( the material change have made use o( that 7no$ledge in purchasing or selling securities o( the reporting issuer= and the reporting issuer immediatel" (iles the report re;uired under paragraph ?%@?/@ mar7ed so as to indicate that it is con(idential= together $ith $ritten reasons (or non2disclosure. S.70 ?see /elo$@ is one o( the areas o( the Act that is still operative has not /een overruled /" a national instrument 4hat is a material change o &emem/er de(inition (rom /e(ore o )ould go $ith (iling in(ormation $ith the )ommission on a con(idential /asis But not $ise /ecause it invaria/l" $ill lea7 4hen does a material change occur o )an occur $hen the /oard decides that the" $ant to implement a change /e(ore the change actuall" occurs Ho$ do "ou identi(" $hen "ou have a material change6 o 0.

I( in(o $ould have a signi(icant*material a((ect on the mar7et i( released Must /e tested on the a((ect on the individual compan" and all securities issued /" that compan" 3his test is market dri(en 0%2.!% +art lists a num/er o( things that may /e a material change= /ut each situation must /e anal"9ed in the context o( the compan" itsel( 9' 018+!1 Part " Materiality page 131+ See MBM MAgnex - #ses the #S idea o( pro/a/ilit" and magnitude anal"sis o Aor/es thin7s this anal"sis is unhelp(ul o 3enerally( err in favour of disclosure I( "ou intend to 7eep silent= ensureG )one o( silence An" due diligence $or7 $ith respect to the transaction is contained Scare ever"one $ith J5ail cardK ?eg= conse;uences@ :et someone to $atch the shares and mar7et care(ull" BE +&E+A&E, 3' )A>> S3')< EC)HA1:E 3' SAM HA>3 3&A,I1: and +E1,I1: A11'#1)EME13 i( there8s an"thing strange*an" run on the stoc7 :et a )on(identialit" Agreement $ith the outside part" Include a carve out to halt trading*disclose $hen necessar" Selective disclosure - s.70 o( the 'SA - one o( the sections o( the 'SA that is still operative S.10617 2 Su/5ect to su/section ?3@= $here a material change occurs in the a((airs o( a reporting issuer= it shall (orth$ith issue and (ile a ne$s release authori9ed /" a senior o((icer disclosing the nature and su/stance o( the change S.106+7 2 Su/5ect to su/section ?3@= the reporting issuer shall (ile a report o( such material change in accordance $ith the regulations as soon as practica/le and in an" event $ithin ten da"s o( the date on $hich the change occurs S.106 7 2 4here= o ?a@ in the opinion o( the reporting issuer= and i( that opinion is arrived at in a reasona/le manner= the disclosure re;uired /" su/sections ?%@ and ?.@ $ould /e undul" detrimental to the interests o( the reporting issuerF or o ?/@ the material change consists o( a decision to implement a change made /" senior management o( the issuer $ho /elieve that con(irmation o( the decision /" the /oard o( directors is pro/a/le and senior management o( the issuer has no reason to /elieve that persons $ith 7no$ledge o( the material change have made use o( that 7no$ledge in purchasing or selling securities o( the issuer= o the reporting issuer ma"= in lieu o( compliance $ith su/section ?%@= (orth$ith (ile $ith the )ommission the report re;uired under su/section ?.@ mar7ed so as to indicate that it is con(idential= together $ith $ritten reasons (or non2 disclosure. Most people don8t li7e this con(idential (iling provision /ecause o( lea7s in the )ommission and also /ecause once "ou (ile the 'S) 7no$s something is going on and $ill /e loo7ing over "our shoulder urging "ou to disclose the in(ormation to the pu/lic 3his section is also incorporated into part 1 o) Rule 0181!+ - /ecause the other 5urisdictions li7ed the 'ntario (ormulation Material change is de(ined in the Act see a/ove 3he more li7el" it is that there $ill /e an impact and the greater that impact the more li7el" that it $ill /e a material change that has occurred 'ne $a" to do things i( "ou are not sure i( it is a material change $ould /e to release the in(o to the mar7et and see $hat happens i( no reaction no need to (ile a report= i( a reaction then it $as a material change and need to (ile a report ,irectors don8t li7e to read a/out their companies in the paper /e(ore the" have made a decision It is di((icult to sa" that "ou do not have a material change $hen "ou have alread" made a decision or signed an agreement even a non2/inding letter o( intent see Ai3 o E.g. in contemplation o( a deal "ou ma" /e tr"ing to 7eep things ;uiet and sign con(identialit" agreements o 3r" to 7eep it ;uiet /ut i( the stoc7 starts to run and the 3SC calls to in;uire i( something is going on then $hat o )ould (ile under s.70?3@ o 'n the other hand don8t $ant to announce too soon /ecause $hat i( nothing happens 4hat a/out rumours o 1othing $rong $ith sa"ing "ou don8t respond to rumours= nothing $rong $ith sa"ing nothing is going on i( that is the truth But i( something is going on then that is a di((erent issue Ma7ing an announcement o :enerall" should ma7e it $hen the mar7ets are closed either a(ter trading is over= or /e(ore opening o ,on8t tal7 a/out a release in a selective meeting such as a shareholder or anal"st meeting 03 o

I( "ou are going to "ou should tell the 3SC /e(ore so the" can halt trading (or a period around the time o( the meeting to allo$ the in(ormation to /e disseminated Part 3 ( 9' 018+!1 ( Disclosure Standards 3.1 General o ?%@ 3here are some practical measures that companies can adopt to help ensure good disclosure practices. o ?.@ 3he measures recommended in this polic" statement are not intended to /e prescriptive. 3.+ -stablishing a ,orporate Disclosure Policy o ?%@ Esta/lish a $ritten corporate disclosure polic". o ?.@ Mou should design a polic" that is practical to implement. o ?3@ 3he (ocus o( "our disclosure polic" should /e on promoting consistent disclosure practices aimed at in(ormative= timel" and /roadl" disseminated disclosure o( material in(ormation to the mar7et. Ever" disclosure polic" should generall" include the (ollo$ingG ?a@ ho$ to decide $hat in(ormation is materialF ?/@ polic" on revie$ing anal"st reportsF ?c@ ho$ to release earnings announcements and conduct related anal"st calls and meetingsF ?d@ ho$ to conduct meetings $ith investors and the mediaF ?e@ $hat to sa" or not to sa" at industr" con(erencesF ?(@ ho$ to use electronic media and the corporate 4e/ siteF ?g@ polic" on the use o( (orecasts and other (or$ard2loo7ing in(ormation ?including a polic" regarding issuing updates@F ?h@ procedures (or revie$ing /rie(ings and discussions $ith anal"sts= institutional investors and other mar7et pro(essionalsF ?i@ ho$ to deal $ith unintentional selective disclosuresF ?5@ ho$ to respond to mar7et rumoursF ?7@ polic" on trading restrictionsF and ?l@ polic" on P;uiet periodsP. 3. &/erseeing and ,oordinating Disclosure o Esta/lish a committee o( compan" personnel or assign a senior o((icer to /e responsi/le (orG ?a@ developing and implementing "our disclosure polic"F ?/@ monitoring the e((ectiveness o( and compliance $ith "our disclosure polic"F ?c@ educating "our directors= o((icers and certain emplo"ees a/out disclosure issues and "our disclosure polic"F ?d@ revie$ing and authori9ing disclosure ?including electronic= $ritten and oral disclosure@ in advance o( its pu/lic releaseF and ?e@ monitoring "our 4e/ site. 3." 5oard and :udit ,o##ittee Re/ie* o) ,ertain Disclosure o ?%@ Have "our /oard o( directors or audit committee revie$ the (ollo$ing disclosures in advance o( their pu/lic release /" the compan"G Y earnings guidanceF and Y ne$s releases containing (inancial in(ormation /ased on a compan"Zs (inancial statements prior to the release o( such statements. % o Mou should also indicate at the time such in(ormation is pu/licl" released $hether "our /oard or audit committee has revie$ed the disclosure. Having "our /oard or audit committee revie$ such disclosure in advance o( its pu/lic release acts as a good discipline on management and helps to increase the ;ualit"= credi/ilit" and o/5ectivit" o( such disclosures. 3his revie$ process also helps to (orce a critical examination o( all issues related to the disclosure and reduces the ris7 o( having to ma7e su/se;uent ad5ustments or amendments to the in(ormation it contains. o ?.@ 4here (easi/le= issue "our earnings ne$s release . concurrentl" $ith the (iling o( "our ;uarterl" or annual (inancial statements. 3his $ill help to ensure that a complete (inancial picture is availa/le to anal"sts and investors at the time the earnings release is provided. )oordinating the release o( a compan"Zs earnings in(ormation $ith the (iling o( its ;uarterl" or annual (inancial statements $ill also (acilitate revie$ o( these disclosures /" the /oard or audit committee o( the compan". 3 3.0 :uthori>ing ,o#pany Spokespersons o >imit the num/er o( people $ho are authori9ed to spea7 on /ehal( o( "our compan" to anal"sts= the media and investors. Having a limited num/er o( compan" spo7espersons helps to reduce the ris7 o(G ?a@ unauthori9ed disclosuresF ?/@ inconsistent statements /" di((erent people in the compan"F and ?c@ statements that are inconsistent $ith the pu/lic disclosure record o( the compan". 3.3 Reco##ended Disclosure Model 0

?%@ Mou should consider using the (ollo$ing disclosure model $hen ma7ing a planned disclosure o( material corporate in(ormation= such as a scheduled earnings releaseG ?a@ issue a ne$s release containing the in(ormation ?(or example= "our ;uarterl" (inancial results@ through a $idel" circulated ne$s or $ire serviceF ?/@ provide advance pu/lic notice /" ne$s release o( the date and time o( a con(erence call to discuss the in(ormation= the su/5ect matter o( the call and the means (or accessing itF ?c@ hold the con(erence call in an open manner= permitting investors and others to listen either /" telephone or through Internet $e/castingF and ?d@ provide dial2in and*or $e/ repla" or ma7e transcripts o( the call availa/le (or a reasona/le period o( time a(ter the anal"st con(erence call. 0 o ?.@ 3he com/ination o( ne$s release disclosure o( the material in(ormation and an open and accessi/le con(erence call to su/se;uentl" discuss the in(ormation should help to ensure that the in(ormation is disseminated in a manner calculated to e((ectivel" reach the mar7etplace and minimi9e the ris7 o( an inadvertent selective disclosure during the (ollo$2up call. 3.1 :nalyst ,on)erence ,alls and 'ndustry ,on)erences o ?%@ Hold anal"st con(erence calls and industr" con(erences in an open manner= allo$ing an" interested part" to listen either /" telephone and*or through a $e/cast.. o ?.@ )ompan" o((icials should meet /e(ore an anal"st con(erence call= private anal"st meeting or industr" con(erence. o ?3@ <eep detailed records and*or transcripts o( an" con(erence call= meeting or industr" con(erence 3.8 :nalyst Reports o Esta/lish a polic" (or revie$ing anal"st reports. 3.$ <pdating %or*ard82ooking 'n)or#ation o 4hen ma7ing voluntar" (or$ard2loo7ing statements= clearl" indicate $hat "our practice is (or updating those statements. 3.1! ?uiet Periods o '/serve a ;uarterl" ;uiet period 3.11 'nsider Trading Policies and 5lackout Periods o Adopt an insider trading polic". 3.1+ -lectronic ,o##unications o ?%@ Esta/lish a team responsi/le (or creating and maintaining the compan" 4e/ site. o ?.@ #se current technolog" to improve investor access to "our in(ormation. 3.1 ,hat Roo#s@ 5ulletin 5oards and e8#ails o ,o not participate in= host or lin7 to chat rooms or /ulletin /oards. 3.1" =andling Ru#oursA o Adopt a Pno commentP polic" $ith respect to mar7et rumours and ma7e sure that the polic" is applied consistentl" 'ne pro/lem $ith a disclosure polic" is that in a situation o( tough disclosure the polic" could /e the thing that hangs "ou gets "ou caught in a /ind o

,i/il 2iability )or ,ontinuing Disclosure 3here is no$ civil lia/ilit" (or improper disclosure in continuing disclosure situations s.%38.% o( the 'SA I( a compan" has a misrepresentation in a prospectus or 'M it is not reall" a pro/lem to hold the compan" responsi/le and to
tell them to give the mone" /ac7 to the investor But in this scenario - secondar" mar7et - the" are not involved in the trade - the" do not /ene(it (inanciall" As a result there is a much greater potential (or lia/ilit" Much more di((icult to sa" that issuers are lia/le in these situations ma" /e $h" the" have the due diligence de(ence availa/le #nli7e civil lia/ilit" (or misrepresentations in a prospectus the lia/ilit" in continuous disclosure is proportionate and not 5oint and several each de(endant is onl" lia/le proportionate to their (ault S.1 8.3617 2 In an action under section %38.3= the court shall determine= in respect o( each de(endant (ound lia/le in the action= the de(endant8s responsi/ilit" (or the damages assessed in (avour o( all plainti((s in the action= and each such de(endant shall /e lia/le= su/5ect to the limits set out in su/section %38.7 ?%@= to the plainti((s (or onl" that portion o( the aggregate amount o( damages assessed in (avour o( the plainti((s that corresponds to that de(endant8s responsi/ilit" (or the damages 00

 #nless one de(endant other than the responsi/le issuer 7ne$ that the in(ormation $as incorrect and allo$ed the in(ormation
to /e sent out to the mar7et - the" can /e lia/le (or the $hole o( the damages S.1 8.36+@ 2 ,espite su/section ?%@= $here= in an action under section %38.3 in respect o( a misrepresentation or a (ailure to ma7e timel" disclosure= a court determines that a particular de(endant= other than the responsi/le issuer= authori9ed= permitted or ac;uiesced in the ma7ing o( the misrepresentation or the (ailure to ma7e timel" disclosure $hile 7no$ing it to /e a misrepresentation or a (ailure to ma7e timel" disclosure= the $hole amount o( the damages assessed in the action ma" /e recovered (rom that de(endant Also unli7e prospectus lia/ilit" there is a cap on the total lia/ilit" S1 8.1617 2 ,espite section %38.0= the damages pa"a/le /" a person or compan" in an action under section %38.3 is the lesser o(= o ?a@ the aggregate damages assessed against the person or compan" in the actionF and o ?/@ the lia/ilit" limit (or the person or compan" less the aggregate o( all damages assessed a(ter appeals= i( an"= against the person or compan" in all other actions /rought under section %38.3= and under compara/le legislation in other provinces or territories in )anada in respect o( that misrepresentation or (ailure to ma7e timel" disclosure= and less an" amount paid in settlement o( an" such actions. Again ho$ever this is tempered /" the (act that one $ho authori9ed= permitted or ac;uiesced in the ma7ing o( the disclosure $hile 7no$ing it $as a misrepresentation S.1 8.16+7 2 Su/section ?%@ does not appl" to a person or compan"= other than the responsi/le issuer= i( the plainti(( proves that the person or compan" authori9ed= permitted or ac;uiesced in the ma7ing o( the misrepresentation or the (ailure to ma7e timel" disclosure $hile 7no$ing that it $as a misrepresentation or a (ailure to ma7e timel" disclosure= or in(luenced the ma7ing o( the misrepresentation or the (ailure to ma7e timel" disclosure $hile 7no$ing that it $as a misrepresentation or a (ailure to ma7e timel" disclosure o >ia/ilit" limits are de(ined in s.1 8.1 ?a@ in the case o( a responsi/le issuer= the greater o(= ?i@ 0 per cent o( its mar7et capitali9ation ?as such term is de(ined in the regulations@= and ?ii@ H% million= ?/@ in the case o( a director or o((icer o( a responsi/le issuer= the greater o(= ?i@ H.0=!!!= and ?ii@ 0! per cent o( the aggregate o( the director8s or o((icer8s compensation (rom the responsi/le issuer and its a((iliates= ?c@ in the case o( an in(luential person $ho is not an individual= the greater o(= ?i@ 0 per cent o( its mar7et capitali9ation ?as de(ined in the regulations@= and ?ii@ H% million= ?d@ in the case o( an in(luential person $ho is an individual= the greater o(= ?i@ H.0=!!!= and ?ii@ 0! per cent o( the aggregate o( the in(luential person8s compensation (rom the responsi/le issuer and its a((iliates= ?e@ in the case o( a director or o((icer o( an in(luential person= the greater o(= ?i@ H.0=!!!= and ?ii@ 0! per cent o( the aggregate o( the director8s or o((icer8s compensation (rom the in(luential person and its a((iliates= ?(@ in the case o( an expert= the greater o(= ?i@ H% million= and ?ii@ the revenue that the expert and the a((iliates o( the expert have earned (rom the responsi/le issuer and its a((iliates during the %. months preceding the misrepresentation= and ?g@ in the case o( each person $ho made a pu/lic oral statement= other than an individual re(erred to in clause ?d@= ?e@ or ?(@= the greater o(= ?i@ H.0=!!!= and ?ii@ 0! per cent o( the aggregate o( the person8s compensation (rom the responsi/le issuer and its a((iliates 1eed leave o( the court to /ring an action S.%38.8 2 1o action ma" /e commenced under section %38.3 $ithout leave o( the court granted upon motion $ith notice to each de(endant. 3he court shall grant leave onl" $here it is satis(ied that= o ?a@ the action is /eing /rought in good (aithF and o ?/@ there is a reasona/le possi/ilit" that the action $ill /e resolved at trial in (avour o( the plainti(( 'ne other thing to remem/er is that unli7e prospectus lia/ilit" is that in these scenarios it is possi/le that there could /e /oth /u"ers and sellers that are see7ing damages in prospectus lia/ilit" there $ill onl" /e /u"ers

