NIN 92/19 - Revised Draft Local Policy Statement 3-04 Filing of Assessment Reports [NIN - Rescinded]

Published Date:	1992-07-16
Effective Date:	1992-07-17

BACKGROUND

In May of 1990, the British Columbia Securities Commission released for comment Draft Local Policy Statement 3-04 (the "Draft Policy"), which will, when finalized, replace Local Policy Statement 3-04 dated February 1, 1987 (the "Existing Policy"). In NIN#90/14, which accompanied the Draft Policy, the Commission indicated that, in order to assist issuers in meeting disclosure requirements, Form 12 would be revised to set out in detail the disclosure that must be contained in the prospectus of an issuer required to file an assessment report under the Draft Policy. A revised draft of Local Policy Statement 3-04 (the "Revised Draft Policy") is published for comment with this notice. The Commission has decided to publish another draft of the policy because there are a number of specific issues on which the Commission requires further input from interested persons and because the Commission is concurrently publishing for comment Form 12A with NIN#92/20. Interested persons are encouraged to review the Form 12A and NIN#92/20 in conjunction with their review of the Revised Draft Policy.

The Revised Draft Policy takes into account many of the comments received concerning the Draft Policy and input the Commission has received from a committee consisting of accountants, consultants, lawyers, brokers and representatives of the Vancouver Stock Exchange (the "Exchange").

Purpose of an assessment report

The Revised Draft Policy, like the Draft Policy, is intended to streamline the review process and improve the quality of business assessments provided to investors by consultants engaged by junior industrial issuers. An assessment report is required to be filed by a junior industrial issuer in order to

- assist the issuer in considering the various factors that will impact on its ability to achieve its stated business objectives,

- provide for a review of the issuer's business by a qualified independent consultant,

- assist issuers in identifying risk factors associated with the issuer's business, and

- provide prospective investors and analysts with additional information to assist them in making informed investment decisions and recommendations.

DISCUSSION OF ISSUES

Some of the major changes to the Draft Policy and issues on which comments are specifically being sought are discussed below. The Revised Draft Policy includes other changes to the Existing Policy and the Draft Policy. The Commission encourages comments on any aspect of the Revised Draft Policy that raises concern.

Qualifications Of Consultant

The Draft Policy required the consultant to have at least five years of management experience and two years of consulting experience. The Commission received a number of comments indicating that this requirement would exclude qualified individuals from preparing assessment reports. The Revised Draft Policy requires five years of recent consulting experience in the area of corporate planning and financial analysis together with either specific post secondary education or 10 years of direct industry experience. The Revised Draft Policy also authorizes the Superintendent to permit an individual who does not meet these requirements to prepare an assessment report.

Are the required qualifications appropriate?

Opinion of Specialist

The Revised Draft Policy requires a consultant to retain a specialist where the consultant lacks the technical expertise to assess a technology that is critical to the issuer's business. It does not, however, provide specific examples of situations where the Commission expects the consultant will engage a specialist to enable the consultant to provide the required opinions in the assessment report.

The Commission invites comments on whether

- there are situations where a consultant will always require the assistance of a specialist in preparing an assessment report, and

- it is appropriate for the Revised Draft Policy to require the use of a specialist where the issuer is engaged in certain industries or business activities (for example, where the issuer is engaged in activities involving the application of biomedical or other unique technologies).

Conflicts of interest

The Draft Policy required that the consultant be paid in full for any services rendered prior to filing the preliminary prospectus. In response to a number of comments, the Revised Draft Policy no longer contains this requirement.

The Revised Draft Policy identifies two new circumstances in which the consultant would not be considered to be independent of the issuer. These are where the consultant is a close relative of a director, officer or employee of the issuer or of an associate or affiliate of the issuer, and where a public distribution of securities is contemplated and the consultant is the underwriter, or an associate or affiliate of the underwriter.
The Committee invites comments on whether

- the circumstances set out in section 4.3 of the Revised Draft Policy indicate a lack of independence between the consultant and the issuer, and,

- there are other circumstances that should be added to the list.

Issuer's stated business objectives

The Draft Policy was silent on whether the consultant is permitted to disclose future oriented financial information ("FOFI") in describing the issuer's business objectives. The Revised Draft Policy prohibits the disclosure of specific prospective financial information, such as sales expressed in terms of dollars or units. For example, a consultant is not permitted to state that the issuer expects to generate X dollars in sales during the 12 month period following the completion of the offering.

