Canadian Securities Law : Canadian Securities Lawyer & Attorney : Stikeman Elliott Law Firm : Montreal, Ottawa, Calgary, Vancouver, Montreal, Toronto

The amendments to the OSA proposed under Schedule 26 to Bill 162 amend statutory provisions in the following areas:

• registration requirements for dealers, advisers and others,
   
• exemptions from the registration requirements,
   
• exemptions from the prospectus requirement, and
   
• resale of securities previously distributed under an exemption from the prospectus requirement.

Proposed amendments to the Prospectus and Registration Rules were originally published for comment on February 29, 2008 in connection with proposals to reform and harmonize registration requirements across the country under Proposed NI 31-103 Registration Requirements (Registration Reform). As a consequence of Registration Reform, NI 45-106 was proposed to be repealed and replaced (largely to reflect to new approach to registration being required on a business-based trigger as opposed to a trade-based trigger) and OSC Rule 45-501 and NI 45-102 were proposed to be amended to, among other things, reflect corresponding changes.

Under Bill 162, the Government of Ontario has taken the approach of retaining or including certain prospectus and registration exemptions in the OSA, thereby requiring corresponding amendments to the Prospectus and Registration Rules as previously proposed.

The prospectus and registration exemptions that the Government of Ontario intends to retain or include in the OSA relate to:

• securities subject to other provincial or federal regulatory regimes such as mortgages, securities evidencing indebtedness secured by or under a security agreement provided under personal property security legislation, and financial intermediaries and Schedule III banks,
   
• securities that Ontario Ministry of Finance staff have advised are subject to securities regulatory considerations as well as broader public policy considerations such as specified debt, including government debt, and
   
• securities that the staff of the Ministry of Finance have advised relate to key government policy priorities such as school board debt, tax incentive securities and venture capital raising.

Specifically, the proposed amendments to the OSA under Bill 162 would supersede the following exemptions contained in NI 45-106, as previously proposed to be amended: specified debt (proposed sections 2.34 and 3.34), mortgages (proposed sections 2.36 and 3.36), securities evidencing indebtedness secured by or under a security agreement provided under personal property security legislation (proposed sections 2.37 and 3.37), and evidences of deposit issued by a Schedule III bank or an association governed by the Cooperative Credit Associations Act (Canada) (proposed sections 2.41 and 3.41). References to resale provisions in section 72 of the OSA found in Appendix C to proposed NI 45-102 would be modified to reflect proposed amendments to section 72 and a new section 73.7 found in sections 11 and 13 of Schedule 26 to Bill 162. Certain provisions of OSC Rule 45-501 would be modified or deleted in favour of the application of corresponding provisions in the OSA.

If the proposed amendments to the OSA under Bill 162 are passed, implementation is expected to take place in two stages; the first, reflecting transitional provisions corresponding to the implementation of Registration Reform; and the second, at a later time intended to replace the prospectus exemptions enacted in stage one. If the second stage of amendments to the OSA are enacted, the OSC intends to publish new versions of NI 45-106 and OSC Rule 45-501 for comment. These stage two amendments are found at subsection 12(2) of Schedule 26 to Bill 162 and related regulation-making powers are found at subsection 20(17) of that Schedule.

These proposals have been published for a 30-day comment period expiring on June 22, 2009.

The Consultation Paper is the work of a working group or a subcommittee of the CSA which was formed on December 20, 2007 to consider securities regulatory issues stemming from the turmoil in international credit markets that began in August 2007 (the Committee). The Committee consists of representatives of the securities regulatory authorities in British Columbia, Alberta, Ontario and Quebec, and the Concept Paper states that the recommendations contained in it have not been approved by any securities regulatory authorities or the various provincial or territorial governments in Canada. 

The Consultation Paper makes a number of proposals to deal with issues arising out of the credit market turmoil and invites comments on these proposals on or before December 20, 2008. Among the proposals included in the Consultation Paper are proposals to implement a regulatory framework for “approved credit rating organizations”, which would require credit rating agencies to comply with “comply or explain” provisions of the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies, and proposals to amend the current short term debt exemption (available under section 2.35 of National Instrument 45-106 – Prospectus and Registration Exemptions) to make it unavailable for distributions of asset-backed short term debt, as well as to reduce reliance on credit rating agencies in Canadian securities legislation. Other proposals include a separate policy review to consider the appropriateness of the net financial asset threshold of the “accredited investor” exemption, and the “$150,000 minimum investment amount” exemption, for prospectus exempt distributions. The Concept Paper also proposes coordinating with IIROC various regulatory initiatives focused on addressing the role of intermediaries that are registrants in distributing asset backed securities such as ABCP. Also proposed is a review of the terms “related issuer” and “connected issuer” in proposed National Instrument 31-103 – Registration Requirements, to ensure these definitions capture issuers of ABCP and similar products. It is also suggested that the CSA should review whether the concentration restrictions contained in National Instrument 81-102 – Mutual Funds for money market funds are appropriate, whether further restrictions on the types of investments a money market fund can make are required, whether assets such as asset-backed short-term debt are appropriate as eligible assets in the definition of “cash-cover” and “qualified securities” and whether short-term debt investments, including ABCP with a specified credit rating, should be permitted to be aggregated in a statement of investment portfolio.