06

Rights o) :ction :/ailable

1 8. 617 2 4here a responsi/le issuer or a person or compan" $ith actual= implied or apparent authorit" to act on /ehal( o( a
responsi/le issuer releases a document that contains a misrepresentation= a person or compan" $ho ac;uires or disposes o( the issuer8s securit" during the period /et$een the time $hen the document $as released and the time $hen the misrepresentation contained in the document $as pu/licl" corrected has= $ithout regard to $hether the person or compan" relied on the misrepresentation= a right o( action (or damages against= ?a@ the responsi/le issuerF ?/@ each director o( the responsi/le issuer at the time the document $as releasedF ?c@ each o((icer o( the responsi/le issuer $ho authori9ed= permitted or ac;uiesced in the release o( the documentF ?d@ each in(luential person= and each director and o((icer o( an in(luential person= $ho 7no$ingl" in(luenced= ?i@ the responsi/le issuer or an" person or compan" acting on /ehal( o( the responsi/le issuer to release the document= or ?ii@ a director or o((icer o( the responsi/le issuer to authori9e= permit or ac;uiesce in the release o( the documentF and ?e@ each expert $here= ?i@ the misrepresentation is also contained in a report= statement or opinion made /" the expert= ?ii@ the document includes= summari9es or ;uotes (rom the report= statement or opinion o( the expert= and ?iii@ i( the document $as released /" a person or compan" other than the expert= the expert consented in $riting to the use o( the report= statement or opinion in the document s.1 8. 6+7 2 4here a person $ith actual= implied or apparent authorit" to spea7 on /ehal( o( a responsi/le issuer ma7es a pu/lic oral statement that relates to the /usiness or a((airs o( the responsi/le issuer and that contains a misrepresentation= a person or compan" $ho ac;uires or disposes o( the issuer8s securit" during the period /et$een the time $hen the pu/lic oral statement $as made and the time $hen the misrepresentation contained in the pu/lic oral statement $as pu/licl" corrected has= $ithout regard to $hether the person or compan" relied on the misrepresentation= a right o( action (or damages against= ?a@ the responsi/le issuerF ?/@ the person $ho made the pu/lic oral statementF ?c@ each director and o((icer o( the responsi/le issuer $ho authori9ed= permitted or ac;uiesced in the ma7ing o( the pu/lic oral statementF ?d@ each in(luential person= and each director and o((icer o( the in(luential person= $ho 7no$ingl" in(luenced= ?i@ the person $ho made the pu/lic oral statement to ma7e the pu/lic oral statement= or ?ii@ a director or o((icer o( the responsi/le issuer to authori9e= permit or ac;uiesce in the ma7ing o( the pu/lic oral statementF and ?e@ each expert $here= ?i@ the misrepresentation is also contained in a report= statement or opinion made /" the expert= ?ii@ the person ma7ing the pu/lic oral statement includes= summari9es or ;uotes (rom the report= statement or opinion o( the expert= and ?iii@ i( the pu/lic oral statement $as made /" a person other than the expert= the expert consented in $riting to the use o( the report= statement or opinion in the pu/lic oral statement s.1 8. 6"7 2 4here a responsi/le issuer (ails to ma7e a timel" disclosure= a person or compan" $ho ac;uires or disposes o( the issuer8s securit" /et$een the time $hen the material change $as re;uired to /e disclosed in the manner re;uired under this Act or the regulations and the su/se;uent disclosure o( the material change has= $ithout regard to $hether the person or compan" relied on the responsi/le issuer having complied $ith its disclosure re;uirements= a right o( action (or damages against= ?a@ the responsi/le issuerF ?/@ each director and o((icer o( the responsi/le issuer $ho authori9ed= permitted or ac;uiesced in the (ailure to ma7e timel" disclosureF and ?c@ each in(luential person= and each director and o((icer o( an in(luential person= $ho 7no$ingl" in(luenced= ?i@ the responsi/le issuer or an" person or compan" acting on /ehal( o( the responsi/le issuer in the (ailure to ma7e timel" disclosure= or ?ii@ a director or o((icer o( the responsi/le issuer to authori9e= permit or ac;uiesce in the (ailure to ma7e timel" disclosure. ,ore49on8,ore Docu#ents o o I( an insider o( the compan" A>> documents are core and there(ore lia/ilit" attaches I( an outside director then some documents ma" /e non2core Buarterl" (inancial statements Material change report 'ral statements 07

o o

Aor non2core documents then there is a /urden o( proo( on the plainti(( 1 8."617 2 In an action under section %38.3 in relation to a misrepresentation in a document that is not a core document= or a misrepresentation in a pu/lic oral statement= a person or compan" is not lia/le= su/5ect to su/section ?.@= unless the plainti(( proves that the person or compan"= ?a@ 7ne$= at the time that the document $as released or pu/lic oral statement $as made= that the document or pu/lic oral statement contained the misrepresentationF ?/@ at or /e(ore the time that the document $as released or pu/lic oral statement $as made= deli/eratel" avoided ac;uiring 7no$ledge that the document or pu/lic oral statement contained the misrepresentationF or ?c@ $as= through action or (ailure to act= guilt" o( gross misconduct in connection $ith the release o( the document or the ma7ing o( the pu/lic oral statement that contained the misrepresentation 1 8."6+7 2 A plainti(( is not re;uired to prove an" o( the matters set out in su/section ?%@ in an action under section %38.3 in relation to an expert

Due diligence de)ence to actions under s.1 8.

S.1 8."637 2 A person or compan" is not lia/le in an action under section %38.3 in relation to=
a misrepresentation i( that person or compan" proves that= ?i@ /e(ore the release o( the document or the ma7ing o( the pu/lic oral statement containing the misrepresentation= the person or compan" conducted or caused to /e conducted a reasona/le investigation= and ?ii@ at the time o( the release o( the document or the ma7ing o( the pu/lic oral statement= the person or compan" had no reasona/le grounds to /elieve that the document or pu/lic oral statement contained the misrepresentationF or ?/@ a (ailure to ma7e timel" disclosure i( that person or compan" proves that= ?i@ /e(ore the (ailure to ma7e timel" disclosure (irst occurred= the person or compan" conducted or caused to /e conducted a reasona/le investigation= and ?ii@ the person or compan" had no reasona/le grounds to /elieve that the (ailure to ma7e timel" disclosure $ould occur Aactors to /e considered /" the )ourt in assessing $hether an"one is guilt" o( gross misconduct S.1 8."617 2 In determining $hether an investigation $as reasona/le under su/section ?6@= or $hether an" person or compan" is guilt" o( gross misconduct under su/section ?%@ or ?3@= the court shall consider all relevant circumstances= including= ?a@ the nature o( the responsi/le issuerF ?/@ the 7no$ledge= experience and (unction o( the person or compan"F ?c@ the o((ice held= i( the person $as an o((icerF ?d@ the presence or a/sence o( another relationship $ith the responsi/le issuer= i( the person $as a directorF ?e@ the existence= i( an"= and the nature o( an" s"stem designed to ensure that the responsi/le issuer meets its continuous disclosure o/ligationsF ?(@ the reasona/leness o( reliance /" the person or compan" on the responsi/le issuer8s disclosure compliance s"stem and on the responsi/le issuer8s o((icers= emplo"ees and others $hose duties $ould in the ordinar" course have given them 7no$ledge o( the relevant (actsF ?g@ the period $ithin $hich disclosure $as re;uired to /e made under the applica/le la$F ?h@ in respect o( a report= statement or opinion o( an expert= an" pro(essional standards applica/le to the expertF ?i@ the extent to $hich the person or compan" 7ne$= or should reasona/l" have 7no$n= the content and medium o( dissemination o( the document or pu/lic oral statementF ?5@ in the case o( a misrepresentation= the role and responsi/ilit" o( the person or compan" in the preparation and release o( the document or the ma7ing o( the pu/lic oral statement containing the misrepresentation or the ascertaining o( the (acts contained in that document or pu/lic oral statementF and ?7@ in the case o( a (ailure to ma7e timel" disclosure= the role and responsi/ilit" o( the person or compan" involved in a decision not to disclose the material change 3here are also sa(e har/our de(ences to actions under this provision S.1 8."687 2 A person or compan" is not lia/le in an action under section %38.3 in respect o( a (ailure to ma7e timel" disclosure i(= ?a@ the person or compan" proves that the material change $as disclosed /" the responsi/le issuer in a report (iled on a con(idential /asis $ith the )ommission under su/section 70 ?3@ or the regulationsF ?/@ the responsi/le issuer had a reasona/le /asis (or ma7ing the disclosure on a con(idential /asisF ?c@ $here the in(ormation contained in the report (iled on a con(idential /asis remains material= disclosure o( the material change $as made pu/lic promptl" $hen the /asis (or con(identialit" ceased to existF ?d@ the person or compan" or responsi/le issuer did not release a document or ma7e a pu/lic oral statement that= due to the undisclosed material change= contained a misrepresentationF and 08 ?a@

?e@ $here the material change /ecame pu/licl" 7no$n in a manner other than the manner re;uired under this Act or the regulations= the responsi/le issuer promptl" disclosed the material change in the manner re;uired under this Act or the regulations 3here is also a provision dealing $ith A'AI S.1 8."6$7 2 A person or compan" is not lia/le in an action under section %38.3 (or a misrepresentation in (or$ard2loo7ing in(ormation i( the person or compan" proves all o( the (ollo$ing thingsG %. 3he document or pu/lic oral statement containing the (or$ard2loo7ing in(ormation contained= proximate to that in(ormation= i. reasona/le cautionar" language identi("ing the (or$ard2loo7ing in(ormation as such= and identi("ing material (actors that could cause actual results to di((er materiall" (rom a conclusion= (orecast or pro5ection in the (or$ard2loo7ing in(ormation= and ii. a statement o( the material (actors or assumptions that $ere applied in dra$ing a conclusion or ma7ing a (orecast or pro5ection set out in the (or$ard2loo7ing in(ormation. .. 3he person or compan" had a reasona/le /asis (or dra$ing the conclusions or ma7ing the (orecasts and pro5ections set out in the (or$ard2loo7ing in(ormation

0D

'nsider Trading
3here is an interrelationship /et$een material change disclosure and insider trading
o 4ith the o/ligation to disclose a material change o And the o/ligation on insiders to not trade $hen the" are in possession o( material change or material (act in(ormation Insider trading is covered /" s.76 o( the Act $hich in some $a"s parallels s.03 prospectus disclosure provisions S.13617 2 1o person or compan" in a special relationship $ith a reporting issuer shall purchase or sell securities o( the reporting issuer $ith the 7no$ledge o( a material (act or material change $ith respect to the reporting issuer that has not /een generall" disclosed 3here are a couple o( things to pa" attention to in this provision o Special relationship $hat does that mean o S.13607 2 Aor the purposes o( this section= o Jperson or compan" in a special relationship $ith a reporting issuerK means= ?a@ a person or compan" that is an insider= a((iliate or associate o(= ?i@ the reporting issuer= ?ii@ a person or compan" that is proposing to ma7e a ta7e2over /id= as de(ined in +art CC= (or the securities o( the reporting issuer= or ?iii@ a person or compan" that is proposing to /ecome a part" to a reorgani9ation= amalgamation= merger or arrangement or similar /usiness com/ination $ith the reporting issuer or to ac;uire a su/stantial portion o( its propert"= ?/@ a person or compan" that is engaging in or proposes to engage in an" /usiness or pro(essional activit" $ith or on /ehal( o( the reporting issuer or $ith or on /ehal( o( a person or compan" descri/ed in su/clause ?a@ ?ii@ or ?iii@= ?c@ a person $ho is a director= o((icer or emplo"ee o( the reporting issuer or o( a person or compan" descri/ed in su/clause ?a@ ?ii@ or ?iii@ or clause ?/@= ?d@ a person or compan" that learned o( the material (act or material change $ith respect to the reporting issuer $hile the person or compan" $as a person or compan" descri/ed in clause ?a@= ?/@ or ?c@= ?e@ a person or compan" that learns o( a material (act or material change $ith respect to the issuer (rom an" other person or compan" descri/ed in this su/section= including a person or compan" descri/ed in this clause= and 7no$s or ought reasona/l" to have 7no$n that the other person or compan" is a person or compan" in such a relationship o Even in this section there are certain terms $here it is necessar" to loo7 /e"ond the section to get a proper de(inition o( the terms Associate $here used to indicate a relationship $ith an" person or compan"= means= ?a@ an" compan" o( $hich such person or compan" /ene(iciall" o$ns= directl" or indirectl"= voting securities carr"ing more than %! per cent o( the voting rights attached to all voting securities o( the compan" (or the time /eing outstanding= ?/@ an" partner o( that person or compan"= ?c@ an" trust or estate in $hich such person or compan" has a su/stantial /ene(icial interest or as to $hich such person or compan" serves as trustee or in a similar capacit"= ?d@ an" relative o( that person $ho resides in the same home as that person= ?e@ an" person $ho resides in the same home as that person and to $hom that person is married or $ith $hom that person is living in a con5ugal relationship outside marriage= or ?(@ an" relative o( a person mentioned in clause ?e@ $ho has the same home as that person Affiliate S.%.. o( the 'SA A compan" shall /e deemed to /e an a((iliate o( another compan" i( one o( them is the su/sidiar" o( the other or i( /oth are su/sidiaries o( the same compan" or i( each o( them is controlled /" the same person or compan" 4nsider ?a@ a director or o((icer o( a reporting issuer= ?/@ a director or o((icer o( a person or compan" that is itsel( an insider or su/sidiar" o( a reporting issuer= ?c@ a person or compan" that has= o ?i@ /ene(icial o$nership o(= or control or direction over= directl" or indirectl"= securities o( a reporting issuer carr"ing more than %! per cent o( the voting rights attached to all the reporting issuer8s outstanding voting securities= excluding= (or the purpose o( the calculation 6!

o( the percentage held= an" securities held /" the person or compan" as under$riter in the course o( a distri/ution= or o ?ii@ a com/ination o( /ene(icial o$nership o(= and control or direction over= directl" or indirectl"= securities o( a reporting issuer carr"ing more than %! per cent o( the voting rights attached to all the reporting issuer8s outstanding voting securities= excluding= (or the purpose o( the calculation o( the percentage held= an" securities held /" the person or compan" as under$riter in the course o( a distri/ution= ?d@ a reporting issuer that has purchased= redeemed or other$ise ac;uired a securit" o( its o$n issue= (or so long as it continues to hold that securit"= ?e@ a person or compan" designated as an insider in an order made under su/section ?%%@= ?(@ a person or compan" that is in a class o( persons or companies designated under su/paragraph ! v o( su/section % 3 ?%@F Material Chan!e $hen used in relation to an issuer other than an investment (und= means= o ?i@ a change in the /usiness= operations or capital o( the issuer that $ould reasona/l" /e expected to have a signi(icant e((ect on the mar7et price or value o( an" o( the securities o( the issuer= or o ?ii@ a decision to implement a change re(erred to in su/clause ?i@ made /" the /oard o( directors or other persons acting in a similar capacit" or /" senior management o( the issuer $ho /elieve that con(irmation o( the decision /" the /oard o( directors or such other persons acting in a similar capacit" is pro/a/le Material 1act $hen used in relation to securities issued or proposed to /e issued= means a (act that $ould reasona/l" /e expected to have a signi(icant e((ect on the mar7et price or value o( the securities 3enerally 'isclosed In a $a" this gets us /ac7 to the issue o( material change disclosure Is a material (act or material change generall" disclosed $hen a press release is issued or ten da"s later $hen the material change statement is (iled $ith the )ommission '8)onnor case o It is some$here in /et$een these t$o da"s o In(ormation has /een generall" disclosed $hen the in(ormation has /een put out into the mar7et and the mar7et has had a reasona/le time to a/sor/ the in(ormation 4ill depend on the circumstances At a minimum one da" conservativel" t$o da"s E.g. a ta7eover /id $ill go through the mar7et ;uic7l" $hile some other in(ormation $ill ta7e a /it longer to $or7 its $a" through the mar7et 4hen an insider (ails to a/ide /" the provisions o( the insider trading sections the" ma" (ace severe sanctions o Big (ines o Oail time under the criminal code o Bans (rom trading etc. o +ossi/ilit" o( /eing (orced to pa" /ac7 an" gains o Also possi/ilit" o( civil lia/ilit" 3he compan" ?issuer@ or the 'S) could also go a(ter the insider (or the gains that the" made as $ell 3he net is cast ver" $ide /" s.76 5ust loo7 at the de(inition o( insider and ho$ the de(inition o( special relationship seems to spiral out$ard Especiall" the special relationship 76?0@?e@ $here $hen one is tipped and then tips another the one $ho gets the tip is then deemed to /e in a special relationship $here the" J7no$s or ought reasona/l" to have 7no$n that the other person or compan" is a person or compan" in such a relationshipK 3his relationship $ould 7eep expanding so (ar as the in(ormation 7eeps getting tipped o 3he example o( the printer (or Merrill >"nch tipping the /ro7er 3he printer is in a special relationship /*c the compan" (its under s.76?0@?/@ and is an emplo"ee o( that compan" he tips it to the /ro7er $ho should have 7no$n the /ro7er is no$ in a special relationship and so onV &emem/er also that there are t$o parts to insider trading o 3here is a prohi/ition against insider trading o 3here is a need (or those $ho need to (ile insider reports $hen the" trade 4e are loo7ing at those that need to (ile insider reports 6%

