NIN 98/11 - Proposed National Instrument 44-101 and Companion Policy 44-101CP Prompt Offering Qualification System [NIN - Rescinded]

The Commission, together with other members of the Canadian Securities Administrators ("CSA"), is publishing for comment the text of proposed National Instrument 44-101, Companion Policy 44-101CP, Form 44-101F1, Form 44-101F2 and the proposed Rule 44-801 (the "Implementing Rule"), which will implement National Instrument 44-101 in British Columbia. The National Instrument, Companion Policy, Forms and Implementing Rule deal with the prompt offering qualification system (the "POP system"). The National Instrument, Companion Policy and Forms contain footnotes which are not part of the proposed instrument, policy or forms, but which have been included to provide background and information.

The proposed National Instrument and Companion Policy are initiatives of the CSA, and the proposed National Instrument is expected to be adopted as a rule in each of British Columbia, Alberta, Ontario and Nova Scotia, as a Commission regulation in Saskatchewan, and as a policy in each of the other jurisdictions represented by the CSA, except Quebec. The Commission des valeurs mobilières du Québec ("CVMQ") agrees with the purpose and intent of the proposed National Instrument but will not be adopting it at this time as its securities legislation provides for accessibility to a simplified prospectus procedure. The CVMQ will be conducting a review of its securities legislation to determine if changes are advisable as a result of the implementation of the proposed National Instrument. The proposed Companion Policy is expected to be implemented as a policy in all of the jurisdictions represented by the CSA. The Forms are expected to be implemented by local rule in certain jurisdictions. In British Columbia, the Forms are expected to be specified by the Executive Director under section 182 of the Securities Act.

The proposed Implementing Rule varies certain sections of the legislation in those provinces and provides that certain other provisions of the rules adopted by those provinces do not apply to a prospectus being filed under the National Instrument.

Substance and Purpose of Proposed National Instrument, Forms, Companion Policy and Implementing Rule

The proposed National Instrument, Forms, Companion Policy and Implementing Rule replace National Policy Statement No. 47, Prompt Offering Qualification System ("NP47") in its entirety and replace those provisions of National Policy Statement No.1, Clearance of National Issues that deal with clearance procedures for initial annual information forms ("AIFs") and short form prospectuses.

The proposed National Instrument and Forms are designed to continue to allow issuers to access Canadian capital markets rapidly and with a minimum of regulatory impediments, while maintaining current levels of investor protection and public disclosure. The proposed Companion Policy provides information relating to the exercise of discretion under the proposed National Instrument and Forms and the manner in which their provisions are intended to be interpreted or applied by the Canadian securities regulatory authorities. The proposed Implementing Rule contains certain exemptions from the requirements of the Securities Act and the Securities Rules.

The CSA are of the view that the regulatory regime established by NP47 has operated efficiently and with minimal difficulties since its inception and that major changes are not required at this time to the policy rationale underlying NP47 or the concepts in NP47. Accordingly, the intent of the CSA in preparing the proposed National Instrument, Forms and Companion Policy was to ensure that these instruments remain largely consistent with the regulatory regime in place for distributions by way of short form prospectus. The substantive modifications made from NP47 are designed to update its provisions where appropriate and to address difficulties that have arisen in respect of NP47 in the past.

Terms used in the proposed National Policy that are defined or interpreted in the proposed National Instrument, the proposed Forms or a definition instrument in force in the jurisdiction and not otherwise defined in the proposed Companion Policy, should be read in accordance with the National Instrument, the Forms or that definition instrument, unless the context otherwise requires.

Summary of Proposed National Instrument, Forms and Companion Policy

The POP system was intended to allow senior issuers to access Canadian markets more rapidly and at a lower cost than had previously been the case. The POP system shortened the time periods and streamlined the procedures by which issuers that qualify could have access to the capital markets through a prospectus offering without reducing the existing benefits of investor protection or the degree and quality of disclosure to the public. The POP system operates through the incorporation by reference in a short form prospectus of the Issuer’s AIF, information circular, financial statements and material change reports. The theory is that the short form prospectus, together with the documents incorporated by reference, provide equivalent disclosure to that contained in a long form prospectus.

The major substantive changes from NP47 are:

(i) a change in the timing of the application of the public float test such that the applicable public float test under Part 2 of the proposed National Instrument must be satisfied on a date within 60 days before the filing of the preliminary short form prospectus;

(ii) the expansion of POP eligibility criteria in section 2.4 of the proposed National Instrument applicable to distributions of approved rating non-convertible debt and non-convertible preferred shares and the POP eligibility criteria in section 2.5 of the proposed National Instrument applicable to distributions of guaranteed non-convertible debt and non convertible preferred shares to expressly include, in each case, cash settled derivatives;