The Commission notes that junior issuers with limited operating histories have rarely achieved their publicly disclosed estimates of expected sales or net income. In addition, prior to the Canadian Institute of Chartered Accountants ("CICA") introducing an audit requirement for FOFI, studies had indicated that FOFI published by more senior companies frequently and materially overestimated future sales and earnings.
Therefore, in the Commission's view, an issuer required to file an assessment report is generally unable to provide FOFI or other specific prospective financial information that would be credible, reliable and not misleading. However, where achievement of sales is a stated business objective of the issuer, the Revised Draft Policy proposes that it must be stated in general terms in the assessment report. In addition, under Local Policy Statement 3-02, the Superintendent may consent to the inclusion of FOFI in a prospectus. Where this occurs and the issuer includes specific financial information extracted from the FOFI in its stated business objectives, the consultant's summary of the issuer's stated business objectives can include this specific financial information.

The Commission invites comments on whether

- the consultant can provide a meaningful assessment of business objectives that include prospective financial information stated in general terms,

- there is a specific stage of the issuer's development at which a consultant is able to provide a meaningful assessment of business objectives that include prospective financial information stated in general terms,

- the consultant can provide a more meaningful assessment of business objectives that include prospective financial information stated in specific terms (e.g., sales by number of units or dollars), and

- prospective financial information stated in specific terms should be supported by FOFI prepared and audited in accordance with the CICA Handbook and Draft National Policy Statement No. 48.

Form of assessment report and opinions

The Commission received a number of comments on the Draft Policy indicating concern over the extent of reliance that may be placed on the opinions contained in the assessment report. The concern expressed was that this may lead investors to not consider other information contained in the prospectus. Comment letters also indicated that it was unrealistic to expect a consultant to be able to provide the opinions required in the assessment report.

The Revised Draft Policy has substituted "review procedures" for "investigations". In addition, the precise forms of the required opinions are no longer specified. The Revised Draft Policy requires that the consultant's opinions be formulated by responding to certain questions. The Commission anticipates that the opinions to be provided will contain fewer qualifications because the questions incorporate a reasonableness test relative to the issuer's business objectives. The Revised Draft Policy continues to require the consultant to include any other opinions considered relevant to an assessment of the issuer's business.

A number of the comment letters indicated that the form of assessment report did not place sufficient emphasis on the risks associated with the issuer's business. The Revised Draft Policy clarifies that any qualifications or limitations to the opinion would generally be considered risks that must be disclosed in the prospectus. The conclusion section of the assessment report also provides the consultant with the opportunity to address other risks that have not been identified elsewhere in the assessment report.

The Commission invites comments on whether

- the form of assessment report that is set out in the Revised Draft Policy will provide information that assists investors in making an informed investment decision,

- the structure of the opinions, being responses to specific questions, is appropriate,

- the questions included in Appendix A to the Revised Draft Policy provide sufficient guidance to the consultant in preparing the opinions,

- there are additional questions that should be added to Appendix A to the Revised Draft Policy in order to provide a more comprehensive and useful assessment report,

- the required review procedures in Part 5 and the factors identified in Part 7 of the Revised Draft Policy provide sufficient guidance to the consultant in preparing the opinions, and

- the consultant's conclusions in the assessment report should include a summary of all of the business risks associated with the various material components of the issuer's operations.

OTHER ISSUES

Issuers required to file

The Draft Policy would have required an issuer to file an assessment report where it has been in business for more than three years but has not been profitable in each of its last two fiscal years. The Commission received comments that the term "profitable" should be defined. Notwithstanding any uncertainty as to the meaning of the term "profitable", the Commission prefers not to set out an arbitrary figure, but rather to consider the matter on a case by case basis. The Revised Draft Policy has not changed the criteria for filing an assessment report except to indicate that an assessment report may also be required where cash sales or net income are not material.

Is further clarification of the term "profitability" required and, if so, how it should be defined?

Waiver of filing requirement

The Draft Policy stated that the Superintendent may waive the requirement to file an assessment report in exceptional circumstances. Comment was received that the Draft Policy gave no indication under what circumstances the Superintendent might consider a waiver. The Revised Draft Policy identifies situations where a waiver would be considered and how to make an application for a waiver. One example is where an issuer has previously filed an assessment report under the Revised Draft Policy or a technical report under the Existing Policy and the issuer has accomplished the business objectives stated in the report.