Insiders o( the compan" 'S) policies themselves sa" that sometimes the net is cast too $ide "ou loo7 at the si9e o( some companies (or example and there could /e a (ar (lung empire $ith numerous interrelated companies and it seems 7ind o( $eird to hold that a director or o((icer o( one small compan" in a huge conglomerate is deemed to have insider in(ormation o( a larger component o( the $hole /ut the prohi/ition is still there 5ust in case that in(ormation does get to that person 1ote ho$ever that (or a /idder there is no stipulation that it is a special relationship $ith the target o 4h" is this it has to ma7e disclosure at %!L and again at .!L o Also ma"/e /ecause it does not reall" stand to gain /" ma7ing trades a(ter all it is tr"ing to get the securities (or the cheapest price not the most expensive ?m" $ords@ S.136076a76iii7 arrangement instead o( ma7ing a ta7eover /id a compan" ma" propose an arrangement $ith a compan" instead $here/" it agrees to s$ap shares in the old compan" (or part shares and part cash in a ne$ compan" or some variation /ene(it (or the ac;uirer is that it get total o$nership in one (ell s$oop rather than piecemeal ho$ever need court approval and .*3 shareholder vote in (avour ?sounds li7e ))AA process is that $hat it is66@ >oo7ing /ac7 at s.76?%@ there is a prohi/ition against trading $hen "ou possess 7no$ledge o( either a material (act or material change that has not /een generall" disclosed o But there is no o/ligation on a reporting issuer to disclose a material (act onl" need to disclose a material change (or a prospectus or as part o( continuing disclosure Seems 7ind o( $eird /ecause material change is a much narro$er thing onl" things that a((ect /usiness= operations or capital $hile material (act is much /roader an"thing that might su/stantiall" impact the price o( the securities But /ecause o( the (act that insiders cannot trade until material (acts are generall" disclosed companies are li7el" to disclose rather than to not disclose them even though the" do not have to 3hree cases (rom the materials spea7 to the di((iculties o( determining $hen "ou should disclose a material (act o Pe5i) Mining compan" drilled a hole and had a high mineralog" content o( gold. 1ormal practice is to drill additional holes in order to determine the overall si9e o( the deposit /ecause one hole is not enough to 7no$ the si9e o( the seam. In +e9im8s vie$ the" had hit a high value seam he goes on to the mar7et and starts /u"ing securities /ut did not disclose /ecause he said it $as not material ruled that it $as material and should have disclosed to the mar7et o 2 v6 Harper Another mining compan" had done some trenching $ith some ver" positive results in :hana and disclosed this in(ormation to the mar7et. ,id some su/se;uent trenching $hich $as not so positive /ut did not disclose claiming that the results $ere inconclusive. Harper $ent to the mar7et and /egan selling securities $as ruled that should have disclosed /ecause it $as material o 'onnini 4or7ed (or Mor7ton Securities as a principal trader traded (or the house account. Heard some rumours a/out a (inancing deal (or a compan" and heard that it $ould /e (inanced at a lo$er price than the mar7et price. 3he (inancing $as to /e done /" Mor7ton. Sold the compan"8s position and shorted the stoc7 /ut said that $as not insider in(ormation /ecause he did not 7no$ $hat $as going on ruled that it $as insider in(ormation +ro/a/l" the concluding (actor in all three o( these cases is that in each instance the trades happened in the same direction as the mar7et i( the mar7et $as going to go up the trades $ent in the same direction ?/ought@ and i( the mar7et $as going to go do$n the trades $ent in the same direction ?sold@ I( their trades had gone opposite to the direction that the mar7et ended up going the" pro/a/l" $ould have /een o7a" 'onnini o 4hat happens $ith a (irm li7e Mor7ton o '((ers corporate (inance= retail /ro7erage= anal"st services and has a house account ?,onini8s role@ o )orporate (inance people get approached /" a client to do a deal o( some sort (alls under s.76?0@?/@ pro(essional services Mou have all o( these di((erent services o((ered /" the (irm and the" could all /e in a con(lict o( interest situation /ecause the" /ecome deemed to /e in a special relationship through s.76 4hat is the solution to this t"pe o( situation

T*o things ,hinese )ire*alls and the Regulations

S.110 o) the Regulations

6.

617 A person or compan" that purchases or sells securities o( a reporting issuer $ith 7no$ledge o( a material (act or material change $ith respect to the reporting issuer that has not /een generall" disclosed is exempt (rom su/section 76 ?%@ o( the Act and (rom lia/ilit" under section %3 o( the Act= $here the person or compan" proves that= ?a@ no director= o((icer= partner= emplo"ee or agent o( the person or compan" $ho made or participated in ma7ing the decision to purchase or sell the securities o( the reporting issuer had actual 7no$ledge o( the material (act or material changeF and ?/@ no advice $as given $ith respect to the purchase or sale o( the securities to the director= o((icer= partner= emplo"ee or agent o( the person or compan" $ho made or participated in ma7ing the decision to purchase or sell the securities /" a director= partner= o((icer= emplo"ee or agent o( the person or compan" $ho had actual 7no$ledge o( the material (act or the material change= o /ut this exemption is not availa/le to an individual $ho had actual 7no$ledge o( the material (act or change. &.&.'. %DD!= &eg. %!%0= s. %70 ?%@.Q o 6+7 A person or compan" that purchases or sells securities o( a reporting issuer $ith 7no$ledge o( a material (act or material change $ith respect to the reporting issuer that has not /een generall" disclosed is exempt (rom su/section 76 ?%@ o( the Act and (rom lia/ilit" under section %3 o( the Act= $here the person or compan" proves that= ?a@ the purchase or sale $as entered into as agent o( another person or compan" pursuant to a speci(ic unsolicited order (rom that other person or compan" to purchase or sellF ?/@ the purchase or sale $as made pursuant to participation in an automatic dividend reinvestment plan= share purchase plan or other similar automatic plan that $as entered into /" the person or compan" prior to the ac;uisition o( 7no$ledge o( the material (act or material changeF or ?c@ the purchase or sale $as made to (ul(il a legall" /inding o/ligation entered into /" the person or compan" prior to the ac;uisition o( 7no$ledge o( the material (act or material change. &.&.'. %DD!= &eg. %!%0= s. %70 ?.@. o 6 7 In determining $hether a person or compan" has sustained the /urden o( proo( under su/section ?%@= it shall /e relevant $hether and to $hat extent the person or compan" has implemented and maintained reasona/le policies and procedures to prevent contraventions o( su/section 76 ?%@ o( the Act /" persons ma7ing or in(luencing investment decisions on its /ehal( and to prevent transmission o( in(ormation concerning a material (act or material change contrar" to su/section 76 ?.@ or ?3@ o( the Act. o 6"7 A person or compan" $ho purchases or sells a securit" o( a reporting issuer as agent or trustee (or a person or compan" $ho is exempt (rom su/section 76 ?%@ o( the Act and (rom lia/ilit" under section %3 o( the Act /" reason o( clause ?.@ ?/@ or ?c@= is also exempt (rom su/section 76 ?%@ o( the Act and (rom lia/ilit" under section %3 o( the Act o 607 A person or compan" is exempt (rom su/sections 76 ?%@= ?.@ and ?3@ o( the Act $here the person or compan" proves that such person or compan" reasona/l" /elieved that= ?a@ the other part" to a purchase or sale o( securitiesF or ?/@ the person or compan" in(ormed o( the material (act or material change= o as the case ma" /e= had 7no$ledge o( the material (act or material change 4ithout the t"pes o( controls mentioned in s.%70?3@ o( the regulations it $ould /e ver" di((icult (or a (irm $ith several (unctions to carr" on /usiness once it entered into a contract to provide services to a client in a (inancing or ta7eover situation $ould /e ver" mess" 3he anal"st is a di((erent pro/lem in essence the (irm o$es a dut" to its clients to disclose an" in(ormation that it has to the clients one pro/lem could /e though $hat happens i( the anal"st is preparing a report separatel" (rom the (inance department that praises the compan" that is currentl" in a ta7eover situation i( the anal"st releases the report is he then trading in insider in(ormation even though he does not 7no$ o +ro/a/l" the onl" $a" to deal $ith this is to have the anal"st /arred (rom releasing an" in(ormation on that particular compan" (or the period $hile the in(ormation is con(idential to avoid an" possi/le rami(ications in the longer term Ainancial services (irms and imputed 7no$ledge the development o( (ire$alls to 7eep in(ormation compartmentali9ed has /een an important part o( protecting people (rom lia/ilit" o Also have s.%70 o( the &egulations $here there is the possi/ilit" o( proving that there $as no actual 7no$ledge 'ne is presumed to have 7no$ledge o( material (act or material change in(ormation i( someone else - usuall" higher up - in the (irm ?such as a la$ (irm= under$riting (irm= /ro7erage etc.@ has actual 7no$ledge o #nless "ou can ta7e advantage o( s.%70 o( the regulations "ou $ill /e in violation o( the 'SA on the /asis o( presumed 7no$ledge ,oes it help i( the compan" has policies and*or procedures in place to help compartmentali9e and control access to this in(ormation o Mes loo7 at s.%70?3@ o 4hat 7inds o( things $ould /e use(ul +ass$ord protected computer (iles= loc7ed (iling ca/inets= code$ord (or transactions= a Jgate7eeperK at the (irm $ho is in charge o( access to all such materials o 63

'ne consideration could /e $hether the (irm should have a /lac7out list $here people $ithin the (irm $ould have to call the gate7eeper /e(ore trading to in;uire as to $hether a particular compan" is on a restricted list i( the compan" is on that list the" $ould not /e a/le to trade 3his $ould /e an airtight $a" o( protecting the (irm /ut could create logistical nightmares In ,onnini i( there $ere (ire$alls at Mor7ton it is apparent that the" did not $or7 as the" $ere supposed to $or7 o De)ences to 'nsider Trading

S.%70 o( the &egulations is one de(ence

S.%70?%@ proves no actual 7no$ledge or proves that no advice $as given on the /asis o( that 7no$ledge S.%70?.@ proves that the" acted solel" as agent (or an unsolicited order= the purchase $as due to an automatic plan= or to (ul(ill a legall" /inding o/ligation o S.%70?0@ proves that the" reasona/l" /elieved that the other part" to the transaction had 7no$ledge o( the material (act or material change S.136"7 2 1o person or compan" shall /e (ound to have contravened su/section ?%@= ?.@ or ?3@ i( the person or compan" proves that the person or compan" reasona/l" /elieved that the material (act or material change had /een generall" disclosed o But this is not ver" use(ul remem/er Harold + )onnor must /e enough time to allo$ (or the mar7et to a/sor/ the in(ormation (or the in(ormation to /e Jgenerall" disclosedK A safe wor+in! rule would be that an insider should wait a )ini)u) of one full tradin! day after the release of the infor)ation before tradin! Must /e at least a da" so it is 7ind o( di((icult to get a$a" (rom this one /ecause "ou should 7no$ $hat it means to /e generall" disclosed o 3he onus is on the accused to prove that he or she had such a reasona/le /elie( in addition the in(ormation must /e generall" disclosed o 3reen v Charterhouse 3roup Can6 /td6 (7&89)( 7$ O2 ($d) $:% (CA) I should comment upon SinclairZs so2called P$arning letterP o( April 3!= %D68. 4hatever ma" /e said o( this letter as /eing a discharge o( the Pmoral o/ligationsP $hich :od/out thought :reenZs (ormer associates o$ed to :reen= the letter $as not the disclosure $hich ma" provide a de(ence to an action under s. %%3?%@ o( the Securities Act. 4hile the letter does not sa" so= the $riter is reall" sa"ing that Pcon(idential in(ormation exists $hich might /e o( su/stantial signi(icance to "ou /ut $hich I am not at li/ert" to discloseP. 'nce the necessar" ingredients o( a cause o( action against an insider under s. %%3?%@ are sho$n to exist= then the resulting o/ligation is discharged /" disclosure o( Psuch in(ormationP. It is not discharged /" disclosing it exists= $ithout sa"ing $hat it is. &easona/le mista7e o( (act o Insider $ill not /e lia/le (or an insider trade $here there is a reasona/le mista7e o( (act on a strict lia/ilit" o((ence o In a $a" this is li7e the arguments o( ,onnini= +e9im and Harper 3he" stated that the" reasona/l" did not /elieve that the changes $ere material (acts #suall" the more unsophisticated o( an investor "ou are the more li7el" it is that this de(ence $ill (l" /ecause $hen "ou are more sophisticated "ou should 7no$ /etter than this Again $ith these cases it 5ust (eels $rong 7ind o( luc7" that "our Jmista7eK 5ust happened to $or7 out to "our /ene(it o o

Tipping S.136+7 2 1o reporting issuer and no person or compan" in a special relationship $ith a reporting issuer shall in(orm= other
than in the necessar" course o( /usiness= another person or compan" o( a material (act or material change $ith respect to the reporting issuer /e(ore the material (act or material change has /een generall" disclosed o 1ote that a reporting issuer can /e a tipper i( the reporting issuer improperl" releases in(ormation through its o((icers or directors then it can /e in violation o( this section o 4hat is Jother than in the ordinar" course o( /usinessK 4hen $ould a reporting issuer /e allo$ed to tip in(ormation that is not generall" disclosed I( a compan" is approached /" another that is interested in doing a transaction 3he target compan" ma" open a data room and allo$ the potential /idder access to con(idential in(ormation this $ould /e access to in(ormation that is not generall" disclosed including some in(ormation that ma" /e material (act in(ormation not "et disclosed In exchange the target $ill $ant to have the /idder sign con(identialit" and standstill agreements o Including provisions a/out not attempting to hire a$a" 7e" emplo"ees= go a(ter 7e" customers etc. (or a set period o( time 6

But $hat a/out i( emplo"ees leave the target later and go to the /idder i( the /id does not materiali9e $ill incorporate provisions a/out that as $ell 3he ordinar" course o( /usiness re(ers to the reporting issuer could also re(er to the potential suitor as $ell depending upon the circumstances ,oes not mean the ordinar" course o( the insider8s /usiness that $ould /e a violation o E.g. i( the insider has investments and $ants to /ene(its tipping $ould /e /ene(icial to them /ut $ould de(initel" /e a violation S.136 7 2 1o person or compan" that proposes= o ?a@ to ma7e a ta7e2over /id= as de(ined in +art CC= (or the securities o( a reporting issuerF o ?/@ to /ecome a part" to a reorgani9ation= amalgamation= merger= arrangement or similar /usiness com/ination $ith a reporting issuerF or o ?c@ to ac;uire a su/stantial portion o( the propert" o( a reporting issuer= o shall in(orm another person or compan" o( a material (act or material change $ith respect to the reporting issuer /e(ore the material (act or material change has /een generall" disclosed except $here the in(ormation is given in the necessar" course o( /usiness to e((ect the ta7e2over /id= /usiness com/ination or ac;uisition 1ote the distinction here /et$een this section and s.76?0@ de(inition o( special relationship /idder is not included in the de(inition o( a special relationship o 4h" then is there a provision (or /idders under tipping Because "ou do not $ant a /idder tipping people o(( a/out an upcoming /id could /e a potentiall" huge loophole in the legislation Bidders are not in a special relationship ho$ever /ecause it is permissi/le (or them to use their o$n 7no$ledge o( their intention to ma7e a /id to /u" securities o( the intended target 136076e7 person $ho receives a tip then /ecomes a person in a special relationship o )ontinuous chain o( tipees $ith the de(ence o( J7no$s o( ought reasona/l" to have 7no$nK o

Re#edies )or Tipping4'nsider Trading S.%3 o( the 'SA S.1 "617 2 Ever" person or compan" in a special relationship $ith a reporting issuer $ho purchases or sells securities o( the
reporting issuer $ith 7no$ledge o( a material (act or material change $ith respect to the reporting issuer that has not /een generall" disclosed is lia/le to compensate the seller or purchaser o( the securities= as the case ma" /e= (or damages as a result o( the trade unless= o ?a@ the person or compan" in the special relationship $ith the reporting issuer proves that the person or compan" reasona/l" /elieved that the material (act or material change had /een generall" disclosedF or o ?/@ the material (act or material change $as 7no$n or ought reasona/l" to have /een 7no$n to the seller or purchaser= as the case ma" /e. Measure o) Da#ages

S.1 "637 2 In assessing damages under su/section ?%@ or ?.@= the court shall consider=
?a@ i( the plainti(( is a purchaser= the price paid /" the plainti(( (or the securit" less the average mar7et price o( the securit" in the t$ent" trading da"s (ollo$ing general disclosure o( the material (act or material changeF or o ?/@ i( the plainti(( is a vendor= the average mar7et price o( the securit" in the t$ent" trading da"s (ollo$ing general disclosure o( the material (act or material change less the price received /" the plainti(( (or the securit"= o /ut the court ma" instead consider such other measures o( damages as ma" /e relevant in the circumstances Accountability for 3ain pa" /ac7 to the reporting issuer S.1 "6"7 2 Ever" person or compan" $ho is an insider= a((iliate or associate o( a reporting issuer that= o ?a@ sells or purchases the securities o( the reporting issuer $ith 7no$ledge o( a material (act or material change $ith respect to the reporting issuer that has not /een generall" disclosedF or o ?/@ communicates to another person= other than in the necessar" course o( /usiness= 7no$ledge o( a material (act or material change $ith respect to the reporting issuer that has not /een generall" disclosed= o

