BCN 2002/27 - Notice of National Policy 46-201 Escrow for Initial Public Offerings and Form 46-201F1 Escrow Agreement [BCN - Rescinded]

Effective June 30, 2002, the Commission, together with the other members of the Canadian Securities Administrators (the “CSA”) other than Quebec, is implementing the uniform escrow regime set out in National Policy 46-201 Escrow for Initial Public Offerings. Also effective June 30, 2002, the Executive Director of the Commission is specifying Form 46-201F1 Escrow Agreement for use in connection with the National Policy.  This is the final implementation of the uniform escrow regime that came into effect on an interim basis on September 21, 2001.  The Commission des Valeurs Mobilieres du Quebec is currently reviewing a regulation that parallels the National Policy.

Background

We have been working with the CSA to develop this new escrow policy for several years. The CSA believes that a simplified, uniform national approach to escrow promotes greater efficiency and places issuers, principals and public investors in different jurisdictions on a more level footing. As such, we determined to develop a national escrow policy that would apply to initial public offerings by prospectus (IPOs) other than for capital pool companies. To achieve its objective, the policy would have to appropriately balance the regulatory objectives of facilitating capital formation in Canada and protecting investors. Further, it would have to be clear, consistent, understandable and administratively efficient.

We considered the objectives and role of escrow requirements in the context of IPOs. The fundamental objective of escrow requirements is to encourage continued interest and involvement in an issuer, for a reasonable period after its IPO, by those principals whose continuing role would be reasonably considered relevant to an investor’s decision to subscribe to the issuer’s IPO. We determined that many of the factors and assessments often associated with escrow such as controlling cheap stock are more properly addressed by underwriters appropriately exercising their responsibilities related to IPO pricing and timing. 

We published previous proposals in May 1998 (see NIN#98/22) and March 2000 (see CSA Notice 46-301).  In each case, we permitted issuers to use the proposed escrow regime at their option. We also published a form of escrow agreement in March 2000 (see NIN#2000/11), and later republished it as Form 46-901F (BC) (see NIN #2000/28), for escrow arrangements that conformed to the March 2000 proposal. 

After we published CSA Notice 46-301, the Canadian exchanges began requiring issuers to enter into escrow agreements based on the March 2000 proposal as a condition of listing. Therefore, on January 31, 2001, the Commission repealed Local Policy Statement No. 3-07 Policy Guidelines Respecting Trading Shares, Performance Shares and Other Consideration (see BCN 2001/03). 

In June 2001, we authorized amendments to existing escrow agreements to permit the release of escrow securities on the terms in the March 2000 proposal (see CSA Notice 46-302). 

On September 21, 2001, we published for comment the proposed National Policy and Form (see BC Notice 2001/66). In British Columbia, issuers were required to use, on an interim basis, the proposed National Policy, which replaced CSA Notice 46-301, Form 46-901F (BC) and CSA Notice 46-302, pending the implementation of the final National Policy and the Form. 

The final National Policy and Form replace CSA Notice 46-301, Form 46-901F (BC), CSA Notice 46-302, and the interim National Policy and Form.  

Summary of Changes to the National Policy

The National Policy contains substantially the same terms as the proposed National Policy that was published for comment on September 21, 2001. The proposed National Policy, in turn, contained substantially the same terms as the 2000 proposal. A limited number of changes were made to the proposed National Policy in response to comments we received on the 1998 proposal and on the basis of additional research which had been conducted since that time. The more important changes were identified in the notice that accompanied the proposed National Policy. Three changes have been made to the National Policy in response to comments we received from four commenters who submitted comments on the proposed National Policy. These changes are set out below.

• With the exception of provisions related to the resignation of the escrow agent, prescribed contractual arrangements have been removed from Form 46-201F1, the escrow agreement. The parties to the agreement may now insert into the agreement any other contractual arrangements they wish to govern responsibilities, remuneration, liabilities, and indemnities for the duties of the escrow agent or any other matter, provided that the terms are not inconsistent with the terms set out in the National Policy and the Form. This change was made in response to numerous, and often contradictory, comments regarding the contractual terms that were previously included in the form of escrow agreement.
• A clause has been added to the National Policy to confirm that reference to “any share certificates or other evidence...” should not be construed to require a paper share certificate or other paper evidence of ownership for securities registered electronically, if the terms of the National Policy and Form are otherwise met. This clarification was inserted in order to ensure that the National Policy is not construed as being inconsistent with the objectives of the T+1 project being conducted by the Canadian Capital Markets Association.
• The release provisions in the National Policy and the Form have been redrafted to reflect the fraction of the then remaining escrow securities that are releasable on a given release date. This change was made in response to a commenter seeking to clarify and simplify the administration of escrow agreements. No change has been made to the underlying release schedules.

Specification of Escrow Agreement

Effective June 30, 2002, the Executive Director of the Commission specifies under section 182 of the Securities Act Form 46-201F1 as the form of escrow agreement for use in connection with the National Policy.  The parties to an existing escrow agreement may amend it by entering into an agreement in this form provided the conditions set out in the National Policy are met.

We have amended the Index of Forms attached to BC Policy 13-601 Required Forms to include Form 46-201F1.  A copy of the amended Index, which is effective June 30, 2002, can be found attached to BC Policy 13-601 on the Commission’s website at www.bcsc.bc.ca.

Questions

Questions may be referred to any of:

Pamela Egger
Senior Legal Counsel, Corporate Finance
British Columbia Securities Commission
Telephone:  (604) 899-6867
Fax:  (604) 899-6506
e-mail: pegger@bcsc.bc.ca

Agnes Lau
Deputy Director, Capital Markets
Alberta Securities Commission
Telephone:  (780) 422-2191
Fax:  (780) 422-0777
e-mail: Agnes.Lau@seccom.ab.ca

Stephen Murison
Legal Counsel
Alberta Securities Commission
Telephone:  (403) 297-4233
Fax:  (403) 297-6156
e-mail: Stephen.Murison@seccom.ab.ca

Ian McIntosh
Deputy Director, Corporate Finance
Saskatchewan Securities Commission
Telephone:  (306) 787-5867
Fax:  (306) 787-5899
e-mail: imcintosh@ssc.gov.sk.ca

Bob Bouchard
Director, Corporate Finance
Manitoba Securities Commission
Telephone:  (204) 945-2555
Fax:  (204) 945-0330
e-mail: bbouchard@gov.mb.ca

Rick Whiler
Senior Accountant, Corporate Finance
Ontario Securities Commission
Telephone:  (416) 593-8127
Fax:  (416) 593-8244
e-mail: rwhiler@osc.gov.on.ca

June 28, 2002

Douglas M. Hyndman     Steve Wilson
Chair       Executive Director

Ref: NIN#98/22
 CSA Notice 46-301
 NIN#2000/11
 Form 46-901F (BC)
 NIN#2000/28
 CSA Notice 46-302
 LPS 3-07
 BCN 2001/03
BCN 2001/66
 Securities Act, s. 182

This Notice may refer to other documents. These documents can be found at the B.C. Securities Commission public website at www.bcsc.bc.ca in the Commission Documents database or the Historical Documents database.