LPS 3-17 - (Interim) Registrant Due Diligence [Lapsed]

PART 1           IMPLEMENTATION

1.1          Effective date - This local policy statement comes into effect on January 6, 1995.

1.2          Defined terms - Terms defined in the Securities Act, S.B.C. 1985, c. 83 (the "Act"), the Securities        Regulation, B.C. Reg. 270/86 (the "Regulation") and the Interpretation Act, R.S.B.C. 1979, c. 206 and used in this local policy statement have the same meaning as in the Act, the Regulation and the Interpretation Act. Other terms defined in this local policy statement are capitalized and in bold.

1.3          Issuers listed on the Exchange - Where an issuer has obtained a listing of its securities on the Vancouver Stock Exchange (the "Exchange"), any reference in this local policy statement to the Superintendent, other than the reference in sections  and , should be read as a reference to the Exchange. 

PART 2           APPLICATION OF POLICY

2.1          Distribution by junior issuers - This local policy statement applies to distributions by prospectus or statement of material facts ("Offering Document"), where the issuer, whether or not listed on the Exchange, does not meet the initial minimum listing requirements for the senior board of the Exchange.

2.2          Rationale -  An underwriter plays an important role in protecting the public interest and the integrity of the local capital market. In view of the importance of this role, each underwriter, which signs a certificate in an Offering Document for a distribution to which this local policy statement applies (a "Junior Issuer Underwriter"), must undertake a due diligence process and prepare the due diligence report described in Part 5 (the "Due Diligence Report").

2.3          Junior Issuer Underwriter group - Where there is more than one Junior Issuer Underwriter, each Junior Issuer Underwriter must prepare a Due Diligence Report.  Where required under Part 6, only one assessment and specialist's report need be obtained to support the Due Diligence Reports.

PART 3           DUE DILIGENCE PROCESS

3.1          Due diligence -  One defence available to an underwriter against potential liability for  misrepresentation in an Offering Document is that the underwriter has conducted reasonable investigations to provide reasonable grounds for belief that there is no misrepresentation in the Offering Document.  This defence is commonly known as due diligence and the reasonable investigations as the due diligence process.

3.2          Importance of underwriter's due diligence process - The due diligence process should provide the underwriter with a thorough understanding of the business of the issuer and the risks associated with the issuer's business.  The understanding gained from this process puts the underwriter in a better position to decide whether to proceed with a distribution and to sign the underwriter's certificate in the Offering Document.

3.3          Due diligence process - The due diligence process is not a mechanical process. It must be tailored to the particular issuer and distribution.  The nature and extent of the due diligence review performed by an underwriter will vary depending on a number of factors, including

(a)           the stage of development of the business of the issuer,

(b)           the stage of development of the issuer's product, service or technology, and

(c)           where applicable, the stated business objectives of the issuer contained in the Offering Document.

PART 4           REQUIREMENT FOR DUE DILIGENCE REPORT

4.1          Undertaking with final Offering Document - In accordance with section 45(1) of the Act, the Superintendent requires a Junior Issuer Underwriter to file with the final Offering Document an undertaking addressed to the Superintendent to file the certificate and undertaking referred to in section  by the earlier of the offering date or 10 days after the date of the final Offering Document.

4.2          Notarization of Due Diligence Report - The Due Diligence Report must be notarized as at the date no earlier than the date of the certificate and undertaking referred to in section .

4.3          Filing of certificate and undertaking -  Within the time period specified in section , the Junior Issuer Underwriter must file a certificate and undertaking addressed to the Superintendent.  The certificate and undertaking must state that

(a)           the Junior Issuer Underwriter has prepared and executed the Due Diligence Report,

(b)           the Due Diligence Report has been notarized, and

(c)           the Junior Issuer Underwriter undertakes to file the notarized copy of the Due Diligence Report when requested by the Superintendent. 

4.4          Retention of Due Diligence Report - The Junior Issuer Underwriter must retain the notarized copy of the Due Diligence Report and all supporting documentation for a period of six years after the  distribution contemplated by the Offering Document.

4.5          Superintendent's request for Due Diligence Report - The Superintendent may require the Junior Issuer Underwriter to produce the notarized copy of the Due Diligence Report either in the context of an investigation or the renewal of an underwriter's registration as an underwriter under the Act.