60

is accounta/le to the reporting issuer (or an" /ene(it or advantage received or receiva/le /" the person or compan" as a result o( the purchase= sale or communication= as the case ma" /e= unless the person or compan" proves that the person or compan" reasona/l" /elieved that the material (act or material change had /een generall" disclosed 3he general thought underpinning s.%3 ? @ is that a gain /" an insider is a /reach o( their (iduciar" dut" to the compan" and an" gain should go /ac7 to the compan" 3"ing into this is s.%30? @ $here the 'S) can commence an action to have the insider pa" /ac7 the mone" to the reporting issuer Aor all intents and purposes s.%3 ?%@ is 7ind o( useless since it is all /ut impossi/le to tie the /u"er and seller o( securities together in all /ut the largest o( trades due to the electronic trans(er s"stems $here /ro7erage houses 5ust trans(er securities /et$een themselves S.%3 ? @ is more interesting especiall" $hen com/ined $ith the po$er o( the 'S) to (orce the repa"ment o( an" gains under s.%30? @ considering that this $a" all o( the shareholders /ene(it Also consider that s.%3 ?%@ is much /roader in application since it applies to all those in a special relationship $hile s.%3 ? @ onl" applies to the more limited group 7no$n as insiders 4e also have other penalties S.1++617 includes (ines and possi/le 5ail time S.1++6"7 2 ,espite su/section ?%@ and in addition to an" imprisonment imposed under su/section ?%@= a person or compan" $ho is convicted o( contravening su/section 76 ?%@= ?.@ or ?3@ is lia/le to a minimum (ine e;ual to the pro(it made or the loss avoided /" the person or compan" /" reason o( the contravention and a maximum (ine e;ual to the greater o(= o ?a@ H0 millionF and o ?/@ the amount e;ual to triple the amount o( the pro(it made or the loss avoided /" the person or compan" /" reason o( the contravention. S.1++637 de(initions (or s.%.. o /oss avoided 2 the amount /" $hich the amount received (or the securit" sold in contravention o( su/section 76 ?%@ exceeds the average trading price o( the securit" in the t$ent" trading da"s (ollo$ing general disclosure o( the material (act or the material change o Profit )ade 2 ?a@ the amount /" $hich the average trading price o( the securit" in the t$ent" trading da"s (ollo$ing general disclosure o( the material (act or the material change exceeds the amount paid (or the securit" purchased in contravention o( su/section 76 ?%@= ?/@ in respect o( a short sale= the amount /" $hich the amount received (or the securit" sold in contravention o( su/section 76 ?%@ exceeds the average trading price o( the securit" in the t$ent" trading da"s (ollo$ing general disclosure o( the material (act or the material change= or ?c@ the value o( an" consideration received (or in(orming another person or compan" o( a material (act or material change $ith respect to the reporting issuer in contravention o( su/section 76 ?.@ or ?3@. 3he prohi/itions against insider trading and tipping in the 'SA are ver" /road cover a $ide range o( people 3he pro/lem $ith insider trading is getting a hold o( the (acts to allo$ (or success(ul prosecutions o 3here have not /een a $hole lot o( success(ul prosecutions usuall" settle 1ormall" settlements are usuall" (or the pro(its and a (ine o 4hen &S starts to see some a/normal trading - and the" $ill see it - the" $ill let the 3SC 7no$ and 3SC ma" call the issuer to in;uire as to $hat is going on= i( an"thing. I( a material change comes up soon a(ter &S $ill let the 'S) 7no$ and the 'S) $ill as7 the issuer (or in(ormation on $ho at the issuer and an" other (irms ?accountants= advisers= la$"ers etc.@ had 7no$ledge o( the material change. 3he 'S) $ill then go to /ro7erages and see i( an" o( those people have accounts and i( an" o( them did an" trading in that period o( time. I( the" did the" could /e in trou/le. It is al$a"s /est to cooperate $ith the 'S) /ecause other$ise the" ma" do a (ull2/lo$n investigation o

'nsider Reporting 'nl" people $ho are insiders need to report as de(ined in the 'SA S.1!1617 2 A person or compan" $ho /ecomes an insider o( a reporting issuer= other than a mutual (und= shall= $ithin %! da"s
(rom the da" that he= she or it /ecomes an insider= or such shorter period as ma" /e prescri/ed /" the regulations= (ile a report as o( the da" on $hich he= she or it /ecame an insider disclosing an" direct or indirect /ene(icial o$nership o( or control or direction over securities o( the reporting issuer as ma" /e re;uired /" the regulations I( the" do not have an"thing to report the" do not have to (ile a report i( the" have no holdings Includes all t"pes o( securities 'ptions= derivatives= shares etc. Insider reporting is done electronicall" through SE,I Includes direct and /ene(icial control 66

Includes directl" controlled securities and those controlled indirectl" such as &&S+ accounts S.1!16+7 - An insider $ho has (iled or is re;uired to (ile a report under this section or an" predecessor section and $hose direct or indirect /ene(icial o$nership o( or control or direction over securities o( the reporting issuer changes (rom that sho$n or re;uired to /e sho$n in the report or in the latest report (iled /" the person or compan" under this section or an" predecessor section shall= $ithin %! da"s (rom the da" on $hich the change ta7es place= or such shorter period as ma" /e prescri/ed /" the regulations= (ile a report o( direct or indirect /ene(icial o$nership o( or control or direction over securities o( the reporting issuer as o( the da" on $hich the change too7 place and the change or changes that occurred= giving an" details o( each transaction as ma" /e re;uired /" the regulations 4ant to 7no$ $hat the insiders are doing 3his in(ormation is use(ul (or investors /ecause i( insiders are selling it ma" signal the investors that things are not all that great $ith the compan" same thing $ith i( the" are /u"ing )ommissions have /ecome more vigilant in this area )learl" )anadian )E' $as (ined H.0!7 (or not updating insider reports )ommissions $ill compare insider reports $ith prox" circulars i( there is a discrepanc" then one or the other is $rong either is a violation S.1!16 7 - A person or compan" $ho /ecomes an insider o( a reporting issuer /" reason o( su/section % ?8@ or ?D@ shall (ile the reports re;uired /" su/sections ?%@ and ?.@ o( this section (or the previous six months or such shorter period that he or she $as a director or o((icer o( the reporting issuer $ithin %! da"s (rom the da" that the issuer /ecame an insider o( a reporting issuer or the reporting issuer /ecame an insider o( another reporting issuer= as the case ma" /e= or such shorter period as ma" /e prescri/ed /" the regulations Idea /ehind the six month thing is to chec7 into $hether or not= prior to the compan" /ecoming an insider o( the reporting issuer= the insiders o( the compan" had /een accumulating shares /ecause the" $ould have /een in a special relationship $ith the reporting issuer ;ational 4nstru)ent <<*7%7 Part $ = "#e)ptions for Certain 'irectors and Senior Officers o +.1 Reporting -.e#ption 6,ertain Directors7 22 Su/5ect to section .%= the insider reporting re;uirement does not appl" to a director o( a su/sidiar" o( a reporting issuer in respect o( securities o( the reporting issuer i( the director ?a@ does not in the ordinar" course receive or have access to in(ormation as to material (acts or material changes concerning the reporting issuer /e(ore the material (acts or material changes are generall" disclosedF and ?/@ is not an ineligi/le insider in relation to the reporting issuer. o +.+ Reporting -.e#ption 6,ertain Senior &))icers7 2 Su/5ect to section .%= the insider reporting re;uirement does not appl" to a senior o((icer o( a reporting issuer or a su/sidiar" o( the reporting issuer in respect o( securities o( the reporting issuer i( the senior o((icer ?a@ does not in the ordinar" course receive or have access to in(ormation as to material (acts or material changes concerning the reporting issuer /e(ore the material (acts or material changes are generall" disclosedF and ?/@ is not an ineligi/le insider in relation to the reporting issuer. o +. Reporting -.e#ption 6,ertain 'nsiders o) 'n/est#ent 'ssuers7 2 Su/5ect to section .%= the insider reporting re;uirement does not appl" to a director or senior o((icer o( an insider issuer= or a director or senior o((icer o( a su/sidiar" o( the insider issuer= in respect o( securities o( an investment issuer i( the director or senior o((icer ?a@ does not in the ordinar" course receive or have access to in(ormation as to material (acts or material changes concerning the investment issuer /e(ore the material (acts or material changes are generall" disclosedF and ?/@ is not an ineligi/le insider in relation to the investment issuer. Part > = "#e)ption for 'irectors and Senior Officers of Affiliates of 4nsiders of a 2eportin! 4ssuer o .1 ?uBbec 2 3his +art does not appl" in BuR/ec. o .+ Reporting -.e#ption 2 Su/5ect to section 3.3 and .%= the insider reporting re;uirement does not appl" to a director or senior o((icer o( an a((iliate o( an insider o( a reporting issuer in respect o( securities o( the reporting issuer. o . 2i#itation 2 3he exemption in section 3.. is not availa/le i( the director or senior o((icer ?a@ in the ordinar" course receives or has access to in(ormation as to material (acts or material changes concerning the reporting issuer /e(ore the material (acts or material changes are generall" disclosedF ?/@ is an ineligi/le insider in relation to the reporting issuerF or ?c@ is a director or senior o((icer o( an issuer that supplies goods or services to the reporting issuer or to a su/sidiar" o( the reporting issuer or has contractual arrangements $ith the reporting issuer or a su/sidiar" o( the reporting issuer= and the nature and scale o( the suppl" or the contractual arrangements could reasona/l" /e expected to have a signi(icant e((ect on the mar7et price or value o( the securities o( the reporting issuer. Part ? = 4nsider /ists and Policies o ".1 'nsider 2ists and Policies 2 An insider o( a reporting issuer ma" rel" on an exemption contained in +art . or +art 3 i( ?a@ the insider has advised the reporting issuer that the insider intends to rel" on the exemption= and 67

?/@ the reporting issuer has advised the insider that the reporting issuer has esta/lished policies and procedures relating to restricting the trading activities o( its insiders and other persons $ith access to material undisclosed in(ormation relating to the reporting issuer or to an investment issuer o( the reporting issuer= and $ill= as part o( such policies and procedures= maintainG ?i@ a list o( all insiders o( the reporting issuer exempted (rom the insider reporting re;uirement /" sections ..%= ...= ..3 and 3..F and ?ii@ a list o( all insiders o( the reporting issuer not exempted (rom the insider reporting re;uirement /" sections ..%= ...= ..3 and 3... o ".+ :lternati/e to 2ists 2 ,espite section .%= an insider o( a reporting issuer ma" rel" on an exemption contained in +art . or +art 3 i( ?a@ the insider has advised the reporting issuer that the insider intends to rel" on the exemption= and ?/@ the reporting issuer has advised the insider that the reporting issuer has esta/lished policies and procedures relating to restricting the trading activities o( its insiders and other persons $ith access to material undisclosed in(ormation relating to the reporting issuer or to an investment issuer o( the reporting issuer= and the reporting issuer has (iled an underta7ing $ith the regulator or securities regulator" authorit" that the reporting issuer $ill= promptl" upon re;uest= ma7e availa/le to the regulator or securities regulator" authorit" ?i@ a list o( all insiders o( the reporting issuer exempted (rom the insider reporting re;uirement /" sections ..%= ...= ..3 and 3..F and ?ii@ a list o( all insiders o( the reporting issuer not exempted (rom the insider reporting re;uirement /" sections ..%= ...= ..3 and 3... Part < = 2eportin! of Ac@uisitions Ander Auto)atic Securities Purchase Plans o 0.1 Reporting -.e#ption 2 Su/5ect to sections 0.. and 0.3= the insider reporting re;uirement does not appl" to a director or senior o((icer o( a reporting issuer or o( a su/sidiar" o( the reporting issuer (or ?a@ the ac;uisition o( securities o( the reporting issuer under an automatic securities purchase plan= other than the ac;uisition o( securities under a lump2sum provision o( the planF or ?/@ a speci(ied disposition o( securities o( the reporting issuer under an automatic securities purchase plan. o 0.+ 2i#itation ?%@ 'ther than in BuR/ec= the exemption in section 0.% is not availa/le to an insider descri/ed in clause ?e@ o( the de(inition o( Pineligi/le insiderP. ?.@ In BuR/ec= the exemption in section 0.% is not availa/le to an insider descri/ed in clause ?(@ o( the de(inition o( Pineligi/le insiderP. o 0. :lternati/e Reporting Re;uire#ent ?%@ An insider $ho relies on the exemption (rom the insider reporting re;uirement contained in section 0.% must (ile a report= in the (orm prescri/ed (or insider trading reports under securities legislation= disclosing= on a transaction2/"2transaction /asis or in accepta/le summar" (orm= each ac;uisition o( securities under the automatic securities purchase plan that has not previousl" /een disclosed /" or on /ehal( o( the insider= and each speci(ied disposition o( securities under the automatic securities purchase plan that has not previousl" /een disclosed /" or on /ehal( o( the insider= ?a@ (or an" securities ac;uired under the automatic securities purchase plan that have /een disposed o( or trans(erred= other than securities that have /een disposed o( or trans(erred as part o( a speci(ied disposition o( securities= $ithin the time re;uired /" securities legislation (or (iling a report disclosing the disposition or trans(erF and ?/@ (or an" securities ac;uired under the automatic securities purchase plan during a calendar "ear that have not /een disposed o( or trans(erred= and an" securities that have /een disposed o( or trans(erred as part o( a speci(ied disposition o( securities= $ithin D! da"s o( the end o( the calendar "ear. ?.@ An insider is exempt (rom the re;uirement under su/section ?%@ i(= at the time the report is due= ?a@ the insider has ceased to /e an insiderF or ?/@ the insider is entitled to an exemption (rom the insider reporting re;uirements under an exemptive relie( order or under an exemption contained in )anadian securities legislation. o 0." Speci)ied Disposition o) Securities 2 A disposition or trans(er o( securities ac;uired under an automatic securities purchase plan is a Pspeci(ied disposition o( securitiesP i( ?a@ the disposition or trans(er is incidental to the operation o( the automatic securities purchase plan and does not involve a discrete investment decision /" the director or senior o((icerF or ?/@ the disposition or trans(er is made to satis(" a tax $ithholding o/ligation arising (rom the distri/ution o( securities under the automatic securities purchase plan and either ?i@ the director or senior o((icer has elected that the tax $ithholding o/ligation $ill /e satis(ied through a disposition o( securities= has communicated this election to the reporting issuer or the plan 68

administrator not less than 3! da"s prior to the disposition and this election is irrevoca/le as o( the 3!th da" /e(ore the dispositionF or ?ii@ the director or senior o((icer has not communicated an election to the reporting issuer or the plan administrator and= in accordance $ith the terms o( the plan= the reporting issuer or the plan administrator is re;uired to sell securities automaticall" to satis(" the tax $ithholding o/ligation. Part 9 = 2eportin! for ;or)al Course 4ssuer ids o 3.1 Reporting -.e#ption 2 3he insider reporting re;uirement does not appl" to an issuer (or ac;uisitions o( securities o( its o$n issue /" the issuer under a normal course issuer /id. o 3.+ Reporting Re;uire#ent 2 An issuer $ho relies on the exemption (rom the insider reporting re;uirement contained in section 6.% shall (ile a report= in the (orm prescri/ed (or insider trading reports under securities legislation= disclosing each ac;uisition o( securities /" it under a normal course issuer /id $ithin %! da"s o( the end o( the month in $hich the ac;uisition occurred. Part 8 = 2eportin! for Certain 4ssuer "vents o 1.1 Reporting -.e#ption 2 3he insider reporting re;uirement does not appl" to an insider o( a reporting issuer $hose direct or indirect /ene(icial o$nership o(= or control or direction over= securities o( the reporting issuer changes as a result o( an issuer event o( the issuer. o 1.+ Reporting Re;uire#ent 2 An insider $ho relies on the exemption (rom the insider reporting re;uirement contained in section 7.% must (ile a report= in the (orm prescri/ed (or insider trading reports under securities legislation= disclosing all changes in direct or indirect /ene(icial o$nership o(= or control or direction over= securities /" the insider (or securities o( the reporting issuer pursuant to an issuer event that have not previousl" /een reported /" or on /ehal( o( the insider= $ithin the time re;uired /" securities legislation (or the insider to report an" other su/se;uent change in direct or indirect /ene(icial o$nership o(= or control or direction over= securities o( the reporting issuer.

