COR#96/055

John H. Frank, for Commission staff. Steven Sobolewski, for Richard Tong.

      This is a hearing under sections 144(1) and 144.1 of the Securities Act, S.B.C. 1985, c. 83 respecting Richard Tong.  A notice of hearing was issued on November 17, 1995, in which Commission staff alleged that:

1.		Tong was at all material times a control person of Canasia Industries Corporation, a reporting issuer under the Act; and
2.		between April 1, 1993 and December 15, 1994, Tong distributed approximately four million shares of Canasia without a prospectus or prospectus exemption, contrary to section 42 of the Act.

2.   BACKGROUND

      Canasia became a reporting issuer on January 28, 1993. Canasia's shares are listed and posted for trading only on the Vancouver Stock Exchange and the company is an exchange issuer under the Act.

      Tong has been president and a director of Canasia since February 1989. Tong admitted that, between April 1, 1993, and December 15, 1994, he was a control person of Canasia.  Tong also admitted that, during this 21 month period, he distributed approximately four million shares of Canasia without a prospectus or a prospectus exemption, contrary to section 42 of the Act.

      On August 11, 1994, counsel for Canasia sent a letter to Commission staff advising that they had reviewed Tong's insider reports for the months of April, May and June 1993. They acknowledged that, during those months, Tong could have sold his Canasia shares in reliance on the exemptions found in section 117(d) and (e) of the Securities Regulation, B.C. Reg. 270/86 (the "former Regulation") but that "he did not use the exemptions appropriately".  Specifically, he sold more shares than he was entitled to pursuant to section 117(e), but failed to file the Form 23, Notice of Intention to Sell and Declaration, that would have allowed him to rely on section 117(d).  Also, Tong admitted that, during November and December 1994, he again sold more shares than he was entitled to pursuant to section 117(e).

      At no time during the 21 month period did Tong file a Form 23, Notice of Intention to Sell and Declaration.  Tong did file insider reports disclosing his purchases and sales of shares during the period.  The reports were filed within ten days after the end of each month.

      At the beginning of the 21 month period, there were 5,010,088 Canasia shares outstanding and, at the end of the period, 6,510,088 Canasia shares outstanding.  During the 21 month period, Tong purchased 2,908,000 shares of Canasia on more than 180 days and sold 3,677,000 shares of Canasia on more than 140 days through the facilities of the Exchange. These 6,585,000 shares represented 28.61% of the 23,019,267 Canasia shares traded on the Exchange during the period.  Tong traded Canasia shares on the Exchange in every month of the 21 month  period.  For four of those months, the shares traded by him represented 50% or more of the total number of shares traded that month on the Exchange. For another seven of those months, the shares traded by him represented more than 25% of the total number of Canasia shares traded that month on the Exchange.

      During the 21 month period, through the Exchange and privately, Tong purchased a total of 3,594,000 Canasia shares at a cost of $970,318.21 and sold a total of 3,809,500 Canasia shares for proceeds of $949,315.98.  Therefore, Tong experienced a net loss of $21,002.23 trading Canasia shares during the 21 month period.

      Tong's income tax return for 1993 includes a table headed "Statement of Business Income - Securities Trading".  The table indicates that, during 1993, Tong traded the securities of 14 companies, including Canasia, and generated a net gain of $41,798.97.  A similar table in Tong's 1994 income tax return indicates that, during that year, Tong traded the securities of 10 companies, including Canasia, and generated a net loss of $143,175.29.

3.   FINDINGS

      The provisions of the Act and the former Regulation that were in force during the 21 month period are straightforward. Section 42(1) of the Act requires that, in the absence of an exemption, a prospectus be filed with, and a receipt obtained from, the Superintendent (now the Executive Director) in respect of every distribution of securities.  The definition of "distribution" is contained in section 1(1) of the Act and includes a trade from the holdings of a control person.  The definition of "trade" is also contained in section 1(1) of the Act and includes a disposition of a security for valuable consideration.