Are there any other common situations where the Superintendent should consider a waiver?

TRANSITION

In order to assist the Commission in ensuring that the final policy resulting from the Revised Draft Policy will be an improved policy and result in the assessment report providing prospective investors with a useful assessment of the issuer's business, issuers and their advisors are encouraged to apply to the Superintendent for permission to file an assessment report in accordance with the Revised Draft Policy prior to the policy being finalized. The Superintendent will provide expedited review of documents filed by these issuers. Where a consultant wishes to prepare the assessment report in accordance with the Revised Draft Policy, the issuer must prepare its prospectus in accordance with Form 12A.

Applications should be addressed to the Deputy Superintendent, Corporate Finance and should include a brief description of the issuer's business and business objectives, the identity of the consultant and a copy of the issuer's most recent financial statements in draft form.

REQUESTS FOR COMMENT

The Commission is requesting written comments on the Revised Draft Policy, particularly on the issues raised in this notice. Comment letters should be submitted by September 30, 1992 to

Adrienne Wanstall
Executive Director,
Policy & Legislation
British Columbia Securities Commission
1100 - 865 Hornby Street
Vancouver, B.C. V6Z 2H4

In order to provide the maximum benefit to the Commission, the comments should identify the specific issue being addressed and, where applicable, fully explain any problems with the proposed provision and provide an alternative solution.

Comment letters submitted in response to Requests for Comment are placed in the public file and form part of the public record, unless confidentiality is requested. Although comment letters requesting confidentiality will not be placed in the public file, freedom of information legislation in future may require the Commission to make comment letters available. Persons submitting comment letters should therefore be aware that the press and members of the public may be able to obtain access to any comment letter.


DATED at Vancouver, British Columbia, on July 16, 1992.

Douglas M. Hyndman
Chairman

REVISED DRAFT LOCAL POLICY STATEMENT 3-04

FILING OF ASSESSMENT REPORTS

PART 1 IMPLEMENTATION

1.1 a - Effective date - Local Policy Statement 3-04 dated February 1, 1987 is hereby rescinded and the following substituted therefore, effective on *, 1992.

1.2 Transition - Until *, 1992, any assessment report or technical report filed with a preliminary prospectus, draft statement of material facts or draft disclosure document in connection with an Application (as defined below) may comply with either this local policy statement or Local Policy Statement 3-04 dated February 1, 1987.

1.3 Terms defined in legislation - 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.

1.4 Issuers listed on the Exchange - Where an issuer has obtained a listing of its securities on the Exchange, any reference in this local policy statement to the Superintendent should be read as a reference to the Exchange.

PART 2 APPLICATION OF POLICY

2.1 Rationale for filing requirement - An assessment report is a summary of the conclusions reached by a qualified independent consultant retained to investigate the business and affairs of an issuer. The requirement to file an assessment report applies to an issuer that has a limited or unprofitable financial operating history relating to its principal business or business to be acquired. In such cases, the issuer is required to subject the business to a rigorous assessment by a consultant and to publish the consultant's assessment report in the issuer's disclosure document.

2.2 Issuers required to file - This local policy statement sets out requirements relating to the preparation and filing of an assessment report by those issuers referred to in section 3.1 that intend to

(a) carry out a public offering of securities by prospectus or statement of material fact on or through the facilities of the Vancouver Stock Exchange (the "Exchange"), except where the issuers are subject to National Policy Statement No. 33 - "Financing of Film Productions",

(b). file a disclosure document as part of an application for listing on the Exchange,

(c) file a disclosure document with the Exchange as part of an application for approval of a reorganization of an inactive issuer or a reverse take over in accordance with the policies of the Exchange, or

(d) make an application for reactivation in accordance with Local Policy Statement 3-35.
The Superintendent may require any other issuer that files a prospectus in British Columbia to file an assessment report pursuant to section 45(1) of the Act.

Reference to an "Application" in this local policy statement means any of the applications referred to in paragraphs (b), (c) or (d).