6D

Takeo/er 5id Regulation

&egulation o( transactions in $hich a part" ac;uires a ma5or economic interest in a reporting issuer
4hat8s so special a/out this It is a matter o( the integrit" o( the (inancial mar7ets &emem/er the purposes o( securities regulation o +rotection o( the pu/lic o Integrit" o( the mar7ets ,eals $ith issues o( a /unch o( some$hat unin(ormed securit" holders /eing given a limited time to ma7e a decision on $hether or not to sell I( the" don8t accept the" could /e (ro9en out= i( the" don8t accept in time the mar7et pros= those close to the mar7et $ould /e the onl" ones on the upta7e o( the deal a/out (airness o Because i( the" do not tender to the deal the" could /e le(t in a minorit" position )ould the" then /e (orced out or could the" /e in a less attractive position 'S) and other commissions $ant to ensure that ever"one is treated e;uall" and (airl" Aor each o( the ma5or sections that $e deal $ith there is one 7e" section in the 'SA (or ta7eover /ids it is s.D0 S.$0 2 Su/5ect to the regulations= the (ollo$ing rules appl" to ever" ta7e2over /id and issuer /idG Deli/ery o) bid o %. 3he /id shall /e made to all holders o( securities o( the class that is su/5ect to the /id $ho are in 'ntario= and delivered /" the o((eror to all holders= $hose last address as sho$n on the /oo7s o( the o((eree issuer is in 'ntario= o( securities o( that class and o( securities that= /e(ore the expir" o( the /id= are converti/le into securities o( that class. All shareholders o( the class are given a cop" o( the /id the same /id 1otice that the distinction is /ased on class o( shares the o((er is made /" class o( shareholder Mini#u# deposit period 3he o((eror shall allo$ at least 30 da"s (rom the date o( the /id during $hich securities ma" /e deposited pursuant to the /id. When taking up prohibited o 3. 1o securities deposited pursuant to the /id shall /e ta7en up /" the o((eror until the expiration o( 30 da"s (rom the date o( the /id. Withdra*al rights o . Securities deposited pursuant to the /id ma" /e $ithdra$n /" or on /ehal( o( a depositing securit" holder= i. at an" time $here the securities have not /een ta7en up /" the o((eror= ii. at an" time /e(ore the expiration o( %! da"s (rom the date o( a notice o( change or variation under section D8= and iii. i( the securities have not /een paid (or /" the o((eror $ithin three /usiness da"s a(ter having /een ta7en up. -.ception o 0. 3he right o( $ithdra$al con(erred /" su/paragraph ii o( paragraph does not appl"= i. $here the securities have /een ta7en up /" the o((eror at the date o( the notice= ii. $here a variation in the terms o( a /id consists solel" o( an increase in the consideration o((ered (or the securities su/5ect to the /id and the time (or deposit is not extended (or a period greater than that re;uired /" su/section D8 ?0@= or iii. in the circumstances descri/ed in su/section D8 ?6@. 9otice o) *ithdra*al o 6. 1otice o( $ithdra$al o( an" securities under paragraph shall /e made /" or on /ehal( o( the depositing securit" holder /" a method that provides the depositar" designated under the /id $ith a $ritten or printed cop" and= to /e e((ective= the notice must /e actuall" received /" the depositar" and= $here notice is given in accordance $ith this paragraph= the o((eror shall return the securities to the depositing securit" holder. Proportionate take8up o 7. 4here the /id is made (or less than all o( the class o( securities su/5ect to the /id and $here a greater num/er o( securities is deposited pursuant thereto than the o((eror is /ound or $illing to ac;uire under the /id= the securities shall /e ta7en up and paid (or /" the o((eror proportionatel"= disregarding (ractions= according to the num/er o( securities deposited /" each depositing securit" holder. E((ect o( mar7et purchases o 8. 4here an o((eror purchases securities as permitted /" su/section D ?3@= the securities so purchased shall /e counted in the determination o( $hether a condition as to the minimum num/er o( securities to /e deposited in the /id has /een (ul(illed= /ut shall not reduce the num/er o( securities the o((eror is /ound under the /id to ta7e up. When securities #ust be taken up and paid )or o 7!

D. Su/5ect to paragraphs %! and %%= the o((eror shall ta7e up and pa" (or securities deposited under the /id= $here all the terms and conditions o( the /id have /een complied $ith or $aived= not later than ten da"s a(ter the expir" o( the /id. Sa#e o %!. An" securities that are ta7en up /" the o((eror under the /id shall /e paid (or /" the o((eror as soon as possi/le= and in an" event not more than three /usiness da"s= a(ter the ta7ing up o( the securities. 'de# o %%. An" securities deposited pursuant to the /id su/se;uent to the date on $hich the o((eror (irst ta7es up securities deposited under the /id shall /e ta7en up and paid (or /" the o((eror $ithin ten da"s o( the deposit o( the securities. -.tension restricted o %.. A /id ma" not /e extended /" the o((eror= $here all the terms and conditions thereo( have /een complied $ith except those $aived /" the o((eror= unless the o((eror (irst ta7es up all securities deposited thereunder and not $ithdra$n. Sa#e o %..% ,espite paragraph %.= i( the o((eror $aives an" terms or conditions o( a /id and extends the /id in circumstances $here the rights o( $ithdra$al con(erred /" su/paragraph ii are applica/le= the /id shall /e extended $ithout the o((eror (irst ta7ing up the securities $hich are su/5ect to such rights o( $ithdra$al. 9e*s release o %3. 4here all the terms and conditions o( the /id have /een complied $ith or $aived= the o((eror shall (orth$ith issue a notice /" ne$s release to that e((ect= $hich ne$s release shall disclose the approximate num/er o( securities deposited and the approximate num/er that $ill /e ta7en up But $hat exactl" is a ta7eover /id loo7 to the de(initional section (or this portion o( the 'SA s.8D Takeo/er 5id an offer to ac@uire outstanding votin! or e@uity securities of a class made to an" person or compan" who is in Ontario or to an" securit" holder o( the o((eree issuer $hose last address as sho$n on the /oo7s o( the o((eree issuer is in 'ntario= $here the securities sub0ect to the offer to ac@uire( to!ether with the offerorBs securities( constitute in the a!!re!ate $% per cent or )ore of the outstandin! securities o( that class o( securities at the date o( the o((er to ac;uire &))errorCs securities securities o( an o((eree issuer /ene(iciall" o$ned= or over $hich control or direction is exercised= on the date o( an o((er to ac;uire= /" an o((eror or an" person or compan" acting 5ointl" or in concert $ith the o((eror o

What is Dointly and in concert?

S.$1617 2 Aor the purposes o( this +art= it is a ;uestion o( (act as to $hether a person or compan" is acting 5ointl" or in concert
$ith an o((eror and= $ithout limiting the generalit" o( the (oregoing= the (ollo$ing shall /e presumed to /e acting 5ointl" or in concert $ith an o((erorG o %. Ever" person or compan" $ho= as a result o( an" agreement= commitment or understanding= $hether (ormal or in(ormal= $ith the o((eror or $ith an" other person or compan" acting 5ointl" or in concert $ith the o((eror= ac;uires or o((ers to ac;uire securities o( the issuer o( the same class as those su/5ect to the o((er to ac;uire. o .. Ever" person or compan" $ho= as a result o( an" agreement= commitment or understanding= $hether (ormal or in(ormal= $ith the o((eror or $ith an" other person or compan" acting 5ointl" or in concert $ith the o((eror= intends to exercise 5ointl" or in concert $ith the o((eror or $ith an" other person or compan" acting 5ointl" or in concert $ith the o((eror an" voting rights attaching to an" securities o( the o((eree issuer. o 3. Ever" associate or a((iliate o( the o((eror What is bene)icial &*nership?

S.$!617 2 Aor the purposes o( this +art= in determining the /ene(icial o$nership o( securities o( an o((eror or o( an" person or
compan" acting 5ointl" or in concert $ith the o((eror= at an" given date= the o((eror= person or compan" shall /e deemed to have ac;uired and /e the /ene(icial o$ner o( a securit"= including an unissued securit"= i( the o((eror= person or compan" is the /ene(icial o$ner o( an" securit" converti/le $ithin sixt" da"s (ollo$ing such date into such a securit" or has the right or o/ligation= $hether or not on conditions= to ac;uire $ithin such sixt" da"s /ene(icial o$nership o( the securit" $hether through the exercise o( an option= $arrant= right or su/scription privilege or other$ise o Also interconverti/ilit" o S.8$6 7 2 Aor the purposes o( this +art= ?a@ a securit" shall /e deemed to /e converti/le into a securit" o( another class i(= $hether or not on conditions= it is or ma" /e converti/le into or exchangea/le (or= or i( it carries the right or o/ligation to ac;uire= a securit" o( the other class= $hether o( the same or another issuerF and ?/@ a securit" that is converti/le into a securit" o( another class shall /e deemed to /e converti/le into a securit" or securities o( each class into $hich the second2mentioned securit" ma" /e converted= either directl" or through securities o( one or more other classes o( securities that are themselves converti/le &))er to ac;uire includes= o ?a@ an o((er to purchase= or a solicitation o( an o((er to sell= securities= 7%

?/@

an acceptance o( an o((er to sell securities= $hether or not such o((er to sell has /een solicited=

or an" com/ination thereo(= and the person or compan" accepting an o((er to sell shall /e deemed to /e ma7ing an o((er to
ac;uire to the person or compan" that made the o((er to sellF ,lass o) securities a series o( a class o( securities 'ssuer bid an o((er to ac;uire or redeem securities o( an issuer made /" the issuer to an" person or compan" $ho is in 'ntario or to an" securit" holder o( the issuer $hose last address as sho$n on the /oo7s o( the issuer is in 'ntario and includes a purchase= redemption or other ac;uisition o( securities o( the issuer /" the issuer (rom an" such person or compan"= /ut does not include an o((er to ac;uire or redeem de/t securities that are not converti/le into securities other than de/t securities &))eror a person or compan" $ho ma7es a ta7e2over /id= an issuer /id or an o((er to ac;uire and= (or the purposes o( section %!%= includes a person or compan" $ho ac;uires a securit"= $hether or not /" $a" o( a ta7e2over /id= issuer /id or o((er to ac;uire -;uity Securities an" securit" o( an issuer that carries a residual right to participate in the earnings o( the issuer and= upon the li;uidation or $inding up o( the issuer= in its assets 4hen "ou get to the .!L threshold "ou are ma7ing a ta7eover /id must ta7e into consideration the securities o$ned /" the o((error and an" other parties acting $ith it 4hat is not covered o 4hat i( the issuer does a rights o((ering and there is a shareholder $ith a %D.DL holding and that holder accepts /ut no other shareholder accepts so that the %D.DL holder no$ has a ..L holding Is this a ta7eover /id pro/a/l" not Example o Have a compan" $ith a dual class share structure )lass A is a super voting %! votes per share and )lass B is % vote per share I( "ou o((er to /u" all o( the )lass A shares do "ou have to ma7e the same o((er to the )lass B shareholders no /ecause "ou have not o((ered to /u" an" o( the class B shares &emem/er the 'SA goes on a class /" class /asis Ho$ever this $ould /e un(air and there are protections (or shareholders )alled Jcoattail provisionsK and implemented /" the 3SC I( an issuer has a dual class share ?or more class@ structure and $ants to list on the exchange the" $ill not /e allo$ed to unless the" underta7e a covenant promising that i( the" su/mit to a ta7eover /id that the same o((er $ill /e extended to all shareholders o 3here is an issue o( privit" here ho$ever cannot get the holder o( the super voting shares to 5ust promise to the other shareholders to give them the same deal /ecause the" $ill sell their shares and the ne$ shareholders $ill no longer /e in contractual privit" so get the holder o( the super voting shares to pledge to a trustee that the" $ill a/ide /" this promise and i( the" trans(er their o$nership that the trans(eree $ill also underta7e this pledge Example is the )anadian 3ire )ase o )ommissions ta7e these promises ver" seriousl" 3he 'S) is onl" allo$ed to deal $ith actions a((ecting people in 'ntario and that is $h" the provision (or ta7eover /id sa"s that it deals $ith people in 'ntario constitutional issues But $hat i( an o((eror sa"s that it is onl" going to o((er its deal to people in one province and not another Rule 3+8+!1 ( ,ease Trade &rders 2 I( a ta7e2over /id or issuer /id is made to securit" holders o( a target compan" in one or more 5urisdictions= /ut is not made to securit" holders in one or more other 5urisdictions= the )anadian securities regulator" authorities in the 5urisdictions in $hich the /id is made ma" issue cease trade orders in respect o( the /id. 3he )anadian securities regulator" authorities $ill generall" not issue a cease trade order $ithout providing the o((eror an opportunit" to address $hether the /id o((ends the pu/lic polic" considerations re(lected in this +olic" and an" other relevant considerations As (or the .!L threshold once "ou reach it - go one share past it - "ou are ma7ing a ta7eover /id - unless "ou can (ind an exemption ?s.$ @ o 3he rules a/out converti/ilit" - s.$!617 and interconverti/ilit" ?s.8$6 @@ are clearl" a/out anti2avoidance ,on8t $ant someone to sa" that J"es I had these /ut I did not 7no$ that the" counted as securitiesK o In calculating the .!L it is important to consider $ho is $or7ing $ith the o((eror 5ointl" and in concert s.$1617 Example Have a compan" $ith a %!L shareholder= 8L shareholder and 7L shareholder 3he" agree to $or7 together to sha7e up management to increase share value 3he moment an" o( them purchase a single securit" "ou have a ta7eover /id 7.

&egardless o( $hether their deal is (ormal or in(ormal

4hen an o((er is made then all securities holders shall /e o((ered the same price (or their securities S.$1617 2 Su/5ect to the regulations= $here a ta7e2over /id or issuer /id is made= all holders o( the same class o( securities
shall /e o((ered identical consideration

In addition there shall /e no collateral arrangement $ith an" holder o( an" securities o( the issuer S.$16+7 2 I( an o((eror ma7es or intends to ma7e a ta7e2over /id or issuer /id= neither the o((eror nor an" person or compan"
acting 5ointl" or in concert $ith the o((eror shall enter into an" collateral agreement= commitment or understanding $ith an" holder or /ene(icial o$ner o( securities o( the o((eree issuer that has the e((ect o( providing to the holder or o$ner a consideration o( greater value than that o((ered to the other holders o( the same class o( securities 3he issuer also needs to have the (unding in place (or the /id prior to ma7ing the /id ho$ever it need not /e de(initive (unding /ecause $hat (unding comes $ithout conditions o( some sort S.$3 2 4here a ta7e2over /id or issuer /id provides that the consideration (or the securities deposited pursuant to the /id is to /e paid in cash or partl" in cash= the o((eror shall ma7e ade;uate arrangements prior to the /id to ensure that the re;uired (unds are availa/le to e((ect pa"ment in (ull (or all securities that the o((eror has o((ered to ac;uire o Sta)) 9otice 3+8 !" It is the normal practice in )anada (or /id (inancing arrangements to have some conditions. )SA sta(( have previousl" ta7en the position that some conditionalit" is accepta/le= provided that the conditions are customar" and minimal. Ho$ever= earlier this "ear an 'ntario court issued a 5udgment that has raised some uncertaint" regarding the legal status o( (inancing conditions )SA sta(( consider that an o((eror has complied $ith the /id (inancing re;uirement i( the o((eror reasona/l" /elieves the possi/ilit" is remote that it $ill not /e a/le to pa" (or tendered securities /ecause o( a (inancing condition not /eing satis(ied. In these circumstances= there is su((icient assurance that the (unds are availa/le to complete the purchase even though there is some conditionalit" in the (inancing arrangements. Sta(( $ill continue to interpret the (inancing re;uirement in this manner 3here are disclosure re;uirements similar to that (or a prospectus (or a ta7eover /id as $ell o Ho$ever "ou do not have to clear it (irst $ith the commission 4ould /e $eird i( "ou did 7ind o( /reach con(identialit" i( "ou had to do that (irst S.$8 2 An o((eror shall deliver= $ith or as part o( a ta7e2over /id or issuer /id= a ta7e2over /id circular or issuer /id circular= as the case ma" /e o Must include in(ormation on Aorm 3. In(ormation includes 1ame o( o((error Sta)) 9otice 3+8 ! 4here a ta7e2over /id is made /" a $holl"2o$ned entit"= )SA sta(( regard the entit"Zs parent to /e a 5oint o((eror. In that case= /oth parties must sign the circular as o((erors. I( the named o((eror is not a $holl"2o$ned entit"= )SA sta(( $ill consider $hether the primar" part" is a 5oint o((eror under the /id /" examining its role in that /id Have to sa" $hat the o((eror no$ o$ns Have to sa" $hat the o((eror has purchased in the previous six months Have to descri/e (unding arrangements Have to descri/e an"thing material that the o((eror 7no$s a/out the o((eree o Bidder ma" actuall" 7no$ something a/out the target compan" that the target compan" does not 7no$ this stipulation exists so that the shareholders o( the target compan" are given a (ull and (air opportunit" to understand and value their holdings in the compan" Have to disclose an" valuation that "ou have done o But don8t do a valuation i( "ou do one have to disclose and i( "ou disclose and o((er less than the valuation then $ill pro/a/l" (ace the heat o )an al$a"s do a statistical anal"sis to tr" to determine $hat the compan" is $orth Have to disclose "our intentions (or the compan" o E.g. $hat $ill "ou do i( "ou don8t get all o( the shares 4hat $ill "ou do $ith the minorit" shareholders $ill "ou (orce them out or $ill "ou 7eep them Securities o( the o((eror to /e issued in exchange (or those o( the o(erree o Is a distri/ution o 4ould have to have in(ormation su/stantiall" similar to that as in a prospectus o 9' ( "081!3 o s.+.13617 2 3he dealer registration re;uirement does not appl" in respect o( a trade in a securit" in connection $ith a ta7e2over /id or issuer /id. o 6+7 3he prospectus re;uirement does not appl" to a distri/ution o( a securit" in the circumstances re(erred to in su/section ?%@ Bid circular must /e certi(ied ?as $ith a prospectus@ as containing (ull true and plain disclosure 73