      The former Regulation provided two exemptions from the prospectus requirements specifically directed to control persons of exchange issuers.  The first, contained in section 117(d) of the former Regulation (now found in section 128(d) of the Securities Rules, B.C. Reg. 479/95), allowed a control person to distribute shares if certain conditions were met. One of the conditions was that the control person file a Form 23, Notice of Intention to Sell and Declaration, in compliance with section 129 of the former Regulation (now section 136 of the Rules).  Section 129 required that the notice be filed at least seven days before the initial trade and that the control person certify that he or she has no knowledge of any material change in the issuer's affairs that has not been generally disclosed and reported to the Commission and no knowledge of any other material adverse information in regard to the current and prospective operations of the issuer that has not been generally disclosed.  Tong did not file a Form 23 during the 21 month period and was therefore unable to rely on this exemption.

      The second exemption, since repealed, was found in section 117(e) of the former Regulation.  This exemption was available for distributions made through the facilities of the Exchange where the number of shares distributed, combined with the number of shares distributed pursuant to the exemption during the 90 day period preceding the distribution, did not exceed 5% of the shares outstanding at the date of the distribution.  While Tong was able to rely on this exemption for some of his distributions during the 21 month period, it would not have been available for the vast majority of them.

      In any event, Tong admitted that, during the 21 month period, he was a control person of Canasia and distributed approximately four million shares of Canasia without a prospectus or prospectus exemption. Therefore, we find that Tong distributed shares of Canasia without filing a prospectus with, and obtaining a receipt from, the Executive Director, contrary to section 42(1) of the Act.

4.   DECISION

      The continuous disclosure regime for reporting issuers set out in the Act is designed to ensure that all investors have equal access to material information concerning an issuer, as a basis for their investment decisions.  Continuous disclosure requirements are imposed not only on the reporting issuer itself, but on the persons most intimately involved in, and therefore most knowledgeable about, the issuer's affairs - its insiders, particularly control persons.

      Insiders of a reporting issuer are prohibited from purchasing or selling the issuer's securities if they know of any material fact or material change respecting the issuer that has not been generally disclosed.  Insiders of a reporting issuer are also required to file insider reports disclosing their changes in ownership and control of the issuer's securities, within ten days after any month in which such changes took place.  Insider reports provide investors with disclosure respecting the trading activity of the issuer's insiders.

      Insiders of a reporting issuer are also subject to disclosure requirements respecting their acquisition of securities.  A person acquiring ownership or control of 10% or more of the voting or equity securities of a reporting issuer must immediately issue a press release and, within two business days, file a report disclosing the acquisition. The press release and report disclose, among other things, whether the person intends to increase their ownership or control over the issuer's securities.  A press release must be issued and a report filed every time the insider acquires an additional 2% or more of the securities.  This "early warning" disclosure requirement is designed to quickly inform investors that the person has acquired a significant stake in the reporting issuer and whether they intend to increase that stake.  At the point the person makes an acquisition of voting or equity securities that would result in their holding 20% or more of these securities, the person must comply with the take over bid requirements set out in the Act.  There are several exemptions from these requirements provided in the Act.  The exemption most likely to be relied on by a control person purchasing securities on the Exchange permits the person to acquire up to 5% of the issuer's securities in any 12 month period, provided that the price paid for the securities does not exceed their market price.

