LPS 3-24 - Statutory Exemptions and Orders made under Section 33 and Section 59 of the Securities Act [Rescinded]
1.1 This Local Policy Statement has been substantially revised to conform with the Securities Act S.B.C. 1985, c.83 and Regulations thereto. It becomes effective with proclamation of the Act on February 1, 1987.
2.0 CHANGES IN EXEMPTIONS
2.1 Section 55 of the former Act permitted the Superintendent to rule that a trade or intended trade be deemed not to be a distribution to the public. Under the new Act the relevant section is Section 59.
A comparison of exemptions available under both Acts is attached for guidance as Appendix A. Some of the differences are as follows:
2.1.1 Section 59 of the new Act permits only an exemption from the prospectus requirements of the Act. Application for registration exemption must be made under Section 33 of the Act. Where both types of exemption are sought they may be applied for in the same order. Only one fee is necessary.
2.1.2 The Act and Regulations now contain exemptions that were not previously available in British Columbia.
2.1.3 Some of the exemptions previously available have been substantially altered.
2.1.4 The Act in Section 56(1) introduces the concept of "exchange issuers". In particular, the Commission has issued a regulation entitled "Exchange Issuer First Trades Regulation". Certain applications under this regulation can be made under Section 59 of the Act.
2.1.5 Hold periods are now established by the Act and Regulations and vary according to the applicable exemption.
2.2 The net effect of all of the above is to reduce substantially the number of applications formerly made under Section 55. However, Forms 20 and 21 will have to be filed with respect to all exempt trades.
3.0 COMMISSION APPROACH
3.1 Where an application is made and it is the Superintendent's view that a statutory exemption exists the Superintendent will return the material because no order is required. The new Act has been drafted to attain a measure of uniformity with Ontario. It is the Commission's view that exemptions under Sections 33 or 59 should only be sought in exceptional or unusual circumstances when the spirit of the exemption under the Act or Regulations is met, but for technical reasons the exemption is not available. Notwithstanding the above, the Commission recognises that it may be necessary to be flexible during the transition period.
4.1 The interaction of the Statutory Exemptions from Prospectus Requirements is described below:
4.1.1 All statutory exemptions from the prospectus requirements under the Act may be used in conjunction with other statutory exemptions from the prospectus requirements except as noted in Section 4.1.3.
4.1.2 Notwithstanding Section 4.1.1, where more than one exemption is to be relied upon, it is the responsibility of the issuer, its professional advisors and its agents, if any, to ensure that one statutory exemption is compatible with another in carrying out the offering.
4.1.3 It is the Commission's position that no other exemption may be used in conjunction with the isolated trade exemption in Section 55(2)(2).
4.2 Sections 122(a) and 122(b) of the Regulations impose upper limits on the number of persons to whom securities can be sold in reliance on the so-called "seed capital" and "government incentive security" exemptions. A trade made in reliance upon an exemption other than the two just mentioned need not be counted for the purposes of the numerical limitations in Sections 122(a) or 122(b).
4.3 $97,000 Exemption Section 55(2)(4)
4.3.1 Under Section 55(2)(4) of the Act (Section 77 of the Regulations), a prospectus exemption is available in respect of a trade where the purchaser purchases as principal and the trade is in a security which has an aggregate acquisition cost to such purchaser of not less than $97,000. The $97,000 consideration may be cash and/or the assumption of liabilities having a value of $97,000 on a present value basis.
4.3.2 The intent of Section 55(2)(4) of the Act is that a transaction is exempt only if the purchaser is making a firm commitment of at least $97,000. Accordingly, a commitment not immediately satisfied by cash payment should be included only if the purchaser is certain, or virtually certain, to be called upon to make payment. This would disqualify commitments assumed under various tax oriented arrangements where the promoter or distributor has held out to the investor a hope or expectation that payment of a promissory note will be waived and would disqualify, from inclusion under this exemption, assumption of mortgages where the purchaser does not have a direct and real obligation to make payment under the mortgage. Further, to determine the amount of the commitment under a promissory note, the liability should be treated on a present value basis. The interest rate used in the calculation of present value would be the rate of interest payable on the note or the current prime rate plus one percent, whichever is higher. If the note is payable on demand, a reasonable maturity date should be assumed for the calculation, based on any representations made by the promoter or distributor as to the probable payment date.
4.3.3 The Commission is of the view that "persons" in the form of syndicates, partnerships, or other forms of unincorporated organizations should not be created solely to permit purchases without a prospectus under Section 55(2)(4) of the Act by groups of individuals whose individual share of the aggregate acquisition cost is less than $97,000. The same concerns do not apply to a corporation.