2.3 Responsibility for disclosure - As set out in the Act and Regulation, the responsibility for disclosure in a prospectus or statement of material facts differ among the consultant, issuer and agent or underwriter. The consultant is responsible only for the contents of the assessment report and any extracts from the assessment report contained in the prospectus, statement of material facts or Application.

PART 3 REQUIREMENT TO FILE ASSESSMENT REPORT

3.1 Issuers subject to filing requirement - Unless waived by the Superintendent under section 3.2, an assessment report must be filed by an issuer, other than a natural resource issuer, where the issuer or, if appropriate in the circumstances, its subsidiaries

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

(b) have 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 the issuer's financial statements that comply with the financial statement requirements of Local Policy Statement 3-02, or

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

Notwithstanding paragraph (c), the issuer will generally not be required to file an assessment report where it is acquiring a business that management anticipates will be a material part of the issuer's future business operations, has been in existence for more than three financial years and has had net income after income taxes in each of its last two financial years.

The circumstances described above are intended to serve as a general guide. The Superintendent may require any issuer that files a prospectus or statement of material facts to file an assessment report pursuant to section 45(1) of the Act, particularly where the issuer or the business it is acquiring has had cash sales or net income referred to in paragraph (b), is not, in the opinion of the Superintendent, a material amount.

3.2 Waiver of filing requirement - In exceptional circumstances, the Superintendent may waive the requirement to file an assessment report prior to the filing of a prospectus, statement of material facts or Application. Situations where the Superintendent would consider granting a waiver include

(a) where the issuer has previously filed an assessment report under this local policy statement, or a technical report under prior Local Policy Statement 3-04, relating to its business and the issuer has accomplished the business objectives set out in the previous prospectus, statement of material facts or Application, the Superintendent will generally waive the filing of an assessment report, and

(b) where 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".

An issuer requesting a waiver must provide the Superintendent with the following information and documentation:

(a) reasons for the requested waiver,

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

(i) for each of the last five 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, the date of the most recent financial statements that were required to be filed with the Superintendent,

(c) a description of the nature of the issuer's past business operations and anticipated business operations for the next 12 month period, including the issuer's stated business objectives as required by section 6.4,

(d) where the issuer has previously filed an assessment report under this local policy statement, or a technical report under prior Local Policy Statement 3-04, relating to its principal business, a description of the issuer's success in accomplishing the business objectives that were set out in the previous prospectus, statement of material facts or Application, and

(e) in the case of an offering of securities, a description of the proposed use of proceeds.

The information required in this section should be in sufficient detail to enable the Superintendent to make a decision respecting the request for a waiver.

3.3 Filing of draft report - In lieu of an originally signed copy of an assessment report, a draft assessment report, including any draft specialist opinion, may be included in a preliminary prospectus or a draft statement of material facts or filed with a draft disclosure document in connection with an Application provided that

(a) the report is clearly marked "Draft",

(b) separate signed certificates in the form required in section 6.10 is appended to the draft assessment report, and

(c) the issuer files a comfort letter signed by the consultant stating that the consultant has no reason to believe that the draft assessment report will differ in any material respect from the signed report that will be filed with the final material, except for any amendments that may be made in response to comments made by the regulatory authorities or as a result of material changes in the affairs of the issuer that occur subsequent to the date of the draft assessment report. The comfort letter must be dated the same date as the draft assessment report.

3.4 Filing of final assessment report - The full text of an originally signed copy of an assessment report, including any specialist's opinion, together with the signed certificates in the form required in section 6.10, must be included in a prospectus or statement of material facts or filed with an Application.

Any assessment report filed by an issuer making an Application will be made available for public inspection at the Commission and, if the issuer's securities are listed on the Exchange, at the Exchange.

3.5 Consent of consultant and specialist - An issuer must file the written consent of the consultant and any specialist to the use of any signed report filed by the issuer. The consent may be filed with any originally signed copy of the assessment report and must be filed before a receipt will be issued for a prospectus or statement of material facts or before an Application will be approved.

3.6 Consultant's comfort letter - The material filed with an issuer's prospectus, statement of material facts or Application must include a letter from the consultant stating that the consultant has read the prospectus, statement of material facts or Application and has no reason to believe that the opinions expressed in the assessment report, including any specialist's report, are no longer valid.

3.7 Joint report - Where more than one individual has prepared any part of the assessment report and is responsible for any opinion expressed in it, each individual must sign a certificate in the form required by section 6.10.