      Once a person holds 20% or more of the voting rights attached to an issuer's securities, that person is deemed to be a control person of the issuer.  Control persons not only are knowledgeable about the issuer's affairs; they have the ability, by virtue of their significant equity position in the issuer, to direct the issuer's affairs.   In recognition of the critical role played by a control person in the issuer's affairs, the Act deems any sale by a control person to be a distribution, requiring the filing of a prospectus.  Section 117(e) of the former Regulation provided a limited exemption from this requirement for distributions through the Exchange of a small number of securities of an exchange issuer, to allow the control person to carry out limited market making activities.  The other exemption directed to control persons of exchange issuers, that set out in  section 117(d) of the former Regulation and section 128(d) of the Rules, can be used for an unlimited number of securities, but has several conditions attached to its use.  One of the most important of these is that the control person is required to file a Notice of Intention to Sell and Declaration at least seven days before the initial distribution. Pursuant to section 136 of the Rules, the notice is now required to be filed if the control person distributes a security under several exemptions in addition to the exemption provided in section 128(d) of the Rules.   In the notice, the control person certifies that he or she has no knowledge of any undisclosed material changes or material adverse information respecting the issuer.  The notice therefore provides the market with both advance notice of the control person's sale of securities and assurance that the control person is not trading on the basis of undisclosed material information.

      Another disclosure requirement that is unique to control persons is the requirement to file an insider report within three days of distributing a security under section 117(d) of the former Regulation.  Section 137 of the Rules now provides that a control person file an insider report within three days of distributing a security under any exemption.  These accelerated insider report filings provide the market with more current disclosure of trades by control persons than of trades by other insiders, in recognition of the more significant involvement of the control person in the reporting issuer's affairs.

      Tong acquired over 3.5 million Canasia shares over the 21 month period, representing over 55% of the Canasia shares outstanding at the end of the period.  However, there is no evidence before us, and therefore we have made no findings, as to  whether Tong filed early warning reports, complied with the take over bid requirements or properly relied on an exemption from those requirements in respect of these acquisitions.

      Tong distributed approximately 4 million Canasia shares over the 21 month period without filing a prospectus or relying on an exemption from the prospectus requirement.  The only exemption available to him for the vast majority of the distributions he made during the 21 month period was that in section 117(d) of the former Regulation.  Had he properly relied on that exemption, the market would have had both advance notice of his sales and assurance that he was not trading on the basis of undisclosed material information. The market also would have had access to the more current insider reports Tong would have been required to file pursuant to section 130 of the former Regulation.

      This information was particularly critical because Tong was a very active trader in Canasia shares.  He purchased and sold a total of over 7.4 million shares during the 21 month period.  It appears that the only disclosure available to the market respecting Tong's massive volume of trading during the 21 month period was the insider reports filed by Tong within ten days after the end of each of these months.  In view of the more onerous disclosure requirements imposed on control persons under the Act and former Regulation, and the market's need for this information, we find the disclosure efforts made by Tong respecting his distributions of Canasia shares seriously inadequate.

      Tong's 1993 and 1994 income tax returns indicate that he traded the securities of over 20 companies, including Canasia. As an active trader, and as an officer, director and control person of a reporting issuer, Tong should have known that he was required to comply with these disclosure requirements.  He obviously knew that he was an insider of Canasia and therefore required to file insider reports.  As well, from at least August 1994, when Canasia's counsel wrote to Commission staff acknowledging Tong's inappropriate use of exemptions, Tong knew that he must either limit his sales to those permitted pursuant to section 117(e) or meet the conditions, including notice and disclosure requirements, of section 117(d). Despite this warning, he again failed to comply in November and December 1994.  The Commission will not tolerate such disregard for regulatory requirements from a person who is not only critical to the ongoing affairs of a reporting issuer, but whose trading activities are of such interest to the market.

      We therefore consider it to be in the public interest to order:

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 Tong for a period of five years from the date of this decision;
2.		under section 144(1)(d) of the Act, that Tong resign any position he holds as a director or officer of a reporting issuer and is prohibited from becoming or acting as a director or officer of a reporting 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 five years has elapsed from the date of this decision;

3.		under section 144.1 of the Act , that Tong pay the Commission an administrative penalty in the amount of $15,000 on or before May 31, 1996; and
4.		under section 154.2 of the Act, that Tong pay the costs of or related to the hearing, in an amount to be determined following further submissions from the parties.