Comments on these and other proposals discussed in the Concept Paper are invited to be made in writing, again, by no later than December 20, 2008. 

As a result of the amendments to OSC Rule 45-501, uncertainty has arisen in the market in the context of foreign issuer private placements and the disclosure requirements, if any, regarding forward-looking information, including future-oriented financial information and financial outlooks. To address this uncertainty, the OSC recently granted exemptive relief to certain foreign dealers allowing for the distribution of securities by way of private placement to "accredited investors", provided the foreign offering documents contain safe-harbour disclosure that complies with U.S. federal securities laws or a disclaimer that the disclosure may differ from that which is required under Ontario securities laws. To deal with this issue in the long-term, the OSC has also proposed to repeal these requirements from OSC Rule 45-501. However, if implemented, this proposed repeal will not take effect until December 2008. Until then, staff at the OSC have advised that they will attempt to deal with exemptive relief applications on an expedited basis.

Until such time as the OSC repeals the forward-looking information disclosure requirements in OSC Rule 45-501, foreign dealers and issuers offering foreign securities into Canada should be aware of these potential issues in order to avoid any unnecessary delays when carrying out private placements into Canada. In addition, consideration should be given to applying for exemptive relief from the forward-looking information requirements in OSC Rule 45-501 consistent with the relief recently granted by the OSC.
 

Key features of Phase II of the Passport System

The proposed National Instrument 11-102 Passport System (NI 11-102) and related policies would build on the steps taken in Phase I, while moving further towards the uniformity of requirements across jurisdictions. Further, each issuer would essentially be exempted from: non–harmonized continuous disclosure requirements, prospectus form and content requirements outside of its Principal Jurisdiction and registration requirements, through a general discretionary exemption system.

While the Ontario Securities Commission (OSC) has not signed onto the Passport System, Phase II has been designed for adoption by all Canadian securities regulatory authorities. 

Proposed Interface Rules with the OSC

Despite Ontario’s reservations, the design of the Passport System allows for Ontario market participants to access Passport System jurisdictions. Further, National Policy 11-202 Process for prospectus review in multiple jurisdictions (“NP 11-202”) and National Policy 11-203 Process for exemptive relief applications in multiple jurisdictions (“NP 11-203”) have been proposed to provide an interface between the OSC and the Passport System regulators. These proposals are designed to protect the efficiencies currently available under the Mutual Reliance Review System by allowing issuers to deal with only one regulator in most circumstances for prospectus review and exemptive relief applications. 

Generally speaking, the proposed interfaces of NP 11-202 and NP 11-203 would work as follows:

Prospectus Review (NP 11-202)

• The market participant would file its prospectus with the Principal Regulator and with the non-principal regulator in each other jurisdiction in which it wishes to offer securities;
• If the OSC was the Principal Regulator, the filer would deal with the OSC, and the decision of the OSC would be the decision of all Passport System regulators. The receipt of the OSC would result in a deemed receipt from each jurisdiction in which the prospectus was filed;
• A market participant for which Ontario was not the Principal Regulator would deal with its Principal Regulator (under the Passport System), which would then coordinate its review with the OSC, and obtain the OSC’s comments. The receipt of the Principal Regulator would result in a deemed receipt from all Passport System regulators and, if the OSC cleared the prospectus, of the OSC.

Exemptive Relief Applications (NP-203)

• If the OSC was the Principal Regulator, the filer would pay fees to the OSC only, which would then deal with the application. The decision of the OSC would result in an automatic exemption in all Passport System jurisdictions;
• If the OSC was not the Principal Regulator, the filer would file the application and pay fees with its Principal Regulator and the OSC. The Principal Regulator would then coordinate its review with the OSC. The decision of the Principal Regulator would result in an automatic exemption in all other Passport System jurisdictions and would evidence the decision of the OSC, if the OSC agreed with the decision;
• If the application was outside the scope of NP 11-102, it would be dealt with as a “coordinated review application” and filings and fees would be submitted in each jurisdiction in which the exemption was required.

Registration

The proposed interface for registration, which has not yet been released for comment, is expected to work in much the same way as described above.

Implementation and transition

Phase I of the Passport System came into force on September 19, 2005.  The CSA is targeting March 2008 for the implementation of all but the registration portion of the Passport System, with the registration portion planned for adopted in July, 2008.

