BCN 2001/67 - Publication for Comment of Proposed Capital Raising Exemptions [BCN - Rescinded]

The British Columbia Securities Commission and the Alberta Securities Commission have developed a new set of capital raising exemptions.  The proposed exemptions increase access to capital and investment opportunities in B.C. and Alberta while providing appropriate investor protection.

The exemptions are contained in a proposed rule, Multilateral Instrument 45-103 Capital Raising Exemptions.  A proposed companion policy provides guidance for users of the exemptions.  Both documents are uniform between the two Commissions and are attached to this notice. 

Proposed Capital Raising Exemptions

1. Private issuer exemption
The proposed rule would broaden and harmonize the existing “private issuer” exemptions in B.C. and Alberta.   A private issuer is an issuer that is not reporting under the Securities Act, and whose equity securities are subject to restrictions on transfer, are beneficially owned by not more than 50 persons, excluding employees, and have been distributed only to prescribed persons.

The new exemption would allow a private issuer to raise capital from:
a. persons specifically listed in the exemption,
b. other persons who are not "the public", and
c. accredited investors. 
It would also permit these persons to sell their securities among themselves.  The proposed rule and companion policy would provide guidance as to who is “the public”. 

The issuer would not be required to provide disclosure to investors or to make filings with the Commissions under this exemption.

2. Family, friends and business associates exemption
The proposed rule would broaden and harmonize the existing B.C. and Alberta exemptions for these investors.  Under this exemption, an issuer would be allowed to raise capital from:
a. directors, senior officers and control persons of the issuer,
b. spouses, parents, siblings and children of directors, senior officers and control persons  of the issuer, and
c. close personal friends and close business associates of directors, senior officers and control persons of the issuer. 
The exemption would also permit a holder of the issuer’s securities to resell them to one of these persons.  The proposed companion policy would provide guidance as to who is a “close personal friend” or a “close business associate”. 

The issuer would not be required to provide disclosure, but would be required to file reports of any distributions under the exemption.

3. Offering memorandum exemption
The proposed rule introduces a new exemption that would allow any issuer to raise any amount of money from any investor on the following conditions:
a. The issuer would have to give the investor an offering memorandum in a prescribed form.  We would prescribe two simplified forms.  A reporting issuer with a current annual information form (a qualifying issuer) could elect to use a shorter form that incorporates by reference the issuer’s existing public disclosure (Form 45-103F2).  A non-qualifying issuer would have to use the longer form (Form 45-103F1).  Both forms would be accompanied by instructions.
b. The investor would have to sign an acknowledgement containing a clear, blunt warning of the risks of investing in exempt market securities.  We would prescribe the form of risk acknowledgement (Form 45-103F3).

All three proposed forms are uniform between the two Commissions and are attached to this notice.

We propose to give the investor 2 days to cancel a purchase under this exemption and to require the issuer to keep the investor’s money in trust for those 2 days.  We also propose to give the investor the right to sue for rescission or damages if the offering memorandum contains a misrepresentation or is not given to the investor.

We have requested that the right to cancel and the right to sue be included in the Securities Act.  If they are, the right to sue for misrepresentation would be available not only against the issuer, but also against the directors, and against the officers and promoters who sign the offering memorandum.  If the amendments to the Securities Act do not proceed, we would include  in the proposed rule a requirement that the issuer give the purchaser contractual rights to cancel, and to sue for misrepresentation, in the offering memorandum.  In that case, the right to sue for misrepresentation would be available only against the issuer.  The text of the actual wording that would be included in the proposed rule is attached to this notice.

The issuer would be required to file the offering memorandum and reports of any distributions under the exemption.

4. Accredited investor exemption
The proposed rule introduces a new exemption that would allow an issuer to raise capital from accredited investors.  The proposed exemption would adopt in substance the accredited investor definition in the Ontario Securities Commission’s new exemptions rule, Rule 45-503.  The definition would include financial institutions, pension and investment funds, substantial corporations and wealthy individuals.  An individual would be an accredited investor if the individual and his or her spouse:
a. have financial assets exceeding $1 million, or
b. have net income exceeding $300,000 ($200,000 without a spouse) in each of the last two years, and a reasonable expectation of exceeding that amount in the current year.

The exemption would also permit a holder of the issuer’s securities to resell them to an accredited investor.

The issuer would not be required to provide disclosure, but would be required to file reports of any distributions under the exemption.

Repeal of Existing Exemptions
The four new capital raising exemptions would replace a number of exemptions in the Securities Rules and the Securities Act.  We propose the repeal of the following exemptions:
a. the 50 purchaser exemption in sections 89(a) and 128(a) of the Securities Rules,
b. the $25,000 - sophisticated purchaser exemption in sections 89(b) and 128(b) of the Securities Rules,
c. the $25,000 - registrant required exemption in section 128(c) of the Securities Rules,
d. the friends and relatives exemption in sections 89(g) and 128(h) of the Securities Rules,
e. the private issuer exemption in sections 46(j) and 75(a) of the Securities Act,
f. the financial institutions exemption in sections 45(2)(2) and 74(2)(1) of the Securities Act, and
g. the $97,000 exemption in sections 45(2)(5) and 74(2)(4) of the Securities Act.

