COR#96/188

Kathleen A. Reilly, for Commission staff. Paul Jan Borkowski, for himself and Canpol Holding.

This is a hearing under sections 144(1) and 144.1 of the Securities Act, S.B.C. 1985, c.83.  A notice of hearing was issued on December 23, 1994, which alleged that, from November 1993 to May 1994, Paul Jan Borkowski ("Borkowski") caused Canpol Holding (a.k.a. Commercial and Productive Enterprise Canpol Company Ltd.) to distribute securities of Canpol to ten or more residents of British Columbia without registration and without a prospectus, contrary to sections 20 and 42 of the Act.

The hearing was adjourned once, by consent, and held on February 17 and May 18 and 19, 1995.  Commission staff submitted their closing argument on June 8, 1995.  Borkowski was to submit his closing argument by June 30, 1995, but requested and received three extensions, the last being to January 30, 1996.  As of today's date, Borkowski has not submitted his closing argument.

BACKGROUND

Canpol was incorporated in Poland on April 8, 1992.  Its incorporation documents describe its business as the design and production of building materials, the running of commercial, consulting and marketing agencies, and export and import.  The directors are stated to be Borkowski, Stanislaw Borkowski (Borkowski's father) and Elzbieta Bardan (Borkowski's cousin).   The incorporation documents also show Borkowski as president and Stanislaw Borkowski as vice president.

Canpol has never been a reporting issuer in British Columbia nor been listed on an exchange.  Neither Canpol nor Borkowski has ever been registered under the Act to trade securities.

Canpol's incorporation documents state that all 3,040 shares of the company's initial capital are held by Borkowski. Forty of these shares were issued for cash and 3,000 for machinery for the production and processing of building materials, specifically the "Canpol Insulboard Mill".

From the date of Canpol's incorporation through August 1993, shares of Canpol were sold to a number of people, most of whom appeared to be residents of Alberta.  A few of these people had discussed with Borkowski prior to Canpol's incorporation their possible investment in the company. Though it appears that the purchasers made their cheques payable to Canpol, the shares they received were transfers from Borkowski's holdings, rather than newly issued shares from Canpol.

On August 20, 1992, the then eleven shareholders of Canpol, including Borkowski, signed a Unanimous Shareholders Agreement "that restricts in whole or in part the powers of the Directors to manage the business and affairs of the Corporation".  Among other things, the Agreement provides that:

-		a shareholder holding shares representing less than 50% of the capital of Canpol shall not sell his or her shares to a third party prior to February 1, 1994;
-		a shareholder shall offer his or her shares to Borkowski before selling to a third party;
-		the president of Canpol, Borkowski, may draw an annual salary not exceeding $120,000 during his full-time employment with Canpol;
-		Canpol shall purchase from Borkowski for $1 before September 30, 1992, all proprietary rights to the machinery, process, technology, real property and materials to be used in the manufacture, production, distribution and marketing of Canpol Insulboard which are owned by Borkowski;
-		Canpol shall maintain at all times "key man" life insurance coverage with a minimum death benefit of $US2.4 million for the president of Canpol, Borkowski; and
-		all share certificates issued by Canpol shall be legended to show that the shares represented by the certificate are subject to the Agreement and may be dealt with only in accordance with the Agreement.

At these meetings, the shareholders also discussed the sale of Canpol shares and the prices at which those shares would be sold.  The minutes of a meeting held on August 6, 1992, state:  "Canpol has reached the point where it must again set goals and sell shares.  Since local investors are unable/unwilling to meet their commitments shares will be sold outside of Alberta.  Proposals have been sent and contacts made because shares do not sell themselves over night."  The minutes of a meeting held on February 8, 1993, state:  "It was determined that Paul [Borkowski] should return to Eastern Canada as soon as possible to finalize negotiations on the sale of more Canpol shares.  Vince will follow at a later date to attend meetings with a new potential investor."  The minutes of a meeting held on April 8, 1993 state:

	In excess of 25% of the shares of the company have been sold.  As per the original agreement, the value of each share sold in excess of the first twenty five shares shall be contributed by Paul Borkowski to the corporation as a shareholder's loan bearing interest of 10% annually. All shareholders shall realize the full value of their investment before this shareholder's loan is repaid.
	... A vote was held in regards to Paul's loan to Canpol of the money generated through the sale of shares 26, 27, and 28.  It was agreed that this loan is in the amount of $160,020 Canadian, and shall bear interest at the rate of 10% annually, not to be repaid until every share holder has recaptured their entire investment through dividends. All shareholders shall accumulated [sic] a pro-rated dividend based on the highest price paid per share.