Proposed changes to the registration and exemption regime

The primary effects of the Proposed Registration Rule on non-Canadian investment funds are:

1. repeal of the dealer registration exemptions contained in National Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106"), including the exemption for trades with an "accredited investor";
2. continuation of the requirement for portfolio managers to register in Canada;
3. introduction of a requirement for "investment fund managers" to register in Canada;
4. introduction of a national exemption from the adviser registration requirement for "international portfolio managers" provided that securities of the investment fund are distributed through a registrant; and
5. introduction of a national exemption from the investment fund manager registration requirement for "international investment fund managers" provided that securities of the investment fund are distributed through a registrant.

Current dealer and adviser registration and exemption regime

Except in Ontario (and the Yukon Territory and Newfoundland and Labrador), provincial and territorial securities laws generally permit a non-Canadian investment fund to sell its own securities to "accredited investors" on a dealer registration and prospectus exempt basis subject to certain disclosure requirements and post-distribution filings. Such exempt distributions are common private placement transactions in Canada. In Ontario, the dealer registration exemption, but not the prospectus exemption, has been removed for "market intermediaries".

The Ontario Securities Commission (OSC) considers an adviser to be acting as an adviser in Ontario if it, directly or through a third party, acts as an adviser for an investment fund that distributes its securities in Ontario, notwithstanding that the advice to the fund may be given to, and received by, the fund outside of Ontario.

As a result, portfolio advisers to investment funds that distribute securities in Ontario must either be registered as advisers in Ontario or rely on an adviser registration exemption. In Ontario, a common practice is for non-resident investment funds to rely upon an adviser registration exemption if the securities of the investment fund are (i) primarily offered outside of Canada, (ii) only distributed in Ontario through a registrant, and (iii) distributed in Ontario in reliance upon an exemption from the prospectus requirements (e.g., "accredited investors").

The practical effect of the Ontario rules is that the sale of investment fund securities in Ontario is typically intermediated by an Ontario-registered dealer, subject to compliance with certain disclosure and post-distribution filing requirements.

Requirement to register as a portfolio manager and investment fund manager

The Proposed Registration Rule makes a distinction between those that are in the business of advising others as to the investing in of securities (i.e., a portfolio manager) and those that are in the business of managing and administering an investment fund (i.e., an investment fund manager). Persons or companies that are in the business of managing an investment fund will be required to register as an investment fund manager.

The Proposed Registration Rule requires that portfolio managers to investment funds and investment fund managers be registered in Canada or comply with the limited international portfolio manager and international investment fund manager exemptions. The Proposed Registration Rule effectively imposes a registration requirement on portfolio managers and investment fund managers where investment fund securities are distributed in any Canadian jurisdiction. The Proposed Registration Rule is silent on what specifically triggers the registration requirement for non-Canadian investment fund service providers.

The British Columbia Securities Commission is considering not adopting the registration requirements for persons who are in the business of dealing in the exempt market. It is unclear whether this will affect the registration requirements for portfolio managers and investment fund managers.

In cases where a company is both a portfolio manager and an investment fund manager, registration will be required in both categories under the Proposed Registration Rule. The registration requirements include application of various "Fit and Proper" requirements such as the requirement to have an Ultimate Designated Person, a Chief Compliance Officer and registered personnel that meet certain proficiency standards, capital and insurance requirements, financial statement filing obligations, and other requirements.

Proposed international portfolio manager and international investment fund manager exemptions

The Proposed Registration Rule contains exemptions from the registration requirements for "international portfolio managers" and "international investment fund managers".

International portfolio managers and international investment fund managers to an investment fund will be exempt from the registration requirements if:

1. the securities of the fund are primarily offered outside of Canada;
2. the securities of the fund are only distributed in Canada through a registrant; and
3. the securities of the fund are distributed in Canada in reliance upon an exemption from the prospectus requirement.

In order to rely on the exemption, an international portfolio manager must also satisfy certain client notification and disclosure requirements.

An "international portfolio manager" is a portfolio manager that has no establishment in Canada or officers, employees or agents resident in Canada, and engages in the business of a portfolio manager in the jurisdiction in which its head office or principal place of business is located.

An "international investment fund manager" is an investment fund manager that has no establishment in Canada or officers, employees or agents resident in Canada, and engages in the business of an investment fund manager in the jurisdiction in which its head office or principal place of business is located.

Significantly, under these definitions, "international portfolio managers" and "international investment fund managers" need not be registered in their home jurisdictions. Such entities must simply engage in the business of a portfolio manager or investment fund manager, as the case may be.

Notably, investment funds cannot be distributed through a non-resident dealer relying on the proposed "international dealer exemption" contained in the Proposed Registration Rule. Consequently, investment funds must generally be distributed through an "exempt market dealer", a proposed new category of dealer registration, or a fully registered Canadian investment dealer.

Transition

The Proposed Registration Rule does not set out any grandfathering or other transitional relief for non-Canadian investment funds that have issued securities to Canadian investors prior to the coming into force of the Proposed Registration Rule. For funds with limited redemption features, this may be an issue. It is also unclear how these requirements will apply to the service providers to non-Canadian investment funds that placed securities in Canada before the Proposed Registration Rule becomes effective.