PART 5           CONTENT OF DUE DILIGENCE REPORT

5.1          Due diligence procedures - The Due Diligence Report must reflect the due diligence process undertaken by the Junior Issuer Underwriter up to the date of the report.  At a minimum, the Due Diligence Report must identify the individual(s) who participated in the due diligence process and describe the procedures performed to complete the process.

5.2          Consideration of assessment and specialist's reports -Where an assessment report is required to be obtained under Part 6, the Due Diligence Report must state that the Junior Issuer Underwriter has fully considered the findings of the consultant and, where applicable, the specialist contained in their report(s).

5.3          Reasons to sponsor - The Due Diligence Report must include a brief description of the reasons why the Junior Issuer Underwriter considers that it is appropriate to proceed with the distribution.

5.4          Signature of Due Diligence Report - The Due Diligence Report must be signed by a director of the Junior Issuer Underwriter.

PART 6           REQUIREMENT FOR ASSESSMENT OR SPECIALIST'S REPORT

6.1          Requirement for assessment report - Each distribution requires a unique due diligence process.  However, for certain junior issuers, the Junior Issuer Underwriter must retain an independent qualified consultant to carry out certain minimum review procedures and provide an assessment report to the Junior Issuer Underwriter in support of its Due Diligence Report.

An assessment report is required where an issuer making a distribution to which this policy applies, other than a natural resource issuer or an issuer subject to National Policy Statement No. 33 - "Financing of Film Productions",

(a)           has been in business for less than three financial years,

(b)           has been in business for three or more financial years but has not had net income after income taxes in each of its last two financial years, calculated by reference to its audited financial statements, or     

(c)           is raising funds to develop or intends to acquire, directly or indirectly, a new business, product or service that is unrelated to the issuer's existing business operations and that management anticipates will be a material part of its future business operations.

The circumstances described above are intended to serve as a general guide.  The Superintendent may require any Junior Issuer Underwriter to obtain an assessment report, particularly where the issuer or the business it is acquiring has had insignificant cash sales or net income.

Notwithstanding paragraph (c), the Junior Issuer Underwriter will generally not be required to obtain an assessment report where the issuer is acquiring a business that has been in existence for three or more financial years and has had net income after income taxes in each of its last two financial years.

6.2          Waiver of requirement to obtain an assessment report -In exceptional circumstances, the   Superintendent may waive the requirement for the Junior Issuer Underwriter to obtain an assessment report and file the certificates required under Part 9.  For example, the Superintendent would consider granting a waiver where

(a)           a Junior Issuer Underwriter had previously obtained an assessment report relating to the   issuer's business and filed the certificates required under Part 9, or where the issuer has previously filed a technical report under prior Local Policy Statement 3-04 relating to the issuer's business, and the issuer has accomplished the business objectives contemplated by the prior assessment report or technical report, or

(b)           the issuer is an investment issuer and will be complying with Local Policy Statement 3-13, "Policy Guidelines for a Venture Capital Issuer Planning to Make a Distribution".

6.3          Information required with waiver request - A Junior Issuer Underwriter requesting a waiver must provide the Superintendent with the following information and documentation prior to the filing of a preliminary Offering Document:

(a)           reasons for the requested waiver,

(b)           financial statements of the issuer and any business to be acquired

(i)            for each of the last three financial years, with at least the most recent financial year being audited, and

(ii)           where the last audited financial year is not within 90 days of the date of the request for the waiver, unaudited interim financial statements made up to a date that is within 90 days of the date of the request for the waiver or, where the issuer is a reporting issuer, to the date of the most recent financial statements that were required to be filed with the Superintendent,

(c)           a description of the issuer's current business operations and its business objectives for the next 12 month period,

(d)           where a Junior Issuer Underwriter had previously obtained an assessment report relating to the issuer's business and filed the certificates required under Part 9, or where the issuer has previously filed a technical report under prior Local Policy Statement 3-04 relating to the issuer's business, a description of the issuer's achievement of the business objectives that were contemplated by the prior assessment report or technical report, and

(e)           a description of the proposed use of proceeds.