(iii) a change in the POP eligibility criteria applicable to distributions of guaranteed non-convertible debt and non-convertible preferred shares such that the requirements in paragraph 4.3(2)(c) of NP47 that the guarantor have approved rating securities outstanding and that the securities being distributed have an approved rating have been omitted from paragraph 2.4(1)3 of the proposed National Instrument where the guarantor satisfies the $75,000,000 public float test;

(iv) a change in the POP eligibility criteria applicable to distributions of guaranteed convertible debt and convertible preferred shares such that the requirements in paragraph 4.3(2)(c) of NP47 that the guarantor have approved rating securities outstanding and that the securities being distributed have an approved rating have been omitted from section 2.6 of the proposed National Instrument on the basis that the guarantor is required to satisfy the $75,000,000 public float test;

(v) the addition of the concept of "alternative credit support" in the POP eligibility criteria in section 2.5 and 2.6 of the proposed National Instrument applicable to distributions of guaranteed securities to address persons or companies that are prohibited by law from providing a guarantee;

(vi) greater harmonization in the treatment of reorganizations and take over bids by omitting the provision in NP47 that requires a successor issuer to file a new AIF promptly after a reorganization, and modifying the provision in NP47 that requires an issuer when filing a renewal AIF to advise of the occurrence of a material take over bid to include any material reorganization or material acquisition of shares or assets;

(vii) the addition in section 2.7 of the proposed National Instrument of eligibility criteria specifically applicable to distributions of asset-backed securities by special purpose vehicle issuers, as a result of which the shelf system will be available for such distributions;

(viii) the addition in section 5.1 of the proposed National Instrument of asset-backed securities and cash settled derivatives in the list of securities that may be distributed by way of a non-fixed price offering under the POP system;

(ix) a change in the conditions in section 5.1 of the proposed National Instrument applicable to the distribution of securities by way of a non-fixed price offering under the POP system such that the securities need only have received a rating from an approved rating organization, rather than an approved rating;

(x) the addition of disclosure standards in proposed Form 44-101F1, the form of AIF, specifically applicable to issuers with asset-backed securities outstanding;

(xi) the addition of disclosure standards in proposed Form 44-101F2, the form of short form prospectus, specifically applicable to distributions of asset backed securities and cash settled derivatives;

(xii) the mandating of expedited review procedures for clearance of renewal AIFs; and

(xiii) the addition in the proposed Companion Policy of the initial AIF and short form prospectus clearance procedures from National Policy Statement No. 1.

Reference should also be made to the Table of Concordance which is being published with this Notice for information as to the treatment of each provision of NP47 in the proposed instruments. The footnotes in each instrument contain further background and explanation.

Alternatives Considered

The only alternative method of implementing the POP System would be to amend the securities legislation of the various jurisdictions. The CSA determined that implementing the POP System by way of national instrument was the most harmonious and efficient method of carrying forward NP47 and best allowed for perpetuating the existing national regime applicable to distributions by way of short form prospectus.

Anticipated Costs and Benefits

The proposed National Instrument and Forms allow issuers to access Canadian capital markets in a very timely fashion and at a lower cost than the cost of distributing securities by way of a long form prospectus while at the same time maintaining existing levels of investor protection and public disclosure. Issuers or selling securityholders carrying out distributions under the POP System can do so by way of "bought deal" underwriting. The consequences of carrying out a bought deal underwriting is that the seller of the securities often pays lower underwriting commissions than under a distribution by way of a long form prospectus. As well, the seller of the securities and the underwriters generally incur less market risk than when the securities are sold under a long form prospectus distribution.

The major cost imposed by the proposed National Instrument, Forms and Implementing Rule on an issuer results from the requirement to prepare and file an AIF if the issuer wishes to be eligible to use the POP System. This results in costs to an issuer in the form of time incurring by their own personnel, and legal and accounting costs preparing an AIF and assisting in the clearance of an AIF as well as associated filing fees. The CSA are of the view that the benefits derived from being able to carry out a distribution under the POP System outweigh the costs involved in preparing and filing an AIF.

Specific Requests for Comment

In addition to welcoming submissions on any provision in the proposed National Instrument, Forms, Companion Policy and Implementing Rule, the CSA seek comment on the specific matters referred to below.

Asset Concentration Test

The definition of "asset-backed securities" contained in section 1.1 of the proposed National Instrument does not include a limit on the percentage of the pool of securitized assets that can be contributed by the same obligor or related obligors. This is sometimes referred to as an "asset concentration test". The CSA invite comment on the desirability of an asset concentration test.

Disclosure of an Acquired Business in Short Form Prospectus

Item 11 of Form 44-101F2 requires that financial statements of an acquired business be included in a prospectus for any completed material acquisition and for any material acquisition that is intended to be completed as disclosed in the prospectus. The financial information concerning the acquired business is not required, however, if the financial results of the acquired business have been included in the audited consolidated financial statements of the issuer for a period of at least six months. Item 11 does not contain the alternative requirement, currently found in certain provinces, that the financial statements of an acquired business must be included if 40 percent or more of the proceeds of the issue are to be applied, directly or indirectly, to finance the acquisition of the business whether or not the acquisition is material. The CSA concluded that the key determination should be the materiality of the acquisition to the issuer, not the amount or percentage of the proceeds that are to be applied towards the purchase. A discussion of the meaning of "materiality" for this purpose is set out in subsection 7.4(2) of the proposed Companion Policy.