Proposed changes to the dealer registration and exemption regime

The primary effects of the Proposed Registration Rule on non-Canadian dealers are:

• elimination of the "international dealer" registration category in Ontario;
• repeal of the dealer registration exemptions contained in National Instrument 45-106 - Prospectus and Registration Exemptions (NI 45-106), including the exemption for trades with an "accredited investor";
• introduction of a national "international dealer exemption" that significantly narrows the list of clients with whom a non-Canadian dealer may trade on an exempt basis; and
• introduction of an "exempt market dealer" registration category that will permit Canadian and non-Canadian dealers to trade (i) in securities being distributed under a prospectus exemption or (ii) to persons or companies to whom a security may be distributed under a prospectus exemption (for example, trading with an "accredited investor").

Current dealer registration and exemption regime

In Ontario, registration as an "international dealer" permits a non-Canadian dealer to trade with "designated institutions" in non-Canadian equity securities and certain Canadian debt securities. The practical effect of the international dealer registration regime in Ontario is to permit a non-Canadian dealer to trade in permitted securities with any person or entity, other than an individual, that qualifies as an "accredited investor."

Except in Ontario (and the Yukon Territory and Newfoundland and Labrador), provincial and territorial securities laws generally permit a non-Canadian dealer to trade in both Canadian and non-Canadian securities with an "accredited investor" on a dealer registration-exempt basis.

Proposed international dealer exemption will narrow list of permitted clients

Under the Proposed Registration Rule, a non-Canadian dealer that has no establishment in Canada may rely on the international dealer exemption to trade with a narrow list of "permitted international dealer clients" when trading in "foreign securities" and certain Canadian debt securities. Subject to the filing of submission to jurisdiction forms and delivering client notifications, the practical effect of the proposed international dealer registration exemption is to significantly narrow the list of clients with whom a non-Canadian dealer is permitted to trade on an exempt basis and to require registration as an "exempt market dealer" as a condition to trading with the full range of "accredited investors."

Non-Canadian dealers that are presently registered as international dealers in Ontario will no longer be permitted to trade with the following clients in Ontario under the proposed international dealer exemption:

• a person or entity that has net assets of C$5,000,000 (note: this category was used by international dealers to trade with corporate entities and hedge funds);
• an investment fund that is not advised by a person registered as a portfolio manager in Canada;
• a registered charity; or
• a person in respect of which all of the owners of interests, direct, indirect or beneficial, are persons that are accredited investors.

In the Canadian provinces and territories that presently permit non-Canadian dealers to trade in securities with "accredited investors" on an unregistered basis, the Proposed Registration Rule will require such dealers to rely on the international dealer exemption. As a consequence, an unregistered non-Canadian dealer will only be permitted to trade with a narrow list of permitted clients or, alternatively, will be required to register as an "exempt market dealer" to gain access to the full list of "accredited investors" with whom they are presently permitted to trade (summarized below). Significantly, in the provinces and territories where a non-Canadian dealer may presently trade in securities with an "accredited investor" on a dealer registration-exempt basis, the proposed international dealer exemption would not permit the dealer to trade with any of the following "accredited investors":

• the persons and entities identified above; and
• individuals who meet the accredited investor asset or income tests.

Under the proposed international dealer exemption, non-Canadian dealers will be restricted to trading only in "foreign securities," the definition of which does not include an inter-listed security (i.e., a security that is listed or traded on a marketplace in Canada), and in certain Canadian debt securities. Presently, a non-Canadian dealer may trade in both Canadian and non-Canadian securities on a dealer registration-exempt basis with an "accredited investor" resident in most provinces and territories, other than Ontario. The "foreign securities" restriction is a requirement presently applicable to registered international dealers in Ontario.

Overview of Permitted Clients

¹ All provinces and territories except Ontario, Newfoundland and Labrador and the Yukon Territory

"Exempt market dealer" registration requirement

Under the Proposed Registration Rule, a non-Canadian dealer will be required to register as an "exempt market dealer" to trade in Canadian and non-Canadian securities with the full list of "accredited investors." A non-Canadian dealer that wishes to register as an exempt market dealer will be required to:

• make informational filings for each of its directors and senior executive officers;
• register each of its individual dealing representatives that will trade in Canada, who will be subject to Canadian proficiency requirements;
• register an Ultimate Designated Person (i.e., the senior person in charge of the firm's activities requiring registration) and a Chief Compliance Officer (i.e., the person responsible for the day-to-day monitoring of the firm's adherence to its compliance policies and procedures).

Exempt market dealers will also be subject to "fit and proper" requirements, such as annual and quarterly financial statement reporting requirements, capital adequacy calculation and reporting requirements, insurance, bonding and other notice filing requirements. In addition, exempt market dealers will be subject to specific custody rules for client assets.