6.4          Requirement for specialist's report - The Junior Issuer Underwriter must retain a specialist to provide it with a report in support of its Due Diligence Report relating to the feasibility of the issuer's technology where

(a)           the Junior Issuer Underwriter is required to obtain an assessment report,

(b)           the issuer has an unproven or unique technology that is critical to its business, and

(c)           the Junior Issuer Underwriter considers that its consultant or any specialist retained by its consultant does not have the necessary technical expertise.

6.5          Filing of consultant's and specialist's certificates -In accordance with section 45(1) of the Act, the Superintendent requires a Junior Issuer Underwriter that is required to obtain an assessment report or a specialist's report under this Part to file with the preliminary Offering Document the signed certificate(s) from the consultant and any specialist in the form required under Part 9.

PART 7           ASSESSMENT REPORT

7.1          Content of assessment report - Where the Junior Issuer Underwriter is required to obtain an assessment report, the assessment report must contain, at a minimum, the consultant's findings relating to the issuer's management, product or service or technology, operations, market, marketing plans or strategies and financial plan.  Where the Junior Issuer Underwriter has retained a specialist to prepare a specialist's report in accordance with section 64, the consultant's findings may be qualified to state that the consultant has not analyzed the feasibility of the issuer's technology.

7.2          Required review procedures - The consultant must use professional judgment to determine what    procedures are appropriate in the circumstances to be able to provide the findings contained in an assessment report to the Junior Issuer Underwriter.  Every consultant who prepares an assessment report must perform at least the following procedures:

(a)           analyze and discuss with management the issuer's business plan relating to the issuer's principal business,

(b)           analyze the issuer's financial statements,

(c)           investigate the relevant background, including confirmation of educational credentials, of those of the directors, officers, employees and contractors of the issuer whose expertise is critical to the issuer in providing it with a reasonable opportunity to achieve its stated business objectives,

(d)           analyze the stage of development of the issuer's product, service or technology,

(e)           where the Junior Issuer Underwriter has not obtained a specialist's report, analyze the feasibility of any technology that is critical to the issuer's business,

(f)            inspect the issuer's material assets, whether owned or leased, including, but not limited to, property, plant, equipment and inventory used, or to be used, in connection with the issuer attempting to achieve its stated business objectives,

(g)           if applicable, analyze the issuer's production methods,

(h)           if applicable, investigate a third party's ability to supply a product, service or technology, where the third party supplies to the issuer a unique product, service or technology that is not readily available from other sources at the cost to be paid by the issuer,

(i)            investigate the issuer's relationships with its existing or proposed principal suppliers, customers and creditors to the extent appropriate in the circumstances,

(j)            analyze the business aspects of all material contracts relating to the business of the issuer,

(k)           if applicable, analyze the business aspects of all legal proceedings, including proceedings known to be contemplated, involving the issuer,

(l)            analyze the business aspects of any legislation or publicly available proposed legislation, such as industry or environmental regulations or controls on ownership or profit repatriation, or economic or political conditions that may, in the consultant's professional judgement, materially affect the issuer's operations,

(m)          investigate the industry and target markets in which the issuer's business operates or management anticipates it will operate, and

(n)           analyze the issuer's financial plan.

The consultant's review procedures can only be limited by

(i)            an arm's length third party, or

(ii)           the issuer, where the investigation will likely have a detrimental effect on the issuer's business relationship with the arm's length third party,

and only with respect to the procedures in (h) or (i) above.

7.3          Factors underlying findings - In order for the consultant to provide their findings in the assessment report, the consultant must consider all factors relevant to the issuer's business.  These factors should include at least the following:

(a)           Management - education; business experience; expertise and experience in the issuer's industry; ability to commit sufficient time to the issuer.

(b)           Product, service or technology - whether the issuer's product or service performs in the manner stated by management, except where the Junior Issuer Underwriter has obtained a specialist's report; the stage of development of the issuer's product, service or technology and of any applicable documentation;  proprietary interests and licensing arrangements; governmental regulations; environmental concerns; if the issuer is required to conduct research and development in order to achieve its stated business objectives; actual or proposed research and development programs including costs, technical feasibility, economic viability, and steps required to achieve commercial production.

(c)           Operations - if the issuer is currently marketing its product or service or will be marketing its product or service in order to achieve its stated business objectives; actual or proposed method of production; historical levels of production; dependence on subcontractors; location and condition of existing plant, property and equipment; terms and conditions of mortgages or leases; availability of skilled personnel; sources and availability of raw materials, component parts and finished products, including dependence on a limited number of suppliers or customers; existing and planned capacity; warranties and quality control;production costs; production cycles; any proposed material changes to any of the above.