The first reference to share sales in British Columbia appears in the minutes of a meeting held on August 24, 1993, which state:

	POTENTIAL BUSINESS: Paul believes that he can sell some 10 shares [sic] blocks in Kelona [sic].  He requires an ROI chart from Niel/Kathleen base [sic] on the $16,500 for 10 share option so that he can include it in the new book.
	Dwight to set up meeting with his interested party ASAP so that Paul can determine the guy's intentions.
	New share sales to have option for interest buy out at end of lst year.  If Canpol notified by the 9th month, Canpol will buy back the share for cost plus 12%.  If new shareholder decides to keep share then no interest is paid.  Paul asks if any shareholder present would sell their shares at cost plus 20%.  All answer no.  Paul may use this statement as a sales tool.

In September 1993, Canpol hired Murray Bond as vice president of operations, reporting to Borkowski.  The minutes of a meeting held on September 8, 1993, at which Bond was introduced to the shareholders, record a discussion between Bond, Borkowski and the other shareholders during which the following statements were made:

	PB [Borkowski] - How does MB [Bond] directly benefit Canpol. MB - Will give PB all of his time back currently waisted [sic] on finance.  MB is selling services [at] less than value.  MB to pull on connections currently unknown to corp.
	... MB - Must work within SEC commission guidelines in anticipation of public stock offer.  Will need securities lawyer to review structure.  As corp. grows, current shareholders position will be altered. PB - Makes clear that HE will protect current shareholders from undue action; P feels that he is reaching the limit of his personal knowledge and must bring in people (MB) in order to advance corp. Additionally a management team must be placed.  At this point the current style of shareholders meetings will cease.  Once board is placed PB will not [sic] longer determine financial direction of corp. but will still retain the final decision.

In the fall of 1993, Bond and Gregory Sando, Canpol's vice president of special projects and a Canpol shareholder, began to seek investors in British Columbia. Borkowski knew of their efforts and was advised from time to time of their progress.   To enable them to effect share transfers while Borkowski was out of the country,  Borkowski gave Bond, Sando and Kevin Barry Bickford, Canpol's vice president of finance and a Canpol shareholder, share certificates of Canpol registered in Borkowski's name, on the back of which Borkowski had signed in blank the share transfer notation.

Between September 1993 and April 1994, ten British Columbia residents purchased Canpol shares, for amounts ranging from $9,900 to $60,000.  One purchase took place in September 1993 and the other nine between December 1993 and April 1994.  The total amount invested by these ten people was $272,886.   Six purchasers each received a share certificate registered in Borkowski's name, on the back of which Borkowski had endorsed the transfer to that purchaser of the shares represented by the certificate.  Despite the fact that the shares were purchased from Borkowski, the cheques were made payable to Canpol.  The documentation respecting the other purchasers was not before us.  However, Canpol's financial records indicate that all of the money received from British Columbia purchasers was deposited into Canpol's treasury.

Canpol's financial records do not indicate whether this money was deposited in the form of direct payments from the various purchasers to Canpol or as shareholder loans from Borkowski, in accordance with the "original agreement" referred to in the minutes of the meeting of April 8, 1993.  A schedule of receipts and disbursements for the period from September 1, 1993 to June 15, 1994, prepared by Commission staff on the basis of Canpol's financial records, lists a number of shareholder loans by various people, but Borkowski is not among them.

The only written material received by any of the British Columbia purchasers prior to or at the time of their purchases was a version of the Canpol booklet referred to earlier.  The various versions of this booklet contain detailed descriptions of Canpol's product, as well as descriptions of Canpol's development plans, accompanied by financial projections. However, none of the booklets contains financial statements of Canpol.  As well, at no time did any of the shareholders receive financial statements of Canpol.