New registration regime

The Proposed Registration Rule represents one piece of what is proposed to be a national, harmonized and simplified registration regime. The full regime is proposed to be brought into force through consequential amendments to securities legislation and related instruments, which will work in conjunction with the National Registration System and implementation of core client relationship principles through SRO by-laws (which are yet to be proposed).

In Ontario, for example, it is proposed that the Securities Act (Ontario) will be amended to require registration by anyone who is in the business of acting as a dealer or representative of a dealer, or who is an adviser or representative of an adviser or an investment fund manager. While the legislation will determine who needs to be registered, the Proposed Registration Rule will set out the categories of registration, for both firms and individuals, and the related requirements for these categories, including "fit and proper" requirements, conduct rules for dealers and advisers and obligations regarding conflicts of interest. Exemptions from the requirement to register as a dealer, including the exemption for trades with accredited investors, will be eliminated. While the text of the Proposed Registration Rule and related Companion Policy has been published for comment (summarized below), the detailed legislative amendments required to implement this regime have not yet been provided.

Meaning of "in the business"

The CSA propose certain factors to be considered in determining whether an activity is conducted as a business. These include, inter alia: undertaking an activity with repetition or regularity; being or expecting to be remunerated or compensated for undertaking the activity; soliciting others in connection with the activity; and holding oneself out as being in the business of conducting the activity.

Moving to this type of "business trigger" for dealers means dealer registration exemptions relating to specific types of trades or trades to specific types of investors will be eliminated (for example, the dealer registration exemptions contained in National Instrument 45-106 - Registration and Prospectus Exemptions, including the accredited investor exemption). These will be replaced by registration requirements for those "in the business of" dealing. While most security issuers themselves would not be "in the business" of dealing in securities (and therefore will not require registration or a registration exemption), the Companion Policy clarifies that an issuer that creates a secondary market in its securities or is a market maker for its own securities would likely be considered to be "in the business of" dealing in securities. Similarly, the Companion Policy states that, in most instances, the CSA would not consider a person whose main or sole activity is dealing for their own account to be in the business of dealing in securities.

Categories of registration

The Proposed Registration Rule contains five basic categories of dealer registration:

1. Investment dealer

2. Mutual fund dealer

3. Scholarship plan dealer

4. Exempt market dealer

5. Restricted dealer

The exempt market dealer category is similar to the current "limited market dealer" category in Ontario and Newfoundland and Labrador, although the fit and proper requirements are more onerous than those applicable to limited market dealers. Persons registered as exempt market dealers would be permitted to deal only in securities being distributed under a prospectus exemption or to persons or companies to whom a security may be distributed under a prospectus exemption (for example, trading in prospectus qualified securities with accredited investors). British Columbia is considering not adopting the exempt market dealer category based on concerns that imposing registration requirements on those dealing in the exempt market will negatively impact venture capital business. Other categories of dealer in the various provinces would be eliminated.

The Proposed Registration Rule also contemplates two categories of adviser registration, namely, portfolio manager and restricted portfolio manager, as well as certain registration exemptions, including exemptions for international dealers and advisers. For an overview of the impact on international dealers and advisers, Stikeman Elliott has published a related Canadian Securities Law Update (February 2007).

Registration for investment fund managers

One of the more significant changes included in the new regime is the proposal to impose a registration requirement for managers of investment funds (which includes domestic, foreign, reporting and non-reporting issuers, but does not include private investment clubs). Investment fund managers will not only be required to register, but will also be subject to registration related obligations imposed under the Proposed Registration Rule, including solvency, proficiency and others (discussed below). The CSA's rationale for imposing fund manager registration is to allow regulators to directly regulate fund managers, impose requirements on fund managers relating to resources and supervision of out-sourced activities, and impose a framework for managing conflicts. Managing an investment fund is considered to include administering the fund but not acting as portfolio manager for the fund.

Individual registration categories

The Proposed Registration Rule also sets out two new categories of individual registration by requiring all registered firms to designate an individual as the ultimate designated person (UDP) and the chief compliance officers (CCO). The UDP is proposed to be the person in charge of the registrant firm or the division in the firm that carries on the activity requiring registration, and the CCO is proposed to be the person responsible for the day-to-day monitoring of compliance policies and procedures. Of importance to smaller registrants, the CSA also clarify that these functions can be carried out by the same individual.

Considerations for private equity and venture capital

While the Proposed Registration Rule does not expressly address private equity or venture capital funds, some guidance is offered in the Companion Policy in respect of registration requirements for general partners. Here the CSA state that whether the general partner will be in the business of providing advisory services and so required to register as an adviser will depend upon the business purpose of the limited partnership and the services the limited partners expect the general partner to provide.

The CSA state in the Companion Policy that if the general partner of a limited partnership selects investments where it will be involved in the management and development of those investments, the CSA would not consider the general partner's activities to be portfolio management activities requiring registration. This is in contrast to the situation where the purpose of the limited partnership is simply to invest in exempt securities relying on the expertise of the general partner. In the CSA's view, as the general partner does not bring "special expertise" to the underlying investments, it would be required to be registered as a portfolio manager. The CSA also state that they would not consider a firm that provides merger and acquisition advisory services without participating in the distribution of securities to be in the business of dealing in securities.