PART 4 QUALIFICATIONS OF CONSULTANT

4.1 Consultant to be retained by issuer - The issuer is responsible for retaining the services of a qualified independent consultant to prepare an assessment report. For greater certainty, a consultant, and any specialist retained by the consultant, is an "expert" and a "professional person" for the purposes of section 114 of the Act and section 99 of the Regulation.

4.2 Qualifications of consultant - Each individual, including a principal or partner, who both prepares any part of an assessment report and is responsible for any of the opinions expressed in the assessment report must possess business experience and education appropriate in the circumstances to enable that individual to express the opinions required by section 7.1. Generally, each individual should have either

(a) a degree from a recognized post-secondary institution with the individual's principal studies carried out in business, economics, technology assessment or a discipline related to the principal business of the issuer, or

(b) ten years of direct industry experience relating to the material aspects of the principal business of the issuer,

and, in five of the last seven years, had consulting experience in the areas of corporate planning and financial
analysis.

The Superintendent may permit an individual who does not meet all of the criteria set out above to prepare an assessment report.

The Superintendent may require supporting evidence of a consultant's work experience.

4.3 Conflict of interest - A consultant and any specialist retained by the consultant must be independent. Independence is a question of fact in the particular circumstances. However, the Superintendent would not consider a consultant or specialist to be independent where the consultant or specialist, or an associate or affiliate of the consultant or specialist,

(a) is a director, officer or employee of the issuer or of an associate or affiliate of the issuer or a contractor whose expertise is critical in providing the issuer with a reasonable opportunity to achieve its stated business objectives,

(b) is a spouse, child, grandchild, parent, grandparent, sibling or a spouse of a child, grandchild, parent, grandparent or sibling, of a director, officer or employee of the issuer or of an associate or affiliate of the issuer or a contractor whose expertise is critical in providing the issuer with a reasonable opportunity to achieve its stated business objectives,

(c) where there is a public distribution of securities, is the underwriter, or an associate or affiliate of the underwriter,

(d) has 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,

(e) will receive compensation that depends, in whole or in part, on any arrangement or understanding that gives the consultant or specialist a financial incentive dependent upon the opinions reached in the assessment report,

(f) engages in any activities or is associated or affiliated with any person that engages in any activities that are directly or indirectly in furtherance of a trade in the issuer's securities, or

(g) is an associate or affiliate of a person, or an associate or affiliate of a director, officer or employee of a person, that has entered into an agreement with the issuer respecting the sale of an asset to the issuer or any associate or affiliate of the issuer.

For the purpose of paragraph (a) and (f), services performed by a consultant relating only to preparation or assistance with the preparation of the issuer's business plan or information or reports to be included in a prospectus, statement of material facts or Application are not considered to create a conflict of interest for the consultant.

Issuers should contact the Deputy Superintendent, Corporate Finance, for assistance in determining whether the Superintendent would consider a consultant to have a conflict of interest in a particular case.

4.4 Opinion of specialist - A consultant must retain a specialist where the consultant lacks technical expertise with respect to a technology that is critical to the issuer's business and, as a result, is unable to provide an opinion relating to the feasibility of the technology. A specialist should also be retained in any other case in which a consultant lacks the necessary expertise to provide an opinion.

The consultant is responsible for determining whether the specialist has the appropriate qualifications. The consultant may accept the specialist's opinion and the scope of the specialist's investigations unless the report of the specialist, the consultant's communication with the specialist or the consultant's knowledge of the issuer's business lead the consultant to believe that the specialist's investigations are unreasonable in the circumstances.

The Superintendent may require supporting evidence of a consultant's work experience.

The specialist or, where more than one individual has prepared any part of the specialist's opinion and is responsible for the opinion, each individual must sign a certificate in the form required in section 6.10 and the specialist's opinion must be appended to the assessment report.

PART 5 REVIEW PROCEDURES OF CONSULTANT

5.1 Scope of review - The nature and extent of the review procedures that a consultant should undertake 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 for which financing is sought.