Must /e signed /" . directors and /" the )E' and )A' 3he ta7eover /id circular $ill also engage civil lia/ilit" penalties under s.%3% as $ith a prospectus (or all parties su/5ect to the due diligence de(ence (or all except the o((eror 3he procedural rules (or doing a ta7eover /id are to /e (ound in s.D0 com/ined $ith s.D7 ?the /it a/out all securit" holders o( securities o( the class receiving identical consideration@ Also s.D8 deals $ith the need to deliver a ta7eover /id circular 4hat happens i( the ta7eover /id circular contains de(ective disclosure Similar to a prospectus= $here a material change has occurred there is a re;uirement to amend the ta7eover /id circular S.$86+7 2 4here= /e(ore the expir" o( a ta7e2over /id or issuer /id or a(ter the expir" o( the /id /ut /e(ore the expir" o( all rights to $ithdra$ the relevant securities= a change has occurred in the in(ormation contained in a ta7e2over /id circular or issuer /id circular or in an" notice o( change or notice o( variation that $ould reasona/l" /e expected to a((ect the decision o( the holders o( the securities o( the o((eree issuer to accept or re5ect the /id= a notice o( the change shall /e delivered to ever" person or compan" to $hom the circular $as re;uired to /e delivered and $hose securities $ere not ta7en up at the date o( the occurrence o( the change o S.$86 7 2 Su/section ?.@ does not appl" to a change that is not $ithin the control o( the o((eror or o( an a((iliate o( the o((eror unless it is a change in a material (act relating to the securities /eing o((ered in exchange (or securities o( the o((eree issuer Similarl"= i( there is a variation in the terms o( the /id there must /e a notice provided s.$86"7 3here is also an o/ligation in the 'SA on directors o( the target compan" to respond to an" ta7eover /id $ith a directors8 circular o 3he" must do so $ithin %0 da"s o( the /id /eing made S.$$617 2 4here a ta7e2over /id has /een made= a directors8 circular shall /e prepared and delivered /" the /oard o( directors o( an o((eree issuer to ever" person and compan" to $hom a ta7e2over /id must /e delivered under paragraph % o( section D0 not later than %0 da"s a(ter the date o( the /id As a part o( this circular it is incum/ent upon the /oard to ma7e a recommendation either in (avour= or against the /id= and $here the" (ail to ma7e a recommendation= to provide reasons (or not ma7ing a recommendation S.$$6+7 2 3he /oard o( directors shall include in a directors8 circular either a recommendation to accept or to re5ect a ta7e2 over /id and the reasons (or their recommendation= or a statement that the" are una/le to ma7e or are not ma7ing a recommendation and i( no recommendation is made= the reasons (or not ma7ing a recommendation o 1ormall"= $hen a ta7eover /id is made there $ill /e a premium attached to it - premium over the mar7et price - and i( the directors are not supporting it the" /etter have good reasons (or not doing so Such as the" don8t (eel it is (ull value - explaining $h" - or that the" have other options such as a 4hite <night ,irectors $ill o(ten (orm a committee in order to search out other strategic options= including (inding a $hite 7night o Aor some investors= such as (iduciar" investors ?pension (unds etc.@ it is hard to resist a ta7eover premium such as .! .0L over mar7et price /etter have prett" good reasons (or turning do$n the /id ,irectors also (ace the possi/ilit" o( civil lia/ilit" (or improper disclosure in the directors8 circular S.1 16+7 2 4here a directors8 circular or a director8s or o((icer8s circular delivered to the securit" holders o( an o((eree issuer as re;uired /" +art CC= or an" notice o( change or variation in respect o( the circular= contains a misrepresentation= a securit" holder has= $ithout regard to $hether the securit" holder relied on the misrepresentation= a right o( action (or damages against ever" director or o((icer $ho signed the circular or notice that contained the misrepresentation o o

Pseudo8si#ulation o) the process o) a takeo/er bid process )ro# the beginning

3here is nothing in the 'SA to stop a potential ac;uirer (rom going into the mar7et and gaining an initial JtoeholdK in the
potential target compan" o &emem/er (rom insider trading rules that a potential ac;uirer is not in a special relationship $ith the issuer 3here is nothing to stop the o((eror (rom using their 7no$ledge o( their intention to ma7e a ta7eover /id to purchase securities in the target compan" Airst thing that happens J/ells go o((K At the %!L threshold s.%!%?%@ 7ic7s in 1!1617 2 Ever" o((eror that ac;uires /ene(icial o$nership o(= or the po$er to exercise control or direction over= or securities converti/le into= voting or e;uit" securities o( an" class o( a reporting issuer that= together $ith such o((eror8s securities o( that class= $ould constitute %! per cent or more o( the outstanding securities o( that class= o ?a@ shall issue and (ile (orth$ith a ne$s release containing the in(ormation prescri/ed /" the regulationsF and o ?/@ $ithin t$o /usiness da"s= shall (ile a report containing the same in(ormation as is contained in the ne$s release issued under clause ?a@. 7

 1ote that this %!L includes securities (alling under the J5ointl" and in concertK de(inition Mou can usuall" tell that something is going on leading up to this point
#suall" have one or t$o /ro7erages that are reall" active in the shares o( the target compan" +rice has /een going up steadil"= volume has /een going up steadil" A(ter this initial threshold the o((eror can still accumulate shares /ut the" need to ma7e a (iling $henever the" ac;uire an additional .L o( the securities o( the class and the" also need to stop accumulating an" more securities (or one (ull trading da" S.1!16+7 2 4here an o((eror is re;uired to (ile a report under su/section ?%@ or a (urther report under this su/section and the o((eror or an" person or compan" acting 5ointl" or in concert $ith the o((eror ac;uires /ene(icial o$nership o(= or the po$er to exercise control or direction over= or securities converti/le into= an additional . per cent or more o( the outstanding securities o( the class or there is a change in an" other material (act in such a report= the o((eror= o ?a@ shall issue and (ile (orth$ith a ne$s release containing the in(ormation prescri/ed /" the regulationsF and o ?/@ $ithin t$o /usiness da"s= shall (ile a report containing the same in(ormation as is contained in the ne$s release issued under clause ?a@. A(ter the %!L threshold the next magic num/er is the %D.DDL threshold o It is here that a determination needs to /e made o Sort o( li7e a prospectus $hat do "ou $ant to do= do "ou $ant to ma7e a ta7eover or do "ou $ant to sit tight 'r ma"/e loo7 (or some exemption that $ill allo$ "ou to accumulate more securities Assuming that "ou are at the %D.DDL threshold there are t$o $a"s that "ou could initiate a ta7eover o #se s.1!!6+7 2 A ta7e2over /id ma"= and an issuer /id shall= /e commenced /" delivering the /id to the securit" holders re(erred to in paragraph % o( section D0 in accordance $ith su/section ?6@. Buestion is ho$ do "ou get the /id delivered to the securit" holders Ans$er "ou need a list o( the securit" holders get it /" as7ing the target compan" 'nce "ou as7 (or it there is a prett" good chance ?read a/solute@ that the" $ill 7no$ $hat is coming and it gives them time to prepare (or the /id= /ecause the cloc7 ?the 30 da" minimum /id period@ $ill not start until the /id is delivered o #se s.1!!617 - An o((eror ma" commence a ta7e2over /id /" pu/lishing an advertisement containing a /rie( summar" o( the /id in at least one ma5or dail" ne$spaper o( general and regular paid circulation in 'ntario= or /" disseminating the advertisement in a prescri/ed manner= i(= ?a@ on or /e(ore the date o( (irst pu/lication or (irst dissemination o( the advertisement= the o((eror= or a person or compan" acting on its /ehal(= (iles the /id and delivers it to the o((eree issuer8s principal o((ice= and (iles the advertisementF ?/@ on or /e(ore the date o( (irst pu/lication or (irst dissemination o( the advertisement= the o((eror= or a person or compan" acting on its /ehal(= re;uests (rom the o((eree issuer a list o( the securit" holders re(erred to in paragraph % o( section D0F and ?c@ $ithin t$o /usiness da"s o( the receipt /" or on /ehal( o( the o((eror o( a list o( the securit" holders re(erred to in paragraph % o( section D0= the /id is delivered to those securit" holders in accordance $ith su/section ?6@. enefits to s67%%(8) the cloc7 on the minimum /id time ?or $hatever time "ou stipulate (or "our /id@ /egins to run (rom the date "ou ma7e the announcement is ;uic7er than under s.%!!?.@ In either o( these situations= once the /id is announced or delivered= it is ;uite li7el" that the deal $ill go through o #nless the directors can get another deal together o 3his is usuall" /ecause there $ill /e a shareholder $ith a signi(icant holding that $ill have /een approached /" the o((eror ahead o( time and the shareholder $ill have signed a loc7up agreement $ith the o((eror at the o((er price $ill agree to sell at that price /ut i( a /etter deal comes along then all /ets are o(( 'ne issue is $hat happens $hen the directors stri7e a committee to explore alternatives o Is there a potential con(lict o( interest issue Especiall" $ith o((icers o( the compan" sitting on the /oard o( directors 3here is al$a"s the potential ?usuall" li7elihood@ that the o((icers $ill /e out o( a 5o/ $hen the deal goes through +ro/a/l" /est to 7eep them o(( o( the committee 3here ma" not /e a positive o/ligation on /oards to go through a (ormal auction process $hen their compan" is approached $ith an o((er o Maple /eaf 1oods v Schneiders Corporation (7&&:)( ?$ O2 (>d) 788 (CA) +rovided that the directors have acted honestl" and reasona/l" the court ought not to su/stitute its o$n /usiness 5udgment (or that o( the Board An auction need not /e held each time there is a change in control o( the compan" o 70

3he particular circumstances are important in determining the /est transaction availa/le and that a /oard is not availa/le= and that a /oard is not limited to considering the amount o( cash or consideration involved as $ould /e the case $ith an auction o Board has an o/ligation to at least revie$ and loo7 at the /est interests o( the shareholders I( "ou are at %D.DDL and are not $anting to /id and i( "ou are going to ac;uire an" more securities "ou $ill /e ma7ing a ta7eover /id unless "ou can (ind an exemption s.D3

Takeo/er 5id -.e#ptions 3here are (ive exemptions availa/le under s.D3?%! (or ta7eover /ids and onl" a couple o( them are reall" Jinterestingl"K
engaged

S.$ 617 2 Su/5ect to the regulations= a ta7e2over /id is exempt (rom sections D0 to %!! i( 6a7 2 the /id is made through the (acilities o( a stoc7 exchange recogni9ed /" the )ommission (or the purposes o( this clause
3here are t$o t"pes o( exempt /ids that can happen through the (acilities o( the stoc7 exchange 1ormal course /id Ac;uisition /" someone o( shares through a share transaction under the exchange rules o )an ac;uire up to .L in an" month and up to 0L in an" one "ear o )an ta7e out sell orders /ut cannot lead the mar7et cannot drive up the price $ith o((ers to purchase= can onl" /u" $hat people put on the mar7et to sell 4ould need to ma7e insider (ilings as "ou are /u"ing $ould state JI am /u"ing these securities= I am an insider= /ut this is an exempt transactionK 3hrough this method it is possi/le to ac;uire control over the course o( time Exchange /id )ould announce that on some speci(ied date at least 30 da"s in the (uture "ou $ill have someone at the exchange $ith an order /oo7 $ho $ill /e availa/le to purchase securities that are (or sale at such and such a price 4ill need disclosure similar to a /id circular 1eed to press release the disclosure 3his used to /e popular /ecause there $as onl" an %% da" period on them ver" ;uic7= /ut no$ that it is 30 da"s it is not so popular o Also the stoc7 exchange is unconditional and cash onl" )an8t sa" "ou $ill onl" /u" the securities i( "ou get control= "ou have to /u" $hatever is o((ered 6b7 2 the /id is (or not more than 0 per cent o( the outstanding securities o( a class o( securities o( the issuer and= o ?i@ the aggregate num/er o( securities ac;uired /" the o((eror and an" person or compan" acting 5ointl" or in concert $ith the o((eror $ithin an" period o( t$elve months in reliance upon the exemption provided /" this clause does not= $hen aggregated $ith ac;uisitions other$ise made /" the o((eror and an" person or compan" acting 5ointl" or in concert $ith the o((eror $ithin the same t$elve month period= constitute in excess o( 0 per cent o( the outstanding securities o( that class o( the issuer at the commencement o( the t$elve month period= and o ?ii@ i( there is a pu/lished mar7et (or the securities ac;uired= the value o( the consideration paid (or an" o( the securities ac;uired is not in excess o( the mar7et price at the date o( ac;uisition determined in accordance $ith the regulations plus reasona/le /ro7erage (ees or commissions actuall" paid In some $a"s this one is e;uivalent o( ?a@ /ut is not done through the exchange 4h" a pu/lic compan" /ut shares not listed )ould have a compan" that does not meet the minimum listing re;uirements o( the exchange 'r could /e a compan" $ith a dual class share structure and "ou are /idding (or unlisted securities o 1ote that i( "ou ma7e a ta7eover /id (or the unlisted shares and it is not exempt then "ou $ill have a ta7eover /id that $ill trigger the coattail 6c7 all o( the (ollo$ing conditions appl"= o ?i@ purchases are made (rom not more than (ive persons or companies in the aggregate= including persons or companies outside o( 'ntario= o ?ii@ the /id is not made generall" to securit" holders o( the class o( securities that is the su/5ect o( the /id= and o ?iii@ the value o( the consideration paid (or an" o( the securities= including /ro7erage (ees or commissions= does not exceed %%0 per cent o( the mar7et price o( securities o( that class at the date o( the /id determined in accordance $ith the regulations 3his is the /ig one the private issuer agreeement exemption 4hat is a mar7et price regulation s.%83?%@ 76 o

S.18 617 2 Aor the purposes o( +art CC o( the Act= Jmar7et priceK o( a class o( securities= as to $hich there is a pu/lished mar7et= at an" date= is an amount e;ual to the simple average o( the closing price o( securities o( that class (or each o( the /usiness da"s on $hich there $as a closing price (alling not more than t$ent" /usiness da"s /e(ore that date 3his could end up amounting to a signi(icant transaction such as change o( control o( the compan" 4ho is a person (or the (irst part o( the de(inition in ?i@ S.$ 6+7 8 Aor the purposes o( clause ?%@ ?c@= $here an o((eror ma7es an o((er to ac;uire securities (rom a person or compan" and the o((eror 7no$s or ought to 7no$ a(ter reasona/le en;uir" that= ?a@ one or more other persons or companies on $hose /ehal( that person or compan" is acting as nominee= agent= trustee= executor= administrator or other legal representative has a direct /ene(icial interest in those securities= then each o( such others shall /e included in the determination o( the num/er o( persons and companies to $hom the o((er to ac;uire has /een made= /ut= $here an inter (i(os trust has /een esta/lished /" a single settlor or $here an estate has not vested in all persons /ene(iciall" entitled thereto= the trust or estate shall /e considered a single securit" holder in such determinationF or ?/@ the person or compan" ac;uired the securities in order that the o((eror might ma7e use o( the exemption provided /" clause ?%@ ?c@= then each person or compan" (rom $hom those securities $ere ac;uired shall /e included in the determination o( the num/er o( persons and companies to $hom the o((er to ac;uire has /een made o 4hat i( "ou /u" the securities (rom a hedge (und (or example is that one person or a num/er o( persons ,epends on the structure o( the hedge (und I( it is a corporation no pro/lem has separate legal identit" I( a limited partrnership no pro/lem all assets are in the name o( the general partner I( a trust it $ould depend upon $hether or not the investors had an" role in directing the investments o I( the" did then it $ould /e tric7"= i( the" did not then hedge (und $ould pro/a/l" /e 5ust one person o 4hen does this section get used 1ot li7el" that a controlling shareholder is going to sell (or onl" %0L a/ove mar7et price :ets used $hen "ou have someone $ith sa" .0L and someone else $ith another si9ea/le chun7 o( around 8L $ho $ants to sell the" $on8t get a %0L premium in the mar7et /ut the .0L holder $ill get a /ene(it (rom holding 33L Also see it in situations $here a (inancial institution has received an interest in securities through a loan de(ault and 5ust $ants to unload the interest in a hurr" to someone even a si9ea/le interest Also see it $here "ou have an aggressive hedge (und that $ants to get paid ta7ing a position and agitating (or changes in the #S get the compan" /u"ing them out /ut in )anada this is not allo$ed so ma" get a ma5or shareholder /u"ing them out instead 6d7 2 the o((eree issuer is not a reporting issuer= there is not a pu/lished mar7et in respect o( the securities that are the su/5ect o( the /id= and the num/er o( holders o( securities o( that class is not more than (i(t"= exclusive o( holders $ho are in the emplo"ment o( the o((eree issuer or an a((iliate o( the o((eree issuer= and exclusive o( holders $ho $ere (ormerl" in the emplo"ment o( the o((eree issuer or an a((iliate o( the o((eree issuer and $ho $hile in that emplo"ment $ere= and have continued a(ter that emplo"ment to /e= securit" holders o( the o((eree issuer o 3his is pro/a/l" the most used one o( the exemptions 3his is reall" the private issuer exemption +rivate issuer $ants to sell the shares o( the compan" instead o( selling the assets 1eed this exemption to /e a/le to do this i( "ou $ant to do a share ac;uisition transaction (or an" private /usiness 6e7 2 the num/er o( holders= $hose last address as sho$n on the /oo7s o( the o((eree issuer is in 'ntario= o( securities o( the class su/5ect to the /id is (e$er than (i(t" and the securities held /" such holders constitute= in the aggregate= less than . per cent o( the outstanding securities o( that class= the /id is made in compliance $ith the la$s o( a 5urisdiction that is recogni9ed (or the purposes o( this clause /" the )ommission= and all material relating to the /id that is sent /" the o((eror to holders o( securities o( the class that is su/5ect to the /id is concurrentl" sent to all holders o( such securities $hose last address as sho$n on the /oo7s o( the o((eree issuer is in 'ntario and (iled o 3his one is rooted in the (act that the 'S) is not reall" interested in doing an"thing a/out ta7eover /ids occurring in 5urisdictions outside o( 'ntario and not impacting 'ntario in an" $a" o 4h" /other o Aor example i( a #S compan" is /u"ing a #S compan" $h" should the 'S) get involved unless there is a ma5or impact in 'ntario o Recognition &rder 3+8$!" 77

'S) onl" recogni9es the securities commissions o( the other )anadian 5urisdictions= the #S= and England

6)7 2 it is exempted /" the regulations

the 'S) can grant exemptions through regulations Aor example i( there is a ta7eover /id in Mexico that has an impact on 'ntario residents then the 'S) ma" have to vet it (or some reason or exempt it depending upon the circumstances.