Referral arrangements

Specific requirements and disclosure obligations for referral arrangements pursuant to which a registrant pays or receives any compensation for the referral of a client are included in the Proposed Registration Rule.

Further requirements and rules

The Proposed Registration Rule also contains rules relating to proficiency, solvency and financial records for registrants (fit and proper requirements), detailed and technical conduct requirements (governing matters such as account opening and know-your-client, relationship disclosure and record-keeping), disclosure and compliance requirements relating to conflicts of interest and provisions governing suspension and revocation of registration. Details on these and other matters governed by the Proposed Registration Rule will be provided in our forthcoming updates.

Comment period

The Proposed Registration Rule is open for comments until June 20, 2007. Implementation is expected to stretch well into 2008 as the CSA have yet to provide any specifics on implementation dates or transition matters.

As part of the consequential amendments made to NI 45-106 effective September 14, 2005, the CSA changed this provision of the Companion Policy to read that a " [b]eneficial securityholder must receive either a paper certificate or an electronic alternative such as an ownership statement under a direct registration system, scheduled to be phased into operation during 2005." The CSA's intentions in requiring what appears to be the mandatory delivery of a confirmation statement to beneficial securityholders are not clear. Nor is it clear that, in adding this requirement, the CSA considered whether clearing agencies such as The Canadian Depositary for Securities Limited (CDS) would have the technological capability to carry it out. It is also not known what the CSA intended when referring to a ".direct registration system, scheduled to be phased into operation during 2005."

These amendments, whose effects appear to have been inadvertent, are part of the Companion Policy and not part of the Instrument itself. While they may represent the view of the CSA, they do not have the force of law. CDS has nevertheless taken the position that it will no longer accept restricted securities (i.e. those required to carry a legend indicating a restriction on resale) in the book-entry system. This effectively means that unless an issuer can deliver an ownership statement carrying the required legend to each beneficial purchaser, every security issued under a private placement (pursuant to a prospectus or registration exemption) will have to be certificated.

However, in at least one offering, staff at the Ontario Securities Commission (OSC) agreed to an interim solution that allowed CDS to accept debt securities that were privately placed. In that case the issuer sent a letter to CDS, with a copy to the OSC, stating that the issuer was not a reporting issuer and was unlikely to be one, that the debt securities being offered would be sold under the "accredited investor" exemption under NI 45-106, that the issuer took the position that subsection 2.5 of NI 45-102 does not require it to legend the certificate representing the debt securities and therefore the issuer would deposit with CDS a global certificate representing the aggregate number of securities to be issued without the legend. Staff at the OSC confirmed that they would not object to the deposit by the issuer of the global certificate without a legend and CDS agreed to hold and transfer the debt securities in the book-entry system. This solution may be viable for offerings where the securities issued will always be subject to a restriction on resale. As discussed above, the conditions set out under subsection 2.5 of NI 45-102 must be satisfied so that the first sale of securities previously issued under a prospectus or registration exemption does not require a prospectus. Where the securities in question are not contemplated to be sold to secondary market purchasers, satisfaction of the conditions set out under section 2.5 of NI 45-106, including the condition that the security certificate or confirmation statement carry the required legend, is therefore not relevant.

In another transaction, we have been able to develop what appears to be an alternative interim solution that is also acceptable to CDS. We propose that a confirmation statement carrying the required legend be sent to purchasers at the time their purchase is confirmed by the applicable dealer (that is, at the time the dealer's confirmation slip or ticket is sent to purchasers). In conjunction with this, the issuer of the security would apply to the applicable regulator for confirmation that the delivery of such a statement is in accordance with Section 1.7 of the Companion Policy (requiring that beneficial securityholders receive an ownership statement carrying the required legend). Based on discussions with CDS, we believe that this is an acceptable alternative interim solution that will allow other types of private placements to proceed in the book-entry system until the CSA have resolved this issue. While this method does impose an additional obligation to deliver a written confirmation statement, it has been proposed only as an interim measure to deal with CDS's reluctance to accept these securities in the book-entry system. Ideally, any long-term solution implemented by the CSA would support more efficient methods of holding and transferring securities and not impose additional paper-based obligations.

Effectively barring privately placed securities from the book-entry system represents a significant setback in the progress that has been made in the electronic holding and transfer of securities over the last number of years. With an increasing number of issuers moving to a book-entry only system, and investors preferring this system, this issue is a matter of great significance for Canadian capital markets and it is to be hoped that it will be resolved in the very near future.

We are currently working with the CSA and CDS to resolve this issue for all types of offerings.