In his testimony, Borkowski did not deny Commission staff's allegation that he caused Canpol to distribute shares of Canpol to British Columbia residents without registration and without a prospectus.  Nor did Borkowski claim that these distributions were made in reliance on exemptions from the registration and prospectus requirements.  In fact, a Shareholders' Newsletter issued in August 1994 by Harding admits that Canpol issued shares in trades for which exemptions were unavailable under the Ontario Securities Act and offers rescission to all shareholders; a rescission offer had also been made in a memorandum dated June 10, 1994, to the shareholders from Borkowski, as chairman of Canpol.  However, Borkowski testified that he hired Bond, whom Borkowski understood had once been a broker, to ensure that securities regulatory requirements were complied with and that no shares were sold in British Columbia until Bond joined Canpol.

All of the money raised by the sale of Canpol shares has been spent.  Canpol currently has no cash and few, if any, other assets.  In fact, there is no documentary evidence that Canpol has ever had any assets,  produced a working Canpol Insulboard machine, or generated any revenue.  Despite requests from several Canpol shareholders as well as Commission staff, Canpol has failed to provide either financial statements or a proper accounting setting out precisely how the money raised from the sale of its shares was spent.

Some indication of this is provided in the various financial records submitted by the parties.  The schedule of receipts and disbursements for the period from September l, 1993 to June 15, 1994, prepared by Commission staff shows total receipts of $577,770 (including the $272,886 received from the British Columbia purchasers) and total disbursements of $527,399.  A document prepared by Borkowski and Bickford recording cash "inflows and outflows" for the period from July 1, 1993 to March 31, 1994, shows payments of $72,330 to Borkowski, $92,000 to Stan (Stanislaw) Borkowski, $5,000 to Mark Borkowski (Borkowski's brother) and $18,000 to Catherine Romaine (Borkowski's wife).  A document prepared by Bickford recording certain payments made during the period from September 1, 1993 to June 15, 1994, shows payments of $69,653 to Borkowski, $142,818.40 to Stan Borkowski and $29,500 to Catherine Romaine.  It is noted beside many of these payments that Bickford had no receipts or other documentation respecting the payment.  Beside several others, there are question marks.

Borkowski testified that these payments were for expenses incurred by him and his family on behalf of Canpol.  However, he did not produce any invoices or other documentation respecting these payments, claiming that they would have been given to Bickford.  Borkowski also testified that Canpol currently owes him approximately $390,000 for salary and expenses, and Stan Borkowski an unspecified amount, also for salary and expenses.  Stan Borkowski was employed as plant manager of the Polish plant at a salary of $1,500 per week. Though the Polish plant was never operational, Borkowski testified that Stan Borkowski instead supervised production of the Canpol Insulboard machines.  Again, there is no documentary evidence respecting these salary and expense claims.

Borkowski currently owns 65% of the shares of Canpol.

FINDINGS AND DECISION

Section 20 of the Act provides that a person can not trade in a security without being registered under the Act. Section 1 of the Act defines a trade to include a disposition of a security for valuable consideration as well as any act, solicitation or conduct in furtherance of such a disposition.

Section 42 of the Act provides that a person can not distribute a security without filing a prospectus and receiving a receipt for it from the Executive Director. Section 1 of the Act defines a distribution to include:

-		a trade in a security of an issuer that has not been previous issued;
-		a trade in a previously issued security of an issuer from the holdings of a control person; and
-		a transaction or series of transactions involving further purchases and sales in the course of or incidental to a distribution.

On the basis of the evidence before us, we can interpret the Canpol share transactions with British Columbia residents in two different ways.

In the first interpretation, there were two separate distributions of the shares.  The first was the disposition of the newly issued shares to Borkowski for cash and assets at the time of Canpol's incorporation.  The second was the disposition of the shares by Borkowski, a control person, to the various British Columbia purchasers for cash, which Borkowski then deposited in Canpol's treasury in the form of shareholder loans.  This interpretation is supported by two factors.  First, the shares sold to the British Columbia purchasers were represented by certificates registered in Borkowski's name, on the backs of which Borkowski had endorsed a transfer.  Second is the reference in the minutes of the April 8, 1993 meeting to the "original agreement" under which money generated by the sale of shares in excess of the first 25% would be contributed by Borkowski to Canpol in the form of shareholder loans.

If this interpretation is correct, we are of the view that both Borkowski and Canpol distributed the shares to the British Columbia purchasers.  While Borkowski was the person to actually dispose of the shares, Canpol carried out acts, solicitations and conduct in furtherance of Borkowski's dispositions. Two of Canpol's officers, Bond and Sando, had primary responsibility for identifying, negotiating with and completing the sales to the British Columbia purchasers.  As well, consideration for these shares went directly to Canpol's treasury.  The minutes of shareholder meetings clearly indicate that the sale of shares to British Columbia purchasers was an important corporate object for Canpol, as the money generated from these sales was necessary for the company's continued existence and development.

