LPS 3-04 - Guidelines for Technical Reports on Non-Natural Resources Properties and Program Proposals Which are the Subject of Funding on Prospectuses and other Statements of Material Facts Submitted for Receipting by the Superintendent of Brokers [Rescinded]
| Published Date: | 1987-01-16 |
|---|---|
| Effective Date: | 1987-02-01 |
| Rescinded Date: | 1995-01-06 |
1.0 Implementation
1.1 This Local Policy, Statement has been revised solely, to conform with the Securities Act S.B.C. 1985 c.83 and the Regulations thereto. There have been no changes of a substantive nature to this policy. It becomes effective upon proclamation of the Securities Act on February 1, 1987.
2.0 Terms of Reference
2.1 This Local Policy, Statement must be read in conjunction with Section 8.0 of Local Policy, Statement 3-07 and with Section 45(l) of the Act.
2.2 This Local Policy, Statement has been published to assist an issuer submitting a technical report on a property or a program proposal (other than natural resource or real estate) which is to be the subject of funding on a prospectus or statement of material facts offering.
2.3 A prospective investor is entitled to full, true and plain disclosure about the viability of a venture which is the subject of funding through a public offering of securities. Any offering of securities to the public to fund the development of a property, or a program must offer the possibility that a marketable product, service or technology will thereby be produced so that the investor has some prospect of a return on his investment. It follows then that where there is insufficient relevant financial history to enable an assessment to be made about the viability of a venture, a technical report providing a due assessment of technological, market and financing aspects of a property development or program proposal may, be required to assure the provision of full, true and plain disclosure. Such a report may also, where fair market value cannot be readily determined, deal with the matter of valuation of assets which the issuer has acquired or plans to acquire.
2.4 Risk is inherent in most ventures which are the subject of funding on a prospectus or statement of material facts offering. An appropriately prepared technical report should provide adequate information about technical problems, marketing problems and other potential risk factors, and thereby facilitate the drafting of full, true and plain disclosure in the offering document. The Superintendent or the Vancouver Stock Exchange may accordingly request major revision of a report which stresses positive factors only.
2.5 A technical report of the nature described in this local policy need not be submitted when any one or a combination of the undernoted conditions prevail, provided that nothing shall be deemed to limit the power of the Superintendent under Section 45(l) of the Act to require the filing of a report when he deems it to be in the public interest:
2.5.1 the issuer is a going-concern entity as defined in Local Policy 3-07, and is seeking funding for its ongoing operations.
2.5.2 the subject of funding is a real estate development for which development estimates acceptable to the Superintendent have been submitted.
2.5.3 the subject of funding is a film or a television production for which a budget as prescribed in National Policy 33 has been submitted.
2.5.4 the subject of funding is a portfolio of investments for which a fair market value can be determined.
2.6 A technical report must be submitted when any one or a combination of the following conditions apply:
2.6.1 the issuer plans to acquire an entity which is not a going-concern entity as defined in Local Policy 3-07.
2.6.2 the project which is the subject of the funding involves the launching by an entity of a new product or service or the entry into a new field by such an entity.
2.6.3 A fair market value of a property acquired cannot be determined objectively by comparison with prices for similar acquisitions carried out free of duress, and therefore a valuation process involving some assessment or estimate of earnings performance or the application of some other generally recognized valuation technique is required. Where a prospectus offering of an listed issuer is involved, this condition is likely to obtain whenever the escrowing of share consideration is prompted under Section 8.1.2 of Local Policy 3-07. Where an offering by way of statement of material facts is involved, this condition will obtain whenever the fair market value cannot be determined as aforesaid in which case any shares to be issued or other consideration to be paid, will be required to be made on an earn-out basis.
2.7 Since a policy statement cannot foresee all the myriad situations and conditions which may prompt the Superintendent to require the filing of a technical report, issuers are invited to seek clarification of the Superintendent's position where the conditions outlined in Sections 2.5 or 2.6 do not appear to apply.
3.0 Content of the Policy Statement
This Policy Statement is divided into sections:
Section 4.0 Qualification and other general requirements for authors
5.0 Form and content of a technical report
6.0 Form and content of a of a technical report to be included in a prospectus or statement of material facts
7.0 Certificate of author(s) and consent letter
8.0 Related disclosure in prospectus or statement of material facts.
4.0 Qualifications and other General Requirements for Authors
4.1 A technical report shall be prepared by a suitably qualified person. The author should be capable of assessing the technical and operational aspects involved, of assessing and evaluating the marketing aspects, of forming an opinion on the reasonableness of cost estimates and of appraising the value of property or assets which are the subject of funding. The following are suggested qualification guidelines for authors:
4.1.1 ten years related academic/industrial experience, and
4.1.2 two to four years specific and relevant experience, and
4.1.3 experience with consulting assignments of the type involved.