Under the current regime, most jurisdictions have a similar, but not identical, set of exemptions. This means that market participants wishing to effect a multi-jurisdictional exempt distribution in Canada must comply with all the various exempt distribution regimes of the relevant jurisdictions. The Instrument, however, will generally enable market participants to view the landscape of exemptions, with the exception of those jurisdictions, including Ontario, that will retain certain local exemptions. Ontario local exemptions will be consolidated in the revised OSC Rule 45-501.

Summary of the Proposed Instrument

The substance of the proposed Instrument can be summarized as follows:

Definitions

• "Founder" will be defined based on MI 45-103. The term "founder" will replace the concept of "promoter," which is currently contained in the securities legislation of most jurisdictions. A designation as a "founder" requires active involvement in the business of the issuer at the time of the trade and not simply the ownership of a certain percentage of an issuer's securities.

• "Control" will have two different interpretations in the Instrument. The exemption for trades to employees, executive officers, directors and consultants will contain a broader concept of "control" than for the rest of the Instrument, in order to "accommodate trades of compensation securities in a wide variety of business structures."

Capital Raising Exemptions

Among the list of prospectus and registration exemptions, the following changes are worth highlighting:

• the "Accredited Investor" exemption contains additional categories to include an investment fund managed by a registered adviser and a person acting on behalf of a fully managed account if the person is registered as an adviser in Canada or, except in Ontario, in a foreign jurisdiction.

• a new "Private Issuer" exemption (welcome back!) will replace the closely-held issuer exemption in the existing OSC Rule 45-501 and the closed company exemption in Quebec.

• the "Minimum Amount Investment" returns and the prescribed minimum amount for all jurisdictions is set at $150,000, payable in cash at the time of the trade.

• the "Family, Friends and Business Associates" exemption will be available in all jurisdictions except Ontario. It applies to executive officers, directors and control persons of the issuer and certain of their close family, friends and business associates. Saskatchewan requires a signed risk acknowledgment from close friends and business associates.

• the "Family, Founder and Control Person" is an Ontario exemption for founders, affiliates of founders, control persons and certain family members of an executive officer, director or founder of the issuer.

• the "Affiliates" exemption, relating to trades by an issuer in a security of its own issue to an affiliate of the issuer purchasing as principal will be a new exemption for most jurisdictions, except in Ontario.

• the "Offering Memorandum" exemption will not be adopted by Ontario. There will be two versions of this exemption, one for British Columbia, New Brunswick, Nova Scotia and Newfoundland and Labrador, and another for Alberta, Manitoba, Northwest Territories, Nunavut, Prince Edward Island, Quebec and Saskatchewan. The primary difference between the two versions is that the latter requires purchasers to either be "eligible investors" as defined in the Instrument, or to purchase securities at an aggregate acquisition cost that is less than $10,000.

Old Friends-But With New Limitations

• the proposed return of the private issuer and $150,000 exemptions, albeit in slightly modified form, is welcome in Ontario, as these exemptions were frequently very useful and have been missed. The closely-held issuer exemption, which replaced the old private company exemption, was fraught with traps for the unwary, and the accredited investor exemption was on occasion just not broad enough.

• a new restriction, however, is proposed on the use of each of the accredited investor and $150,000 exemptions. An accredited investor includes a person, other than an individual or certain funds, with net assets of at least $5 million according to its most recent financials. Despite this, the proposed exemption would not be available to such a person if the person is "created primarily" to purchase securities in reliance on prospectus exemptions or is "used primarily" to purchase securities under "these" (the meaning of this word is unclear) exemptions. Similar limitations apply to all entities in the case of the proposed new $150,000 exemption. The reasons for these limitations are not entirely clear, especially in the case of the accredited investor exemption, and they could pose a number of (probably unintended) difficulties for entities that would otherwise be considered sophisticated and that might wish to participate in a substantial private placement.

• the new $150,000 exemption would also require payment in cash at the time of the purchase, creating a more restrictive situation than existed in the past, when obligations in that amount could be incurred instead.

Transaction Exemptions

Certain exemptions that are transactional in nature relate to:

• trades made in connection with an amalgamation, merger, reorganization, arrangement, dissolution or winding-up of an issuer.

• an asset acquisition with a fair value of not less than $150,000.

• an acquisition of mining, petroleum or natural gas properties or any interest in them.

• securities issued to settle bona fide debt of the reporting issuer owed to a creditor.

• an issuer's acquisition or redemption of its own securities.

• trades pursuant to take-over bids and issuer bids.

Investment Fund Exemptions

Additional exemptions pertaining solely to investment funds include:

• reinvestments allowing trades of securities of the issuer to existing security holders of the issuer under a plan, if the plan permits the security holder to direct that "dividends or distributions out of earnings, surplus, capital or other sources" payable in respect of the issuer's securities be applied to the purchase of additional securities of the same class.

• additional investments in investment funds if the purchaser has initially purchased securities at a cost of not less than $150,000, paid in cash, or if the net asset value of those securities is at least $150,000 at the time of the trade.