5.2 Required review procedures - The consultant must use professional judgment to determine what procedures are appropriate in the circumstances to be able to provide the opinions contained in the assessment report. Notwithstanding section 5.1, in order to provide the required opinions in Part D of Appendix A, 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 and any prior assessment reports or technical reports under prior Local Policy Statement 3-04, or draft reports, relating to the issuer's principal business,

(b) analyze the issuer's financial statements,

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

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

(g) 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,

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

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

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

(k) analyze the business aspects of any laws, such as industry or environmental regulations or controls on ownership or profit repatriation, or economic or political conditions that may materially affect the Issuer's operations,

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

(m) analyze the issuer's financial plan.

5.3 Supporting documents - The Superintendent may require that a consultant or specialist submit any working papers or supporting documents that relate to an assessment report prepared by the consultant.

PART 6 FORM AND CONTENT OF ASSESSMENT REPORT

6.1 Form of assessment report - An assessment report must be in the form set out in Appendix A.

6.2 Date of report - An assessment report must be dated within 60 days of the date of the issuer's preliminary prospectus, draft statement of material facts or draft disclosure document filed in connection with an Application.

6.3 Filing of up-dated report - The Superintendent may require the filing of an up-dated assessment report if,

(a) a material change in the affairs of the issuer occurs after the date of the assessment report but before the offering under the prospectus or statement of material facts is completed or the Application is approved, or

(b) within 180 days of the date of the assessment report,

(i) the receipt for the prospectus is not issued,

(ii) a letter accepting a statement of material facts is not issued, or

(iii) the issuer's Application is not approved.

6.4 Issuer's business objectives - In Part A of the assessment report, the consultant must summarize the business objectives that the issuer expects to accomplish using the funds available to the issuer on completion of the offering or approval of the Application and the time period in which the business objectives are expected to be achieved. This summary must identify each significant event that must occur for the business objectives to be accomplished and state the specific time period in which each event is expected to occur.

The consultant's summary of the issuer's stated business objectives may not include any specific prospective financial information, such as sales expressed in terms of dollars or units. However, where achievement of sales is considered to be an important objective because the issuer is currently marketing its product or service, or will be marketing its product or service to achieve its stated business objectives, the objective must be stated in general terms. For example, a stated business objective of the issuer may be to generate sufficient funds from sales to pay its operating costs for a specified period following the completion of the offering. In addition, under Local Policy Statement 3-402, the Superintendent may consent to the inclusion of future oriented financial information in a prospectus. Where this occurs and the issuer includes specific financial information extracted from the future oriented financial information in its stated business objectives, the consultant's summary of the issuer's stated business objectives can include this specific financial information.

6.5 Review procedures carried out by consultant - The procedures that the consultant carried out must be summarized in Part B of the assessment report. If any of the procedures required under section 5.2 or any other procedures the consultant considered were appropriate in the circumstances were not carried out, the consultant must explain the reasons for not doing so in Part B of the assessment report. The Superintendent may reject an assessment report that contains limitations on the procedures carried out by the consultant.

Where the consultant relies on information or data that is not based on the consultant's own observations, the assessment report must identify the source of the information.

6.6 Reliance on specialists - Where the consultant retained the services of a specialist to provide an opinion, Part C of the assessment report must contain a description of the task delegated to the specialist. The opinion of the specialist must be appended to the assessment report. The opinion must, as a minimum, indicate the specialist's terms of reference and the scope of investigations, including any limitations in the scope of investigations, carried out by the specialist in arriving at the opinion.

Where the consultant is expressing an opinion in Part D of the assessment report that is based on a specialist's opinion, the consultant should indicate in Part C that, in expressing its opinion, the consultant is relying on the opinion of the specialist.

6.7 Opinions - Part D of the assessment report should contain the consultant's opinions. The form and content of the opinions are discussed in Part 7 of this local policy statement. The opinions expressed in the consultant's assessment report must relate to the issuer's stated business objectives.

6.8 Conclusions - Part E of the assessment report should contain the consultant's conclusions. In this part of the assessment report, the consultant has the opportunity to provide further comments concerning the issuer's business, particularly additional business risks that may not have been identified elsewhere in the assessment report. This discussion may go beyond the scope of the opinions expressed in Part D of the assessment report.

