NIN 98/23 - Disclosure Obligations and Insider Trading Prohibitions in the Context of Material Facts and Material Changes [NIN - Rescinded]

The purpose of this Notice is to remind issuers and their promoters, directors, officers and other insiders, of their obligations respecting disclosure of material facts and material changes and of the prohibitions on trading on undisclosed material facts or material changes. The Commission is issuing this Notice to correspond with the publication by the Vancouver Stock Exchange of its Policy 30: Venture Capital Pool Companies. Although this Notice provides guidance to assist "VCPs", "parties related to the VCP" and "parties related to the Qualifying Transaction", as those terms are defined in VSE Policy 30, in satisfying their disclosure obligations and complying with insider trading prohibitions, the guidelines set out in this Notice are of relevance to all reporting issuers and associated persons.

Parties related to a VCP or to a Qualifying Transaction and their advisers are reminded that the thresholds for prospectus disclosure, material change announcements, and prohibitions on tipping and insider trading are no different for VCPs than they are for any other issuer. In this regard, such parties must ensure compliance not only with the requirements of VSE Policy 30, but with all other relevant Exchange policies (such as Policy 7: Timely Disclosure), the terms of the VCP's Listing Agreement with the Exchange, the requirements of the legislation under which the VCP was incorporated, and the requirements of relevant securities legislation as discussed in National Policy Statement No. 40: Timely Disclosure (or its replacement).

Insiders and others who have access to material information about a VCP or in respect of a Qualifying Transaction are reminded that trading in securities of the VCP while in possession of information that constitutes a material fact or material change respecting that VCP before it has been generally disclosed or tipping such information is an offence under the B.C. Securities Act and the securities legislation of a number of jurisdictions, and may give rise to civil liability. The Exchange will be reviewing Insider Reports filed by parties related to a VCP or to a Qualifying Transaction with a view to identifying any apparent trading anomalies. As is its usual practice, the Exchange will investigate trading anomalies. Trading by insiders prior to a Qualifying Transaction where it appears to the Exchange that the insiders may have been trading on inside information, may lead the Exchange to consider whether to approve the Qualifying Transaction or to question the suitability of those insiders to act as directors of VCPs or other exchange issuers. The Exchange may also refer cases of insider trading to the Commission for further enforcement action.

It is difficult to articulate a bright-line test as to when discussions between a VCP and a prospective target (which may be assets or an existing business as per the definition of "significant assets" in VSE Policy 30) have progressed to the point where the discussions represent either a material fact (which would require disclosure in the VCP's prospectus) or a material change (which would necessitate the issuance of a press release to announce the material change and the filing of a material change report). In either of those cases, the insider trading restrictions discussed above would be triggered. Despite the difficulties in developing a clear test, some general observations can be made.

First, given that at the time of filing the prospectus the VCP will not have an existing business or substantial assets, any negotiations then underway between the VCP and prospective targets, to acquire the prospective target assets/business, should be disclosed in the VCP's prospectus on the basis that such negotiations would generally constitute a material fact. The disclosure must at least make plain the stage of the negotiations and provide some disclosure about the target. The degree of detail concerning the target will depend on how advanced the negotiations are.

Second, if negotiations between the VCP and a prospective target have reached the point where an "agreement in principle" (as defined in VSE Policy 30) exists prior to the VCP completing its IPO, the VCP should not proceed with its offering and should, instead, undertake a traditional IPO.

Third, when, subsequent to the completion of the VCP's IPO, negotiations between the VCP and a prospective target have progressed to the point where an agreement in principle exists, then at least at that time a material change has occurred requiring the VCP to both issue a press release announcing the Qualifying Transaction and file a material change report.

Fourth, a VCP may, in the course of negotiations with a prospective target, experience a material change that requires disclosure prior to an agreement in principle being reached. It is not feasible to state definitively the point in time at which the material change might occur in such circumstances, since that will vary depending on the facts of a particular case. In the interests of satisfying its statutory timely disclosure obligations, however, it would be advisable for the VCP to issue a press release announcing a Qualifying Transaction once management or the directors of the VCP have determined to proceed with the deal to acquire the prospective target. This point in time might be reached earlier in the negotiation process where the target in issue involves parties who are non-arm's length to the VCP, as in such circumstances the VCP has greater control over the process of acquiring the target and is in a better position to ensure that the deal completes.

Fifth, even if negotiations have not proceeded to the stage of being a material change, they may still constitute a material fact requiring insiders to not trade until disclosure has been made.

VCPs, their related parties and advisers should err on the side of caution, both in meeting applicable disclosure obligations and in complying with insider trading restrictions. When in doubt as to whether undisclosed information is material, the best practice is to not trade until the information has been disclosed and to disclose promptly. Issuers should have corporate governance policies in place that impose trading black-outs on insiders in such circumstances. Where it would be inappropriate to disclose sensitive negotiations that are material, issuers should consider filing a confidential material change report under relevant securities legislation.

DATED at Vancouver, British Columbia, on May 15, 1998

Douglas M. Hyndman
Chair

Ref: NPS 40
VSE Policy 7
VSE Policy 30