Takeo/er 5id De)ences In this area $e see a ma5or intersection /et$een corporate la$ and securities la$
o In terms o( the duties o( directors and their lo"alt" to the compan" o Man" o( the cases in this area are (ought over the dut" o( the directors to the compan" 4hen directors act aggressivel" in the (ace o( a ta7eover the ;uestion is $h" o Is it /ecause the" are $orried a/out protecting their o$n position o 'r is it /ecause the" are loo7ing out (or the /est interests o( the compan" I( the latter then it is no /ig deal that is $hat the" are supposed to /e doing an"$a"s Tec+ and Miller case 6(rom )orporate >a$7 I( the directors reasona/l" attempted to isolate themselves (rom the con(lict is one /ig issue o But ho$ can the" do this ho$ can the" sho$ that the" did this= or tried to do this o Aormation o( a special committee o( the /oard is one $a" Aive 7e" steps that a /oard should underta7e to (ul(ill its dut" to shareholders o Aorm an independent committee All directors $ill have some (orm o( con(lict generall" i( a deal goes through the" $ill all /e out o( a 5o/ Ho$ever outside directors $ill have less to lose than inside directors such as the )E' and )A' o )onduct a credi/le process to /ring (or$ard a non2con(licted result 3his can occur in man" $a"s >oo7 at the Maple /eaf and Schneider case I( a /oard o( directors has acted on the advice o( a committee composed o( persons having no con(lict o( interest= and that committee has acted independentl"= in good (aith= and made an in(ormed recommendation as to the /est availa/le transaction (or the shareholders in the circumstances= the /usiness 5udgment rule applies 3here $as also a complaint that the Board /reached its dut" /" allo$ing the )E' to /e involved in some portions o( the negotiations etc. on /ehal( o( the special committee o 3he special committee had no prior experience in dealing $ith a ta7eover /id and did not have the in2depth 7no$ledge o( Schneider that ,odds did. It $as there(ore appropriate (or the special committee not to conduct the negotiations $ith the potential /idders directl" 1eed to loo7 at the overall process cannot 5ust loo7 at a microcosm o( it and sa" that /ecause o( one microcosm the $hole process is (la$ed loo7 at Schneider I( "ou need to involve the inside people /ecause o( their particular expertise "ou can - Schneider - /ut "ou /etter /e care(ul that "ou do not involve them an" more than is necessar" to avoid the appearance o( impropriet" o As "ou act "ou need to /e a/le to sho$ that "ou /elieved that $hat "ou $ere doing $as in the /est interests o( the compan" And "ou need to /e a/le to /ac7 this up $ith some t"pe o( o/5ective evidence 4hat is the /est interests o( the compan" A line o( #S cases e;uates the /est interests o( the compan" $ith the /est interests o( the shareholders o( the compan" o 1eed to sho$ that "ou met "our dut" o( care throughout the process o ,irectors are entitled to the protection o( the /usiness 5udgment rule I( "ou did all o( the right things and provided that "ou met the dut" o( care ?exercised due diligence= exercised care etc.@ then "ou are entitled to /e $rong 3he courts are not entitled to su/stitute their 5udgment o( $hat the correct decision should have /een (or the decision o( the directors o 3here is no positive dut" on directors to auction the compan" In the #S there is such a dut" &evlon case Maple /eaf sa"s other$ise Sunrise &EI3 supports this decision 78

Ho$ever there is an o/ligation on directors to see7 the /est possi/le value that is reasona/l" availa/le o 3his is a lesser dut" on the directors o Ma" involve a dut" to at least canvass the mar7et (or potential alternatives to the proposed /id to see i( there is someone $ho is $illing to pa" more (or the compan" 3hose are the o/ligations on directors in the (ace o( a ta7eover /id prett" much covers all eventualities +enalties could /e signi(icant (or directors should the" not live up to their o/ligations under corporate la$ 4h" $ould securities la$ even care a/out ta7eover de(ences then $hen there is a signi(icant regime alread" in place :o /ac7 to the /eginning (ostering con(idence in the mar7ets o )an8t have /oards acting in an inappropriate (ashion and have con(idence in $ell (unctioning capital mar7ets at the same time 9' 3+8+!+ is the source o( the po$er to deal $ith improper de(ences in response to ta7eover /ids 1.1. ( De)ensi/e Tactics o ?%@ 3he )anadian securities regulator" authorities recogni9e that ta7e2over /ids pla" an important role in the econom" /" acting as a discipline on corporate management and as a means o( reallocating economic resources to their /est uses. In considering the merits o( a ta7e2over /id= there is a possi/ilit" that the interests o( management o( the target compan" $ill di((er (rom those o( its shareholders. Management o( a target compan" ma" ta7e one or more o( the (ollo$ing actions in response to a /id that it opposesG %. Attempt to persuade shareholders to re5ect the /id. .. 3a7e action to maximi9e the return to shareholders including soliciting a higher /id (rom a third part". 3. 3a7e other de(ensive measures to de(eat the /id. o ?.@ 3he primar" o/5ective o( the ta7e2over /id provisions o( )anadian securities legislation is the protection o( the /ona (ide interests o( the shareholders o( the target compan". A secondar" o/5ective is to provide a regulator" (rame$or7 $ithin $hich ta7e2over /ids ma" proceed in an open and even2handed environment. 3he ta7e2over /id provisions should (avour neither the o((eror nor the management o( the target compan"= and should leave the shareholders o( the target compan" (ree to ma7e a (ull" in(ormed decision. 3he )anadian securities regulator" authorities are concerned that certain de(ensive measures ta7en /" management o( a target compan" ma" have the e((ect o( den"ing to shareholders the a/ilit" to ma7e such a decision and o( (rustrating an open ta7e2over /id process. o ?3@ 3he )anadian securities regulator" authorities have determined that it is inappropriate to speci(" a code o( conduct (or directors o( a target compan"= in addition to the (iduciar" standard re;uired /" corporate la$. An" (ixed code o( conduct runs the ris7 o( containing provisions that might /e insu((icient in some cases and excessive in others. Ho$ever= the )anadian securities regulator" authorities $ish to advise participants in the capital mar7ets that the" are prepared to examine target compan" tactics in speci(ic cases to determine $hether the" are a/usive o( shareholder rights. +rior shareholder approval o( corporate action $ould= in appropriate cases= alla" such concerns. o ? @ 4ithout limiting the (oregoing= de(ensive tactics that ma" come under scrutin" i( underta7en during the course o( a /id= or immediatel" /e(ore a /id= i( the /oard o( directors has reason to /elieve that a /id might /e imminent= include ?a@ the issuance= or the granting o( an option on= or the purchase o(= securities representing a signi(icant percentage o( the outstanding securities o( the target compan"= ?/@ the sale or ac;uisition= or granting o( an option on= or agreeing to sell or ac;uire= assets o( a material amount= and ?c@ entering into a contract other than in the normal course o( /usiness or ta7ing corporate action other than in the normal course o( /usiness. o ?0@ 3he )anadian securities regulator" authorities consider that unrestricted auctions produce the most desira/le results in ta7e2over /ids and the" are reluctant to intervene in contested /ids. Ho$ever= the" $ill ta7e appropriate action i( the" /ecome a$are o( de(ensive tactics that $ill li7el" result in shareholders /eing deprived o( the a/ilit" to respond to a ta7e2over /id or to a competing /id. o ?6@ 3he )anadian securities regulator" authorities appreciate that de(ensive tactics= including those that ma" consist o( some o( the actions listed in su/section ? @= ma" /e ta7en /" a /oard o( directors o( a target compan" in a genuine attempt to o/tain a /etter /id. 3actics that are li7el" to den" or limit severel" the a/ilit" o( the shareholders to respond to a ta7e2over /id or a competing /id ma" result in action /" the )anadian securities regulator" authorities. o ?7@ As a general rule= the )anadian securities regulator" authorities $ill not advise parties as to the propriet" o( proposed action in a particular case except in the context o( a meeting or proceeding o( $hich interested parties have /een given notice 4hat this polic" is aimed at in essence is the result o( de(ensive tactics o I( the result is to drive a$a" the /id and i( no other /id materiali9es as a result then the commissions $ill /e interested o Ho$ever i( the de(ensive tactics result in a higher /id then $ho reall" cares Example Hira) ,al+er 2esources Bidder comes along and H&4 has three su/sidiaries - )onsumers :as= Home 'il W ,istiller" Bidder is interested in the (irst t$o and the ,istiller" is valued at H. /illion 7D

 H&4 gets a deal to sell the ,istiller" (or H3.0 /illion Bidder goes to the commission sa"ing that the" $anted the ,istiller" /id trou/le ?asset sale@ I( no other /idder comes along $ould /e an issue But other /idders did come along and drove up the price o( the overall deal so it $as not an issue Even situations that a/ide /" corporate la$ and securities la$ $ould engage the ire o( the commission o )anadian 3ire (or example Although the deal met the legal test it $as 5ust un(air especiall" since it had long /een promised to the non2 voting shareholders that such a thing $ould not occur )ommission $as a/le to exercise its po$er under s.%.7 to /loc7 the transaction even though it $as technicall" legal I( the e((ect o( the transaction is to drive a$a" the /id then the regulators $ill get involved o 3his is especiall" trou/ling (or the directors $hen their intention $as to either :et the /idder to raise their /id= not $al7 a$a" :et another to come on /oard $ith a /etter /id ,hat types of thin!s will the Co))issions loo+ at under ;4 9$*$%$ Share issues

Bidder comes along and compan" issues a /unch o( shares to a (riendl" shareholder ma7es it harder (or the /idder to gain
control o( the compan" o I( the compan" can sho$ that it had some valid reason (or issuing the shares - such as a need (or (inancing - then it $ill pro/a/l" /e o7a" ?this is the (act scenario (rom 3ec7 v Miller@ 3his is /ecause there $as o/5ective in(ormation to /ac7 it up And /ecause o( the protection o( the /usiness 5udgment rule But the commission $ould pro/a/l" not li7e it ver" much Example o Bidder comes along and /ids H%.*share (or the compan" o )ompan" goes to another $ho o((ers to /u" the compan" (or H%3*share provided the compan" issues them %!L o( the shares at H%. 'S) $ould pro/a/l" sa" o7a" since the shareholders $ould /e getting a /etter /id But $hat i( the initial /idder $ould have /id more6 4ould that change things at all 'ne thing to remem/er in all de(ensive tactics is that the action ta7en /" the compan" must /e proportionate to the threat that the compan" is (acing and the action ta7en cannot /e such that it (orecloses the possi/ilit" o( a /etter deal 5reak )ees

Bidder comes (or$ard and o((ers to /u" the compan" /ut /oard doesn8t li7e the deal Board solicits other /ids /ut potential /idder $ill onl" come (or$ard i( the" get a /rea7 (ee so /oard agrees 3he (ee is onl" paid i( the deal is unsuccess(ul issue $ith /rea7 (ees is not the (ees themselves it is that it ma7es it more
expensive (or the initial /idder to come /ac7 - ta7es mone" (rom the shareholders i( the initial /idder ma7es a higher o((er (or the compan" C, Shareholdin!s o )an4est o((ered to /u" 4I) ?4estern International )ommunications@ /ut 4I) $ent to Sha$ instead and negotiated a deal including a /rea7 (ee and a deal to sell some radio stations i( the deal $ith Sha$ did not go through. o )an4est $ent to the )ommission complaining a/out the deal o )ommission the ;uantum o( a speci(ic (ee could result in the agreement to pa" such a (ee amount to an improper de(ensive tactic. Ho$ever a /rea7 (ee in an appropriate amount could /e properl" agreed to /e a target compan" i( it $ere necessar" to agree to it in order to induce a competing /id to come (or$ard o ?)ourt decision@ Brea7 (ees are appropriate in such circumstances $here 3he" are necessar" to induce a competing /id to come (or$ard 3hat represents /etter value (or the shareholders and $here 3he /rea7 (ee represents a reasona/le commercial /alance /et$een its potential negative e((ect as an auction inhi/itor and its potential positive e((ect as an auction stimulator 'ne thing to /ear in mind in relation to /rea7 (ees ?and asset sales@ is the a/ilit" o( the commission to exact remedies the most e((ective remedies the" have are to den" exemptions= cease trading and to lev" (ines o 3he (ines are small= and the rest aren8t ver" e((ective (or these t"pes o( transactions so their a/ilit" to exact an" t"pe o( penalt" is rather limited 8!

:sset sales

See the Hiram 4al7er example a/ove )ompan" could sell assets as a $a" o( getting out (rom under the /id 4as another aspect to the )an4est - 4I) - Sha$ deal as $ell
o )ommission a particular asset option ma" or ma" not /e an improper de(ensive tactic depending upon $hether it is necessar" to o/tain a competing /id and $hether it has the e((ect o( depriving shareholders o( the a/ilit" to respond to a ta7eover /id or a competing /id or is li7el" to den" or limit severel" the a/ilit" o( the shareholders o( the target compan" to respond to a ta7eover /id or competing /id )ourt ma" /e an accepta/le measure (or a target corporation to adopt as a competitive /id stimulating inducement $here it stri7es a reasona/le commercial /alance /et$een its potential negative e((ect as an auction inhi/itor depressing shareholder value and its potential positive e((ect as an auction stimulator enhancing shareholder value. Aactors to consider include 4hether the process /" $hich the directors o( the target compan" exercised their dut" to maximi9e shareholder value complied $ith their duties as target corporation directors 4hether the overall commercial /alance and proportion /et$een the auction inhi/iting and auction stimulating e((ect o( such an agreement in the circumstances has /een struc7= i.e. $hether the agreement is li7el" to preclude (urther /idding= in the sense o( harming or signi(icantl" dampening the auction process= and thus deprive the shareholders o( potential additional value 4hether the price (or the optioned asset is $ithin the range o( reasona/le value attri/uted to that asset= or $hether it represents such a discount that it $ould result in a disproportionate erosion in the value o( the corporation ma7ing it uneconomical (or others to /id 4hether the competing /id induced /" the asset loc72up agreement provides enough additional value to the shareholders to 5usti(" the granting o( the option

Shareholder Rights Plans poison pill de)enses

Allo$ (or the directors to preclude someone (rom conducting a creeping ta7eover o( the compan" 4hen this happens the pill is triggered and a rights option is triggered $here shareholders get the option to /u" more
securities at lo$ prices e((ectivel" (looding the mar7et $ith shares and ma7ing it prohi/itivel" expensive (or a potential /idder to /u" the compan" Is an e((ective tool (or /u"ing time issue is a/out ho$ it is used I( the plan is voted on /" shareholders then the commissions are more li7el" to give the directors more time to (ind options o I( the plan has /een adopted /" the /oard in the (ace o( the /id then the" are unli7el" to get as much time o In either case the most that can /e hoped (or is an additional 30 da"s to (ind a suita/le option Bidder $ill have to negotiate $ith the Board to get them to li(t the plan i( the /oard does not do so voluntaril" then the /idder can go to the commission to get the plan li(ted /" it o )ommission $ill $ant to see that the target /oard is ta7ing positive steps or else the" $ill li7el" li(t the plan 2oyal Host 2"4T o Made a ta7eover o((er (or )HI+ $hich had a shareholder rights plan $anted the plan li(ted o Some (actors to consider in $hether the plan should /e li(ted 4hether shareholder approval o( the plan had /een o/tained 4hen the plan $as adopted 4hether there $as /road shareholder approval (or continued operation o( the plan 3he si9e and complexit" o( the target compan" 3he other de(ensive tactics= i( an"= emplo"ed /" the target compan" 3he num/er o( potential via/le o((erors 3he steps ta7en /" the target compan" to (ind an alternative /id or transaction that $ould /e /etter (or the shareholders 3he li7elihood that= i( given more time= the target compan" $ill /e a/le to (ind a /etter /id or transaction 3he nature o( the /id= $hether it is coercive or un(air to the shareholders o( the target compan" 3he length o( time since the /id $as announced and made 3he li7elihood that the /id $ill not /e extended i( the rights plan is not terminated Producers Pipeline o Had a rights plan and had a shareholders meeting /ut a lot o( mar7et pros had moved into the stoc7 so the compan" did not put the plan to a vote at the meeting o 3he /idder $ent to the commission and complained a/out the plan and the commission said that it should have /een voted on at the shareholders meeting 8%

>i(ted the plan as a result o( the lac7 o( vote

)ommissions are ver" interested in poison pill de(ences the" could ver" easil" drive a$a" /ids and allo$ directors to 7eep
control o( companies (orever i( le(t unregulated #nder 1I 6.2.!. the 7e" issue is $hether the Board has used its availa/le de(ences in such a $a" as to drive a$a" the /id o I( it has and no other /id has come (or$ard then the Board is li7el" in trou/le o Ho$ever i( alternative /ids have come (or$ard then li7el" there is no real issue maximi9ation o( shareholder value is $hat it is reall" all a/out In de(ending against ta7eovers the /oard usuall" onl" has 30 da"s to respond minimum /id period o #nless there is a poison pill $hich ma" allo$ (or up to an additional 30 da"s depending upon the circumstances At the end o( the da" the /oard needs to ma7e a recommendation to the shareholders a/out $hether or not to accept or re5ect an" ta7eover /id o In either case the" need to state their reasons (or their recommendation o I( the" recommend re5ecting a /id that is a premium /id - .!2.0L a/ove mar7et - there is a good chance that the mar7et $ill ignore their advice an"$a"s and accept the /id due to the large num/er o( institutional investors $ho have (iduciar" o/ligations ?pension plans= trusts etc.@

8.