In revising the requirements for financial disclosure in connection with business acquisitions, the CSA considered SEC Release No. 33-7355; 34-37802; International Series Release No. 1021 dated October 10, 1996, which amended the existing provisions set forth in Rule 3-05(b) of Regulation S-X under the United States Securities Act of 1933 regarding inclusion of financial statements of acquired businesses (the "SEC Release"). Under SEC Rule 3-05(b), the extent of financial statement disclosure of an acquired business is determined not on the basis of whether the proceeds of the issuer are to be applied to the acquisition, but instead on the basis of the significance of the acquisition of the business of the issuer determined by reference to a "sliding scale". The effect of the SEC Release is to raise the thresholds of "significance" that determine whether financial statements must be included so as to encourage issuers to offer their securities under registered offerings rather than unregistered offerings under Regulation S. The CSA chose not to adopt the "sliding scale approach" reflected in the SEC Release as the current disclosure requirement based on materiality appears to work well in practice.

In proposing the requirement to include the financial history of an acquired business unless the financial results of the acquired business have been included in the audited consolidated financial statements of the issuer for a period of at least six months, the CSA is trying to strike a balance between providing prospective investors with relevant historical financial information of an acquired business and ensuring that the disclosure requirements for issuers are not too onerous. At a certain point in time the results of the acquired business will have formed part of the issuer’s historical financial disclosure so that a separate history relating to the acquired business is not necessary. The CSA is of the view that after six months there would be sufficient history to provide an understanding of the financial results.

Although the CSA has proposed that the financial information concerning an acquired business be provided unless the "six month test" is met, the CSA recognizes that each acquisition is to some extent fact specific and that it is difficult to set out one test that can be applied consistently to each fact situation. For that reason the CSA invite comment on the proposed test and any suggested alternative tests which should be considered. For example, one alternative may be to combine the "six month test" with a provision that indicates that disclosure would not be required for acquisitions which took place longer than 12 months ago even if there was less than six months of audited consolidated financial information.

AIF Disclosure for Issuers with Oil and Gas Operations or other Natural Resource Operations

Item 4(3) of the proposed form of AIF, Form 44-101F1, contains disclosure specifically applicable to issuers with natural resource operations, other than oil and gas operations. Item 4(4) of proposed Form 44-101F1 contains disclosure specifically applicable to issuers with oil and gas operations and has been expanded significantly compared to item 3(1)(j) of Appendix A of NP47. The CSA invites comment on the appropriateness and comprehensiveness of the disclosure required by items 4(3) and (4) of Form 44-101F1.

Comments

Interested parties are invited to make written submissions with respect to the proposed National Instrument, Forms, Companion Policy and Implementing Rule. Submissions received by May 22, 1998 will be considered.

Submissions should be addressed to all of the Canadian securities regulatory authorities listed below in care of the Ontario Securities Commission, in duplicate, as indicated below:

British Columbia Securities Commission
Alberta Securities Commission
Saskatchewan Securities Commission
The Manitoba Securities Commission
Ontario Securities Commission
Office of the Administrator, New Brunswick
Registrar of Securities, Prince Edward Island
Nova Scotia Securities Commission
Securities Commission of Newfoundland
Securities Registry, Government of the Northwest Territories
Registrar of Securities, Government of the Yukon Territory

c/o Daniel P. Iggers, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8

Submissions should also be addressed to the Commission des valeurs mobilières du Québec as follows

Claude St-Pierre, Secretary
Commission des valeurs mobilières du Québec
800 Victoria Square
Stock Exchange Tower
P.O. Box 246, 17th Floor
Montréal, Québec H4Z 1G3

A diskette containing an electronic copy of the submissions (in DOS or Windows format, preferably WordPerfect) should also be submitted. As securities legislation in certain provinces requires that a summary of written comments received during the comment period be published, confidentiality of submissions cannot be maintained.

Questions may be referred to any of:

Veronica Singer
Legal Counsel, Policy and Legislation
British Columbia Securities Commission
604-899-6646, 1-800-373-6393(B.C. only)

Agnes Lau
Deputy Director, Securities Analysis
Alberta Securities Commission
403-422-2191

Susan Wolburgh Jenah
Manager, Market Operations
Ontario Securities Commission
(416) 593-8245

Ram Ramachandran
Associate Chief Accountant
Ontario Securities Commission
(416) 593-8253

Pierre Martin
Conseiller juridique
Commission des valeurs mobilières du Québec
514-873-5325

DATED at Vancouver, British Columbia, on February 19, 1998

Joyce C. Maykut, Q.C.
Vice Chair