4.2 Where one individual does not possess sufficient expertise to deal with all aspects of a technical report, a joint report compiled by more than one individual possessing in aggregate the required expertise will be accepted.
4.3 Except for the situation described in Section 4.5 below, the author or joint authors of a report should have no direct, indirect or contingent interest in a property or program which is the subject of a report nor should there exist any form of association with the vendor of such property.
4.4 When information or data in a report is not based on his own observations, the author must provide a precise reference to the source of information used to reach his conclusions and recommendations.
4.5 Where staff of the issuer possesses the qualifications indicated in Section 4.1 above, a technical report may be prepared by such staff, provided such report is accompanied by a letter from an independent qualified consultant commenting on the adequacy and credibility of the contents of the issuer's report. The relevant certificate and consent of such independent qualified consultant (see Section 7.0) must accompany his letter.
5.0 Form and Content of a Technical Report
Ideally a report should enable a reader to grasp the stage reached by the issuer as at the date of the prospectus in each of the product development cycle, the market development cycle and the management team capability cycle. Any evaluation of the product, service or technology should support the reasonableness of the product plan and should contain the author's opinion of the ability of the issuer to complete any research and development pending. A matrix illustrating this "stage of development" concept has been included as Appendix "A" of this local policy. Where the issuer is concerned that disclosure of any information called for in this Section may place him at a competitive disadvantage he may mark such information as "confidential" and it will be treated as such by the Superintendent or the Exchange.
5.1 Introduction and Background Material
Some or all of the following topics should be included:
5.1.1 Brief history and overview of the issuer, and a description of the environment in which the issuer is operating.
5.1.2 Review of the products and services which have been developed and/or marketed to date.
5.1.3 Review of the project management team.
5.1.4 Business objectives, including how the project to be funded fits into long range plans
5.2 Definition of the Project
5.2.1 Description of the project or service including unique features, competitive advantages, number and type of models in product line and identification of the stage of the product development.
5.2.2 Resources (facilities, equipment, manpower and costs of these) required to develop and manufacture the product or service. Disclosure should clarify the basis of labour costing (e.g. in-house or outside consulting rates).
5.2.3 Schedule of implementation.
5.3 Details of the Project Management Team
This section should provide a history of the management team in terms of its track record, expertise and direct related experience in the development and marketing of products, services or technology in the issuer's field of specialization. Some of the following management topics are likely to be relevant.
5.3.1 Track record.
5.3.2 Special related experience to the development and marketing of the issuer's product, services or technology.
5.3.3 Details of organization, extent of the time commitment to the project of each member of the management team.
5.4 Assessment and Evaluation of the Product, Service, Technology
This section should provide a complete and clear documentation of the product, service or technology within the context of a product development cycle such as the one described in Appendix "A". Some of the following topics are likely to be relevant:
5.4.1 The actual costs of development of the project to date.
5.4.2 The estimated replacement cost of development of the project to date including reference to costing formulae used, e.g. in-house or consulting rates used for labour.
5.4.3 Uniqueness and/or innovativeness of the product, service or technology or other aspects of the Issuer's distinctive competence that are expected to result in the success of the Issuer.
5.4.4 Progress to date in the development of the project with specific reference to a development cycle such as the one included in Appendix "A".
5.4.5 Abundance and quality of documentation used in the project development. Documentation is of importance in events such as:
5.4.5.1 incapacitation of the developer(s),
5.4.5.2 ability to sell the technology if necessary, and
5.4.5.3 ability to support the project in the future.
5.4.6 Availability, contractual commitment and qualifications of the personnel and consultants developing the product, service or technology, in order to provide a reasonable expectation that development can be completed, supported and/or enhanced in future.
5.4.7 Adequacy, and comprehensiveness of project plan and estimates in order to provide an assessment of demonstrable management direction in carrying out the project.
5.4.8 Proprietary protection and potentially competitive products, services, technologies
5.4.8.1 steps taken by management to provide proprietary product protection (e.g. copyrights, patents, product design features)
5.4.8.2 existing and potentially competitive products, services and technologies
5.4.8.3 other aspects of the Issuer's competitive edge, barriers to entry, which will deter competition.
5.4.9 Assessment of value added to the project specifically, by the issuer.
5.4.10 The alternative technical approaches which have been considered but rejected, in order to support the reasonableness of the chosen product strategy.
5.4.11 Aspects of production (e.g. second sourcing, quality, assurance, inventory, control, delivery, economies-of-scale, make-or-buy).
5.5 Evaluation of the Marketing Plan
In appraising the marketability of the product, service or technology being developed, and in evaluating the marketing plan devised for the product, service or technology, the report should pay due regard to a number of the following aspects:
5.5.1 the marketplace and the market size
5.5.2 pricing
5.5.3 existing competitive products, services, technology
5.5.4 likelihood of new competition
5.5.5 market acceptance of the product, service or technology
5.5.6 the marketing plan for sales - distribution and support
5.5.7 product maintenance and service after sale
5.5.8 reasonableness of proposed marketing expenditures
5.5.9 direct related marketing experience and expertise of the project team
5.5.10 impact of regulation within the industry,.