-n)orce#ent
'S) loo7s at /ids and directors lia/ilit" /ecause o( the issue o( con(idence in the capital mar7ets
o >oo7 to 1I 6.2.!. o )ommissions have an en(orcement arsenal at their disposal to en(orce violations o( securities la$ &emem/er /ac7 at the /eginning (ive topics to securities la$ o &egistration o +rospectus re;uirements need one in order to trade in securities o )ontinuous disclosure re;uirements o Insider trading o 3a7eover /id regulation 4here there is a violation o( an" o( these (ive areas that is $here en(orcement comes into pla" There are four )a0or )ethods of enforce)ent of securities law ,i/il liability pro/isions o) the &S: s.1 ! ( 1 8.1

It is open to someone to sue (or an" o( the various (ailures outlined in these provisions
o Aailure to ma7e ade;uate disclosure o Aailure to ma7e ongoing disclosure Ho$ever the right o( action is limited and there is the availa/ilit" o( the due diligence de(ence There are also statutory o))ences under s.1++

S.1++617 2 Ever" person or compan" that=

?a@ ma7es a statement in an" material= evidence or in(ormation su/mitted to the )ommission= a ,irector= an" person acting under the authorit" o( the )ommission or the Executive ,irector or an" person appointed to ma7e an investigation or examination under this Act that= in a material respect and at the time and in the light o( the circumstances under $hich it is made= is misleading or untrue or does not state a (act that is re;uired to /e stated or that is necessar" to ma7e the statement not misleadingF o ?/@ ma7es a statement in an" application= release= report= preliminar" prospectus= prospectus= return= (inancial statement= in(ormation circular= ta7e2over /id circular= issuer /id circular or other document re;uired to /e (iled or (urnished under 'ntario securities la$ that= in a material respect and at the time and in the light o( the circumstances under $hich it is made= is misleading or untrue or does not state a (act that is re;uired to /e stated or that is necessar" to ma7e the statement not misleadingF or o ?c@ contravenes 'ntario securities la$= o is guilt" o( an o((ence and on conviction is lia/le to a (ine o( not more than H0 million or to imprisonment (or a term o( not more than (ive "ears less a da"= or to /oth 3his is a ver" strong provision people $a7e up $ith the prospect o( (ive "ears in 5ail or a H0 million (ine Ho$ever the pro/lem $ith these provisions is more o( en(orcement than an"thing o 3hese provisions are ;uasi2criminal the" are not prosecuted /" the )ommission /ut rather handed o(( to the police and the courts to prosecute the police= in large measure= lac7 the resources and the expertise to deal $ith these t"pes o( o((ences o Ho$ever= $ith the introduction o( IME3 this should /e /etter o 3he 7e" thing is to determine $hether the 'S) $ill investigate and prosecute the o((ence - using its po$ers under section %.7 - or $hether it $ill hand it o(( to someone else 3he lac7 o( e((ective external actors limits the e((ectiveness o( this en(orcement mechanism o 3here is also a need (or the )ommission to approve an" proceeding under s.%.. o S.1++617 2 1o proceeding under this section shall /e commenced except $ith the consent o( the )ommission Also remem/er the s.%..? @ penalties (or insider trading o Ho$ever the same d"namic is at pla" must /e externall" en(orced ma7ing it di((icult to en(orce and prosecute these t"pes o( crimes o ,ri#inal ,ode pro/isions

S. 8!6+7 2 Ever" one $ho= /" deceit= (alsehood or other (raudulent means= $hether or not it is a (alse pretence $ithin the
meaning o( this Act= $ith intent to de(raud= a((ects the pu/lic mar7et price o( stoc7s= shares= merchandise or an"thing that is o((ered (or sale to the pu/lic is guilt" o( an indicta/le o((ence and lia/le to imprisonment (or a term not exceeding (ourteen "ears. 3his provision= in man" $a"s= corresponds to those provisions (ound in the 'SA itsel( 83

o o

,eals $ith situations such as pump and dump schemes 4in(all 'il compan" is an example Executives $ere on2site $hen a drill core $as pulled up and danced around li7e it $as all good= /ut it $asn8t Emplo"ees tipped the in(ormation to the mar7et= the share price too7 o(( and the insiders sold their shares 3he executives $ere prosecuted and (ound guilt" /ecause it $as determined that the" had intended (or the emplo"ees to see them and (or the emplo"ees to tip the in(ormation to the mar7et

Public interest po*er o) the &S, under s.1+1 o) the &S:

S.1+1617 2 3he )ommission ma" ma7e one or more o( the (ollo$ing orders i( in its opinion it is in the pu/lic interest to ma7e
the order or ordersG o %. An order that the registration or recognition granted to a person or compan" under 'ntario securities la$ /e suspended or restricted (or such period as is speci(ied in the order or /e terminated= or that terms and conditions /e imposed on the registration or recognition. o .. An order that trading in an" securities /" or o( a person or compan" cease permanentl" or (or such period as is speci(ied in the order. o ..% An order that ac;uisition o( an" securities /" a particular person or compan" is prohi/ited= permanentl" or (or the period speci(ied in the order. o 3. An order that an" exemptions contained in 'ntario securities la$ do not appl" to a person or compan" permanentl" or (or such period as is speci(ied in the order. o . An order that a mar7et participant su/mit to a revie$ o( his= her or its practices and procedures and institute such changes as ma" /e ordered /" the )ommission. o 0. I( the )ommission is satis(ied that 'ntario securities la$ has not /een complied $ith= an order that a release= report= preliminar" prospectus= prospectus= return= (inancial statement= in(ormation circular= ta7e2over /id circular= issuer /id circular= o((ering memorandum= prox" solicitation or an" other document descri/ed in the order= i. /e provided /" a mar7et participant to a person or compan"= ii. not /e provided /" a mar7et participant to a person or compan"= or iii. /e amended /" a mar7et participant to the extent that amendment is practica/le. o 6. An order that a person or compan" /e reprimanded. o 7. An order that a person resign one or more positions that the person holds as a director or o((icer o( an issuer. o 8. An order that a person is prohi/ited (rom /ecoming or acting as a director or o((icer o( an" issuer. o 8.% An order that a person resign one or more positions that the persons holds as a director or o((icer o( a registrant. o 8.. An order that a person is prohi/ited (rom /ecoming or acting as a director or o((icer o( a registrant. o 8.3 An order that a person resign one or more positions that the person holds as a director or o((icer o( an investment (und manager. o 8. An order that a person is prohi/ited (rom /ecoming or acting as a director or o((icer o( an investment (und manager. o 8.0 An order that a person or compan" is prohi/ited (rom /ecoming or acting as a registrant= as an investment (und manager or as a promoter. o D. I( a person or compan" has not complied $ith 'ntario securities la$= an order re;uiring the person or compan" to pa" an administrative penalt" o( not more than H% million (or each (ailure to compl". o %!. I( a person or compan" has not complied $ith 'ntario securities la$= an order re;uiring the person or compan" to disgorge to the )ommission an" amounts o/tained as a result o( the non2compliance Examples o( the 'S) using its pu/lic interest po$er o 'onnini Had o((ered to settle $ith him (or a (ive "ear /an ?num/er %@ /ut he did not settle. A(ter the hearing the" /anned him (or %0 "ears and he appealed to the courts. 3he courts reduced it to "ears arguing that the pu/lic interest po$er is not meant to /e punitive. Also said that since his /oss onl" got a . "ear suspension ?he cooperated@ and the initial o((er $as 0 "ears= the %0 "ears $as unreasona/le o ;ortel Because o( the issues $ith the (inancial statements o( the compan" it $as not in compliance $ith securities la$s $as a (ailure to meet continuous disclosure o/ligations 'S) imposed a cease trade order on the a/ilit" o( insiders to trade securities o( 1ortel ?num/er ..%@ /ecause it $ould have /een too punitive to have imposed a cease trade order on all o( the shares ?too punitive to all o( the other shareholders@ Ousti(ication (or this o Insiders ma" have had in(ormation that $as not availa/le to others o 4ant to put pressure on the compan" to get it8s house in order ASA+ o - M Ma!ne# 8

'S) said that the" (elt that the la$"er (or MBM had misled the 'S) and that he should /e called in and reprimanded ?num/er 6@ is a ver" serious thing= especiall" (or a pro(essional to have /een reprimanded ,oesn8t happen o(ten /ut it is e((ective against someone in this t"pe o( position +roceedings under s.%.7 are administrative proceedings o As a result the Statutor" +o$ers +rocedures Act ?S++A@ applies to proceedings under s.%.7 o Aairness and 5urisdiction are issues that arise in these t"pes o( proceedings +u/lic Interest Ourisdiction o( the 'S) under s.%.7 o Asbestos case $%%7 SCC 3he legislature clearl" intended that the 'S) have a ver" $ide discretion in such matters in considering an order in the pu/lic interest= it is an error to (ocus onl" on the (air treatment o( investors. 3he e((ect o( an intervention in the pu/lic interest on capital mar7et e((iciencies and pu/lic con(idence in the capital mar7ets should also /e considered 3he purpose o( the )ommissionZs pu/lic interest 5urisdiction is neither remedial nor punitiveF it is protective and preventive= intended to /e exercised to prevent li7el" (uture harm to 'ntarioZs capital mar7ets 3he role o( the 'S) under s. %.7 is to protect the pu/lic interest /" removing (rom the capital mar7ets those $hose past conduct is so a/usive as to $arrant apprehension o( (uture conduct detrimental to the integrit" o( the capital mar7ets Standard o( revie$ is reasona/leness o Cartaway 2esources Corp $%%? SCC Ma" 8= %DD6= )arta$a" announced that it had (ound signi(icant minerali9ation on the Ioise"Zs Ba" claims /ased on a visual inspection o( drilling samples. 3he share price 5umped dramaticall" to H.3= /ut later (ell /elo$ H% $hen an anal"sis o( the samples (ailed to con(irm these (indings In imposing sanctions on Hartvi7son and Oohnson under ss. %6% and %6. o( the Act= the )ommission $eighed several important (actors= including general deterrence= protecting the securities mar7et= the settlement agreements and the circumstances o( the case )ourt recogni9ed in Pe2im= at pp. 0D32D = that the )ommission has special expertise regarding securities matters. 3he core o( this expertise lies in interpreting and appl"ing the provisions o( the Act= and in determining $hat orders are in the pu/lic interest $ith respect to capital mar7ets As I stated a/ove= the application o( s. %6. re;uires the determination o( $hen an order is in the pu/lic interest= and this calls (or the )ommission to appl" its expertise It is there(ore reasona/le to assume= particularl" $ith re(erence to the expertise o( the )ommission in regulating capital mar7ets= that general deterrence has a proper role to pla" in determining $hether to ma7e orders in the pu/lic interest and= i( the" choose to do so= the severit" o( those orders. In m" vie$= nothing inherent in the )ommissionZs pu/lic interest 5urisdiction= as it $as considered /" this )ourt in As"estos, supra= prevents the )ommission (rom considering general deterrence in ma7ing an order. 3o the contrar"= it is reasona/le to vie$ general deterrence as an appropriate= and perhaps necessar"= consideration in ma7ing orders that are /oth protective and preventative It ma" $ell /e that the regulation o( mar7et /ehaviour onl" $or7s e((ectivel" $hen securities commissions impose e, post sanctions that deter (or$ard2loo7ing mar7et participants (rom engaging in similar $rongdoing 3he $eight given to general deterrence $ill var" (rom case to case and is a matter $ithin the discretion o( the )ommission. +rotecting the pu/lic interest $ill re;uire a di((erent remedial emphasis according to the circumstances. )ourts should revie$ the order glo/all" to determine $hether it is reasona/le. 1o one (actor should /e considered in isolation /ecause to do so $ould s7e$ the textured and nuanced evaluation conducted /" the )ommission in cra(ting an order in the pu/lic interest 'S) gets a high degre o( de(erence (rom the courts /ecause o( its speciali9ed 7no$ledge interpretation o( its ena/ling legislation etc. o 4ill /e unusual circumstances (or the courts to sa" that the interpretation o( the commission $as unreasona/le But loo7 /ac7 to ,onnini $here the court reduced the penalt" to "ears $hich $as less than the 0 "ears that had /een o((ered (or settling the matter o 4here does this (it in $ith the Sta(( 1otice on )ooperation I( "ou cooperate "ou ma" not even get punished= or ma" get reduced penalties But according to ,onnini i( "ou (ight it through the courts "ou ma" get a lesser penalt" an"$a"s Canadian Tire o )ase tells us that the 'S) /elieves that the pu/lic interest po$er extends to areas $here no securities la$s have /een violated at all o Bidders /ring a deal to the controlling (amil" /ut don8t ma7e the same deal to the pu/lic shareholders 80

All along pu/lic shareholders and the mar7et had /elieved that i( an o((er o( more than %0L a/ove mar7et came along to the (amil" then the pu/lic shareholders $ould get the same o((er But a close reading o( the coattail sho$s that the o((er did not violate the coattail provision So technicall" there $as nothing $rong $ith the deal o 'S) (elt that the transaction $as a/usive o( the capital mar7ets and /rought the capital mar7ets into disrepute #sed its pu/lic interest po$er to halt the accumulation o( shares /" the /idder ?..%@ o( s.%.7 o 3his case tells us that s.%.7 is /roader than 5ust regulating violations o( securities la$ 3here are some that sa" i( this case had /een challenged in the courts it $ould have /een overturned o But others sa" that= loo7ing at As/estos and )arta$a" that is unli7el" it appears that the pu/lic interest po$er is ver" /road indeed o 'n/estigations

3here are also investigative po$ers under the 'SA that have a /earing on the en(orcement provisions S.11617 2 3he )ommission ma"= /" order= appoint one or more persons to ma7e such investigation $ith respect to a matter as
it considers expedient= o ?a@ (or the due administration o( 'ntario securities la$ or the regulation o( the capital mar7ets in 'ntarioF or o ?/@ to assist in the due administration o( the securities la$s or the regulation o( the capital mar7ets in another 5urisdiction 1ote that there is no re;uirement o( due process= no need to go /e(ore a 5udge etc. is a ver" open2ended po$er 4nvesti!ators can co)pel witnesses to testify and can force the) to attend and !ive evidence S.1 617 2 A person ma7ing an investigation or examination under section %% or %. has the same po$er to summon and en(orce the attendance o( an" person and to compel him or her to testi(" on oath or other$ise= and to summon and compel an" person or compan" to produce documents and other things= as is vested in the Superior )ourt o( Oustice (or the trial o( civil actions= and the re(usal o( a person to attend or to ans$er ;uestions or o( a person or compan" to produce such documents or other things as are in his= her or its custod" or possession ma7es the person or compan" lia/le to /e committed (or contempt /" the Superior )ourt o( Oustice as i( in /reach o( an order o( that court o 3his po$er ties into s.%.. $here someone lies under oath the" are open to the remed" provisions and penalties o( s.%.. Can also !et search and sei5ure orders fro) a 0ud!e S.1 6"7 2 A person ma7ing an investigation or examination under section %% or %. ma" appl" to a 5udge o( the 'ntario )ourt o( Oustice in the a/sence o( the pu/lic and $ithout notice (or an order authori9ing the person or persons named in the order to enter and search an" /uilding= receptacle or place speci(ied and to sei9e an"thing descri/ed in the authori9ation that is (ound in the /uilding= receptacle or place and to /ring it /e(ore the 5udge granting the authori9ation or another 5udge to /e dealt $ith /" him or her according to la$ o 3his is a ver" extreme po$er ver" signi(icant How does the OSC operate in this area o #suall" /egins $ith a tip (rom the 3SC that something is going on also ma" get tipped (rom someone else o 'S) $ill do an investigation to see i( there is an" su/stance to the complaint But the issue then /ecomes $hether to (ollo$ through $ith it I( it is straight(or$ard then li7el" $ill prosecute I( it is part o( an ongoing series o( in(ractions $ill li7el" prosecute I( it is o/vious that an in(raction has occurred then li7el" $ill prosecute I( the violation is egregious $ill li7el" prosecute But sometimes it is 5ust not $orth it o I( the issue is 5ust too complex to (igure out= i( it $ill ta7e up too man" resources then it is li7el" that the 'S) $ill not go a(ter it 5ust don8t have the resources to do it Also the issue o( $hether to 7eep it in2house or (arm it out to the police unli7el" unless it goes to IME3 /ut there is still an issue o( e((ectiveness even $ith them As a result it is rare to see criminal prosecutions o( securities violations

86