Securities Rules Amendments
We are proposing amendments to the Securities Rules to repeal the first four exemptions noted above and related provisions.  We are also proposing that the shares for debt exemption in sections 89(c) and 128(e), and the bonus or finder’s fee exemption in sections 89(e) and 128(f), be expanded so that they would be available to all reporting issuers.  Finally, we propose to amend section 139(2) to require an issuer making a distribution under any of the proposed capital raising exemptions, other than the private issuer exemption, to file a Form 45-902F Report of Exempt Distribution.  The proposed amendments to the Securities Rules are attached to this notice.

Securities Act Amendments
We have requested amendments to the Securities Act in connection with this proposal, including:
a. amendments to repeal the three Securities Act exemptions noted above and related provisions,
b. establishing the right to cancel and the right to sue for misrepresentation in an offering memorandum (as discussed above under the proposed offering memorandum exemption),
c. prohibiting a person engaging in investor relations activities or intending to effect a trade in securities from engaging in unconscionable acts or unfair practices; the proposed amendment would apply to any trades, not just exempt market transactions, and
d. amendments to the exemption in sections 45(2)(22) and 74(2)(19) so that the exemption would remain available for additional purchases of a mutual fund provided that the purchaser made the initial investment using the current $97,000 exemption.

The proposed companion policy refers to certain of these amendments.

Sample Offering Memorandum and Risk Acknowledgement
We wanted to develop forms of offering memorandum that would provide practical guidance to issuers and readable, meaningful disclosure to investors.  To assist us in doing this, our Commission asked outside counsel to prepare a sample offering memorandum for a fictitious company based on proposed Form 45-103F1 Offering Memorandum for Non-Qualifying Issuers. 

Our Commission is publishing the sample offering memorandum, and a sample risk acknowledgement for the same company based on proposed Form 45-103F3 Risk Acknowledgement, to give issuers an idea of what we expect these documents to look like.  The sample offering memorandum is short, concise and in plain language.  It does not look like a prospectus; nor does it contain the broad, detailed disclosure found in a prospectus.  Both sample documents are attached to this notice.

Information Sessions
Our Commission has scheduled two information sessions on the proposed capital raising exemptions.  At those sessions, we will provide information about the proposed exemptions and answer questions about the proposal.  The sessions will be held:

on: Tuesday, November 6, 2001 at 1:00 - 2:00 p.m.
 Wednesday, November 7, 2001 at 9:00 - 10:00 a.m.

at: Four Seasons Hotel
 Shuswap Room
 791 West Georgia Street
 Vancouver, B.C.

If you wish to attend one of the sessions, please contact Irene Gates, either by telephone at (604) 899-6533 or by e-mail at igates@bcsc.bc.ca

Documents Published for Comment
We invite you to comment on the proposed capital raising exemptions with reference to the following documents, all of which are attached to this notice:

• Multilateral Instrument 45-103 Capital Raising Exemptions
• Companion Policy 45-103CP
• Form 45-103F1 Offering Memorandum for Non-Qualifying Issuers
• Form 45-103F2 Offering Memorandum for Qualifying Issuers
• Form 45-103F3 Risk Acknowledgement
• Text of contractual rights of action for possible inclusion in MI 45-103
• Consequential amendments to the Securities Rules
• Sample Offering Memorandum
• Sample Risk Acknowledgement

Please submit your comments in writing on or before November 30, 2001, to:

Leslie Rose
Senior Legal Counsel, Exemptions and Orders
British Columbia Securities Commission
PO Box 10142, Pacific Centre
701 West Georgia Street
Vancouver, British Columbia
V7Y 1L2
Fax: (604) 899-6814
E-mail:  lrose@bcsc.bc.ca

Comment letters will be placed in a public file and form part of the public record, unless you request confidentiality. Although we will not place comment letters requesting confidentiality in the public file, freedom of information legislation may require us to make comment letters available. If you submit a comment letter you should be aware that the press and members of the public may be able to obtain access to your letter.

If you have any questions, please contact:

Leslie Rose
Senior Legal Counsel, Exemptions and Orders
British Columbia Securities Commission
(604) 899-6654

Denise Hendrickson
Legal Counsel
Alberta Securities Commission
(403) 297-2648

September 27, 2001

Adrienne R. Salvail-Lopez
Commissioner

Ref: BCN 2001/36

This Notice may refer to other documents. These documents can be found at the B.C. Securities Commission public website at www.bcsc.bc.ca in the Commission Documents database or the Historical Documents database.