6.9 Future oriented financial information - The consultant may analyze future oriented financial information relating to the issuer to arrive at the opinions contained in the assessment report. However, the consultant's opinions may not disclose the future oriented financial information or be based upon the assumption that all or any part of the future oriented financial information will be accurate. In addition, where under Local Policy Statement 3-02 the Superintendent consents to the inclusion of future oriented financial information in a prospectus, the consultant's opinions may disclose the future oriented financial information but may not base any opinions on the assumption that all or any part of the future oriented financial information will be accurate.

6.10 Certificate of consultant and specialist - While the assessment report or specialist's opinion may be signed on behalf of a corporation or partnership, each individual who has both prepared any part of the assessment report or specialist's opinion and is responsible for any of the opinions expressed in the report, must sign a separate certificate that must be appended to the assessment report, stating

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

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

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

(d) with respect to a consultant, the individual's consulting experience in the areas of corporate planning and financial analysis,

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

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

(g) with respect to a consultant, that the individual, except as stated in the assessment report, has carried out all of the review procedures required by section 5.2 of Local Policy Statement 3-04 and considered all of the factors in section 7.3 of Local Policy Statement 3-04 that relate to the part of the assessment report or opinion that is the responsibility of the individual,

(h) where more than one individual has prepared a report referred to in section 3.7 or an opinion referred to in section 4.4, the part of the assessment report or opinion that is the responsibility of the individual, and

(i) the individual has no conflicts of interest as set out in section 4.3 of Local Policy Statement 3-04.

Paragraphs (b), (c) and (d) are intended to provide the reader with sufficient information to demonstrate that the consultant has met the qualification requirements in section 4.2 of this local policy statement.

PART 7 OPINIONS OF CONSULTANT

7.1 Required form of opinions - Part D of the form of assessment report specifies the questions that must be answered by the consultant in every case. The answers to the questions comprise the consultant's opinions.

The opinions are not required or intended to be a guarantee of performance but are professional judgments based on a set of facts as of a specific point in time.

7.2 Additional opinions - The assessment report must include any other opinions that the consultant considers necessary to an assessment of the issuer's business and its ability to meet its stated business objectives. The specific aspects of the issuer's business that should be dealt with in an assessment report will vary depending on the nature and stage of development of the issuer and its stated business objectives.

7.3 Factors underlying opinions - In reaching the required or additional opinions, 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; 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; 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.

7.4 Reasons for opinions - After each opinion, the consultant must provide, in sufficient detail, an explanation of the reasoning underlying the opinion in order to enable an investor to understand the consultant's opinion.

The consultant may not rely on a representation of management as the primary basis for any of the consultant's opinions.

7.5 Qualifications to opinions - Any qualifications or limitations to an opinion must be expressed under the applicable heading in the assessment report. Generally, such qualifications or limitations would be business risks that must be disclosed in the prospectus, statement of material facts or Application of the issuer. The Superintendent may reject an assessment report that contains qualifications, limitations, or assumptions that, in the opinion of the Superintendent, render the consultant's opinions meaningless.


DATED at Vancouver, British Columbia, *, 1992.

Douglas M. Hyndman
Chairman


APPENDIX A - LOCAL POLICY STATEMENT 3-04

FORM OF ASSESSMENT REPORT
(DATE)

TO: Board of Directors of * (the "Issuer")

Assessment Report

We, [name of consultant] have carried out an analysis of the business and affairs of the Issuer in accordance with the requirements of Local Policy Statement 3-04 issued by the British Columbia Securities Commission. The opinions expressed in this report are not a recommendation to purchase securities of the Issuer or a guarantee of performance but are professional judgments based on a set of facts as of the date of this report. We report as follows:

A. Issuer's business objectives

We understand the Issuer intends to

with the following stated business objectives:
B. Scope of review

In order to express the opinions contained in this report, we have carried out the following procedures:
There have been no limitations on the scope of our review [, other than as follows:
[C. Reliance on specialists

We have retained * to provide an opinion with respect to the Issuer's [technology or other aspects of the Issuer's business]. A copy of *'s opinion dated * is attached to this assessment report. We are satisfied that * has the appropriate qualifications and we have no reason to believe that *'s assumptions or investigations are unreasonable in the circumstances. We have relied on the opinion of * in reaching our opinions in Part D of this assessment report]

D. Opinions

Based on our review, we are of the opinion that:

(i) Management
(ii) Product, Service or Technology
(iii) Operations
(iv) Market
(v) Marketing plans and strategies
(vi) Financial plan
E. Conclusions