Employee, Executive Officer, Director and Consultant Exemptions

• exemptions will be available for trades to employees, executive officers, directors and consultants, and are based on the current MI 45-105, with some modifications.

Miscellaneous Exemptions

Exemptions available in the miscellaneous category of the Instrument include trades relating to:

• isolated trades.

• trades to and among underwriters.

• trades of "debt securities" that are rated and issued or guaranteed by governments, "Canadian financial institutions" and "Schedule III banks."

• trades in non-convertible negotiable promissory notes or commercial paper maturing within one year of issue and with an "approved credit rating."

• trades in non-syndicated mortgages on real property by a registered or licensed person.

• trades in a security evidencing indebtedness "secured by or under" a security agreement for the acquisition of personal property if the security is not offered for sale to an individual.

• trades in an evidence of deposit issued by a "Schedule III bank" or an association governed by the Cooperative Credit Associations Act (Canada).

• conversion, exchange or exercise of securities automatically, at the option of the holder or at the option of the issuer.

• in Ontario only, certain registration exemptions for trades in Ontario by market intermediaries are removed, preserving Ontario's current universal registration regime.

Registration Only Exemptions

An exemption from the registration requirements would be available for trades:

• under judicial procedures such as the probate of estates, receivership, bankruptcy, liquidation or judicial sale.

• by lawyers, accountants, engineers, teachers, notaries in Quebec and publishers and writers for newspapers, magazines or business journals under certain circumstances.

• there is an exemption from the requirement to be registered as an adviser for registered investment dealers who manage the investment portfolios of clients through discretionary authority, but otherwise must comply with the rules and policies for portfolio managers set out by the Investment Dealers Association of Canada. In Ontario, a registered investment dealer must also provide the OSC with the names of partners, directors, officers or employees designated and approved to make investment decisions.

Control Block Distributions

"Eligible institutional investors" (as defined in NI 62-103) will continue to be exempt from the prospectus requirements in connection with "control block distributions."

TSX Venture Exchange Offerings

Except for Ontario, there would be an exemption from the prospectus requirements for TSX Venture Exchange issuers that file a TSX Venture Exchange offering document and comply with certain other requirements.

Report of Exempt Distribution

Form 45-106F1

Changes to Existing Exemptions in Ontario based on NI 45-106

As discussed above, Ontario will experience changes to its existing exemptions as a result of the Instrument, including:

• Minimum amount exemption - the prescribed minimum amount is $150,000, payable in cash at the time of trade.

• Private issuer exemption - will replace the closely-held issuer exemption currently set out in OSC Rule 45-501.

• Securities for debt exemption - currently available in British Columbia, but will be available pursuant to the Instrument in all provinces, with guidance on the appropriate circumstances of usage contained in the companion policy.

• Schedule III banks - based on the fact that Schedule III banks have been receiving relief from the registration and prospectus requirements by way of exemptive orders for several years.

Consequential Amendments and Repeals as a Result of NI 45-106

Amendments

• consequential changes will be made to NI 33-105 Underwriting Conflicts, NI 45-101 Rights Offerings, NI 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues.

• MI 45-102 Resale of Securities has been amended to include Quebec. With Quebec's inclusion, 45-102 would become a national instrument. Other revisions include updating definitions, removing obsolete transitional provisions and revising appendices to incorporate the exemptions contained in the Instrument and transitional provisions for current exemptions.

• in Ontario, the resale provisions currently set out in both the existing Rule 45-501 and MI 45-102 have been consolidated into the amended MI 45-102. In the Instrument and the revised 45-501, the concept of "founder" has replaced the concept of "promoter" in many cases. However, the current Ontario resale regime for securities acquired under the existing Ontario promoter exemptions before the coming into force of the Instrument and the revised 45-501 will apparently be maintained, which adds a lot of extra complexity. Going forward, if a promoter or founder acquires a security under the exemptions in the Instrument and the revised 45-501, the first trade will be subject to either a restricted period or a seasoning period.

• in Ontario, amendments will be made to update OSC Rules 13-502 Fees, 31-503 Limited Market Dealers, 91-501 Strip Bonds and 91-502 Trades in Recognized Options according to the securities legislative references contained in the Instrument. Replacements will be made to OSC Rules 45-502 Dividend or Interest Reinvestment and Stock Dividend Plans and 81-501 Mutual Fund Reinvestment Plans by sections 2.2 and 2.18 of NI 45-106, respectively.

Misrepresentations in Ontario

• requirements relating to the statutory right of action and right of rescission referred to in section 130.1 of the Securities Act (Ontario), for misrepresentations, would apply in the use of an offering memorandum in connection with a distribution made in reliance on the following exemptions: accredited investor, private issuer, family, founder and control person (Ontario), affiliates, additional investment in investment funds, and government incentive security.

• however, section 130.1 would not apply in respect of an offering memorandum delivered to a Canadian financial institution, a Schedule III bank, the Business Development Bank of Canada or a subsidiary of any of the foregoing as a prospective purchaser.