It may be appropriate to deal with this section by making statements on subsets of marketing strategy defining the key differentiating factors likely to lead to success:
5.5.11 overall strategy
5.5.12 market segment or customer base strategy
5.5.13 product strategy
5.5.14 pricing strategy
5.5.15 advertising and promotion strategy
5.5.16 sales and distribution strategy
5.5.17 service and maintenance strategy.
5.6 The Financial Plan
The report must address the question of whether the financial plan devised by management for the development and marketing of products, services and technology appears to be reasonable and adequate for the achievement of goals. If it appears unlikely that the proposed securities offering will provide sufficient proceeds to achieve all indicated goals, the report should identify those goals which can reasonably be funded through the offering.
5.7 Assessment of Asset Valuation
Where assets have been acquired by the issuer for valuable consideration, the report must comment on the reasonableness and adequacy of the valuation techniques used in arriving at a valuation for such assets. The report should also comment if an asset is deemed to have no value or indeterminate value.
5.8 Conclusion
5.8.1 A summary evaluation of the competitive strengths and weaknesses of the Issuer should be provided. (These may occur in any of the functional areas of the firm, i.e. research and development, production, human resources.) Features of the Issuer likely to deter competition and enhance the prospects of long-term success should be identified.
5.8.2 Major risks should be identified, their nature disclosed, and their potential impact on the financial results indicated.
6.0 Form and Content of a Summary of a Technical Report to be Included in a Prospectus or a Statement of Material Facts
6.1 A summary may be incorporated in a prospectus or a statement of material facts (hereinafter collectively referred to as an "offering document") by any one of the five methods set out below:
6.1.1 Where a full report is sufficiently succinct, it may be included in an offering document in place of a summary.
6.1.2 A condensed form of a technical report prepared by the author of the full report may be bound in with an of offering document.
6.1.3 A suitably qualified author (per Section 4.1) other than the author of the full report may prepare a summary report for inclusion in an offering document.
6.1.4 The authors of the prospectus may, with due acknowledgement of the source, paraphrase excerpts from the full technical report and intersperse them in the disclosure in the offering document.
6.1.5 Excerpts from the full technical report, clearly identifying the source, may be interspersed in the disclosure in the offering document. Such excerpts must be reproduced verbatim.
6.2 Topics to be included in a summary report
The summary report should include references to the captions disclosed in Sections 5.2 to 5.7 inclusive.
7.0 Certificate and Consent Letter
7.1 A certificate from the author, dated and signed, must accompany a signed copy of the report. The certificate must contain the following:
7.1.1 the professional seal or permit stamp of the author, where applicable
7.1.2 the name, address and occupation of the author
7.1.3 the qualifications of the author
7.1.4 any conditions defining the scope of the report and, if a visit to the laboratory or plant was not made, the reasons why a visit was judged unnecessary
7.1.5 the period during which the report was prepared and the effective date of the information therein
7.1.6 whether or not the author has or expects to receive any interest, direct or indirect, in the properties or securities of the issuer or any associate or affiliate of the issuer and, if so, the particulars of the interest or beneficial ownership.
7.2 A signed copy of the report must also be accompanied by a letter from the author directed to the appropriate regulatory body(ies) consenting to the inclusion of his report and/or summary thereof in the offering document.
Pursuant to Regulation 99, written consent is required from the author of the report authorizing use of the report.
7.3 Where a report is prepared for inclusion in the offering document by a suitably qualified author, a certificate and consent letter as outlined in Sections 7.1 and 7.2 should accompany a signed copy of the report.
7.4 Where a report has been prepared by the authors of the prospectus, a letter directed to the appropriate regulatory body(ies) must acknowledge such authorship and must identify the authors' expertise, capacity and relationship with the issuer.
8.0 Related Disclosure in Prospectus or Statement of Material Facts
8.1 Identifying Names
The identifying names of corporations, individuals, places, products, processes, services, etc. disclosed in a prospectus or statement of material facts shall be consistent with those used in the technical report or summary, of the report, and in any accompanying diagrams, financial forecasts or projections.
8.2 Disclosure of Reasons for Inconsistencies
A prospectus or a statement of material facts may on occasion contain disclosure of a technical nature which appears to be inconsistent with that contained in a technical report. Subsequent developments occurring in the time period elapsing between the preparation of the technical report and the preparation of the prospectus or the statement of material facts are the most frequent cause of apparent inconsistencies. When such apparent inconsistencies occur, the reasons therefore should be disclosed in the prospectus or the statement of material facts.
Dated at Vancouver, B.C., this ________ day, of ______ 19_____
Jill Bodkin
Chairman
B.C. Securities Commission