(d)           Market - market segment and specific geographical area in which the issuer is selling or is expecting to sell its product, service or technology; trends within that market segment or specific geographical area; competition within that market segment or specific geographical area, including principal competitors and their relative size and aggregate market share, principal aspects of competition and significant potential sources of competition; market share or market acceptance of the issuer's product, service or technology; likelihood of product or technological obsolescence; market controls or regulation; seasonal variations.

(e)           Marketing plans and strategies - if the issuer is currently marketing its product or service or will be marketing its product or service in order to achieve its stated business objectives; distribution channels; actual or proposed marketing programs; pricing policy; after-sales service, maintenance or warranties.

(f)            Financial plan - historical and anticipated costs related to research and development, production, distribution and marketing of the issuer's product, service or technology; historical and anticipated general and administrative costs, including costs required to maintain a reporting issuer in good standing with the Commission and the Exchange; payment terms under agreements or other arrangements with suppliers; potential revenues and payment terms under agreements or other arrangements with principal customers; costs of financing; royalty obligations; long term liabilities; working capital requirements; availability of credit and other financing alternatives.

PART 8           QUALIFICATIONS OF CONSULTANT AND SPECIALIST

8.1          Qualifications of consultant - The Junior Issuer Underwriter is responsible for determining that the consultant possesses the business experience and education appropriate in the circumstances to enable the consultant to sign the consultant's certificate required by section 91. 

8.2          Qualifications of the specialist - The Junior Issuer Underwriter is responsible for determining that the specialist has the appropriate qualifications to assess the feasibility of the technology.

8.3          Conflict of interest - The Junior Issuer Underwriter must satisfy itself that the consultant and any specialist do not have a relationship with the issuer or Junior Issuer Underwriter that, under the circumstances, may lead a reasonable person to conclude that the consultant's or specialist's independence or objectivity could be compromised.  Regardless of the conclusion reached above, the consultant and specialist must not own any direct, indirect or contingent interest in any of the securities or assets of the issuer or of any associate or affiliate of the issuer.

PART 9           CERTIFICATES

9.1          Consultant's certificate - Where the Junior Issuer Underwriter is required to obtain an assessment report, each individual, except as provided for in section , who has both prepared any part of the report and is responsible for any of the findings expressed in the report, must sign a separate certificate stating

(a)           the individual's name, address and occupation,

(b)           the individual's relevant educational background, including areas of principal studies,

(c)           the individual's relevant employment history, including a description as to how it relates to the material aspects of the principal business of the issuer,

(d)           the individual's consulting experience in the areas of corporate planning and financial analysis,

(e)           the individual's membership in any professional organization,

(f)            that the individual has carried out all of the review procedures required by section  of Local Policy Statement 3-17 and considered all of the factors in section  of Local Policy Statement 3-17 that relate to the findings that are the responsibility of the individual,

(g)           the period during which the review procedures were carried out,

(h)           that the individual has no conflicts of interest as the result of a relationship with the issuer or the Junior Issuer Underwriter, and 

(i)            that the individual does not own any direct, indirect or contingent interest in any of the securities or assets of the issuer or of any associate or affiliate of the issuer.

Where the Junior Issuer Underwriter has retained a specialist, the information required by item (f) of the consultant's certificate may state that the consultant has not analyzed the feasibility of the issuer's technology.

Where a consultant is not able to carry out a procedure as provided for in section , the information required by item (f) of the consultant's certificate may state to what extent and the reasons that the procedures were not carried out.

9.2          Signature where consultant not an individual - Where the consultant is not an individual, the consultant's certificate may be signed by the consultant rather than by the individual(s) identified in the certificate.

9.3          Specialist's certificate - Where a Junior Issuer Underwriter has retained a specialist, the specialist must sign a certificate that includes the information required by paragraphs (a), (b), (c), (e), (g), (h) and (i) of section 91 and states what procedures were conducted to arrive at the specialist's findings  regarding the feasibility of the issuer's technology.

DATED at Vancouver, British Columbia, on October 5, 1994.

Douglas M. Hyndman
Chair