In the second interpretation, there was only one distribution of the shares.  The disposition of shares to Borkowski at the time of Canpol's incorporation was the first transaction and the disposition of the shares by Borkowski to the British Columbia purchasers was the second transaction in a series of transactions in the course of a distribution of its shares by Canpol to the British Columbia purchasers.  This interpretation is supported by several factors.  First, the minutes of meetings clearly indicate that the shareholders understood that the money raised by the sale of shares would go to Canpol, rather than Borkowski.  Second, the money raised by the sale of shares did go directly to Canpol; all of the cheques before us were made out to Canpol and Canpol's financial records show that all of the money paid by the British Columbia purchasers was deposited into Canpol's treasury.  Third, except for the reference in the minutes of the April 8, 1993 meeting, there is no documentation before us that refers to shareholder loans made by Borkowski to Canpol. As well, the schedule of Canpol's receipts and disbursements for the period from September 1, 1993 to June 15, 1994, prepared by Commission staff lists a number of shareholder loans by various people, but Borkowski is not one of them. Finally, in June and August 1994, Canpol offered rescission to all of the current shareholders of the company.  Neither rescission offer excluded persons who had purchased after the 25% threshold had been reached.

If this interpretation is correct, we are again of the view that both Borkowski and Canpol distributed the shares to the British Columbia purchasers.  While there may have been two separate transactions, the goal  from the time of Canpol's incorporation was to get some part of the shares that were issued to Borkowski into the hands of other shareholders as a means of getting money into the company.  In other words, both Canpol and Borkowski intended that part of these shares would ultimately end up in the hands of shareholders other than Borkowski.  Canpol made the dispositions of the shares, while Borkowski carried out several acts in furtherance of those dispositions.  Borkowski originally had the shares issued in his name and then transferred them to the British Columbia purchasers.  As well, Borkowski was clearly the directing mind behind Canpol in this, as in all other matters:  he decided when new shareholders should be sought; he hired Bond in order to help bring in those shareholders; and he received reports as to Bond's and Sando's success in this regard.

We do not need to determine which of the two interpretations outlined above is correct.  Under either interpretation, both Canpol and Borkowski distributed shares of Canpol to the British Columbia purchasers.  Neither was registered under the Act, no prospectus was filed, and no registration or prospectus exemptions were available. Therefore, we find that both Canpol and Borkowski contravened sections 20 and 42 of the Act.

Securities legislation is intended to strike a balance between the need to protect investors and the need for businesses to raise capital.  The Securities Act provides various exemptions from the registration and prospectus requirements that would permit a private, start-up company like Canpol to raise capital from sophisticated investors or persons connected to the company or its principals.  Canpol and Borkowski ignored all of the rules and restrictions associated with the use of these exemptions.  They sold securities to the public without dealing through a registered dealer or providing the mandated disclosure.  As a result, a number of investors suffered losses and the capital raising process for small issuers was brought into disrepute. Considering it to be in the public interest, we order:

1.		under section 144(1)(b) of the Act that all persons cease trading in securities of Canpol until Canpol files a prospectus with, and obtains a receipt for it from, the Executive Director; and
2.		under section 144.1 of the Act that Canpol pay the Commission an administrative penalty in the amount of $10,000 on or before November 30, 1996.

1.		under section 144(1)(c) of the Act that the exemptions described in sections 30 to 32.1, 55, 58, 80 and 81 do not apply to Borkowski for a period of 15 years from the date of this decision;
2.		under section 144(1)(d) of the Act that Borkowski resign any position he holds as a director or officer of an issuer and is prohibited from becoming or acting as a director or officer of any issuer until

a)		he has successfully completed a course of study satisfactory to the Executive Director concerning the duties and responsibilities of directors and officers, and
b)		a period of 15 years has elapsed from the date of this decision;

3.		under section 144.1 of the Act that Borkowski pay the Commission an administrative penalty in the amount of $25,000 on or before November 30, 1996; and
4.		under section 154.2 of the Act that Borkowski pay prescribed fees or charges for the costs of or related to the hearing incurred by the Commission and the Executive Director, the amount to be determined following further submissions from the parties.