4.3.4 The Commission will normally be satisfied that the vendor has exercised reasonable diligence if the vendor relies on statutory declarations from the purchasers unless the vendor had knowledge to the contrary.
4.4 The Seed Capital Exemption. Sections 122(a) and 122(b) of the Regulations.
4.4.1 The Commission notes that with respect to the "seed capital" exemption in Section 122(a) or the "government incentive securities" exemption in Section 122(b) of the Regulations, where the purchaser or prospective purchaser is a partnership, syndicate, trust or unincorporated organization, except:
18.104.22.168 Pension Plans;
22.214.171.124 Groups of pension plans under common management;
126.96.36.199 Organizations of members of a family fund formed to make investments of family funds;
188.8.131.52 Testamentary trusts and estates;
184.108.40.206 Organizations which have primary ongoing business activities other than investing in securities; i.e., law, accounting or investment firms; or
220.127.116.11 Mutual funds other than private mutual funds within the meaning of Section 1 of the Act (investment clubs);
each member of such partnership, syndicate, trust or unincorporated organization must be counted separately in calculating the numbers of prospective purchasers and purchasers.
4.4.2 It is intended that the restrictions in this Section 4.0 will affect purchasers who are non-institutional partnerships, syndicates, inter vivos trusts, and unincorporated organizations created primarily for investment purposes, including investment clubs.
Vendors or their representatives who are in doubt as to the application of this Section 4.0, or who are of the view that the nature of the purchaser is such that the proposed trade should be exempted from this Section 4.0 are encouraged to consult with the Superintendent.
5.0 USE OF OFFERING MEMORANDA IN CONNECTION WITH CERTAIN STATUTORY EXEMPTIONS
5.1 The Act and Regulations provide that under certain statutory exemptions an offering memorandum must be received by a purchaser.
5.2 Offering memorandum is defined in Section I of the Act. Reference should also be made to Section 126 of the Regulations. Local Policy Statement 3-11 describes the contents required in an offering memorandum.
6.0 FORM 20 AND FORM 21
6.1 Form 20 must be filed with the Superintendent pursuant to Section 125(2) of the Regulations, and Section 2(2) and 2(10) of the Commission Regulation "Exchange Issuer First Trades Regulation", with respect to exempt distributions. In completing Form 20, an issuer should specify which particular statutory exemption or exemptions were relied upon in effecting the distribution of the securities.
6.2 Form 21 must be filed with the Superintendent pursuant to Section 125(3) of the Regulations, Section 2(4)(c) and 2(1l)(b) of the Commission Regulation "Exchange Issuer First Trades Regulation", with respect to first trades.
7.0 DISTRIBUTION BY CONTROL PERSONS
7.1.1 Section 1 of the Act deals with the definition of control.
7.1.2 "Control base" is defined in Section I of Commission Regulation "Exchange Issuer First Trades Regulation".
7.2 Sales from Control
7.2.1 Pursuant to Section 1 of the Act a trade in a previously issued security of an issuer from the holdings of a control person is a "distribution". Therefore, in order to make a trade a "control person" must either:
18.104.22.168 Qualify a prospectus;
22.214.171.124 Rely on a statutory exemption;
126.96.36.199 Seek a Section 59 order; or
188.8.131.52 Rely on Section 7.4 of this Local Policy Statement.
7.2.2 It should be noted that Section 125 of the Regulations provides a mechanism for trades by a "control person". Please note the differences between the mechanisms for exchange issuers and non-exchange issuers. Where the control person" proposes to trade in securities of an exchange issuer, the Commission Regulation "Exchange Issuer First Trades Regulation" should be reviewed. In all cases, Form 23 must be filed.
7.3 Establishment of Control Base
7.3.1 Notwithstanding the views expressed in Section 3.0 of this Local Policy Statement it is the view of the Commission that the practice established with respect to the control base system should be continued.
7.3.2 A control person may on a supplement to the insider report forms required to be filed with the Superintendent establish the control base in his holding of a security. The supplementary form on which the control base is to be established, is to be found as Appendix B to this Local Policy Statement.
7.3.3 Where the computation of the control base yields a balance in the control base greater than that disclosed as the closing total on the Insider Report most recently filed, the control base balance is to be established as the amount which is equal to the said closing total.
7.3.4 The control base balance established must be subsequently increased for all acquisitions except those of previously issued securities acquired in an ordinary market transaction through the facilities of a Stock Exchange recognised by the Commission, and may be reduced for all dispositions made from the control base.
7.3.5 On subsequent Insider Report filings, the control person must indicate which security acquisitions and dispositions relate to the control base and which lie outside the control base. A reconciliation of the opening and closing balance in the control base should be furnished in the "additional remarks" section of the Insider Report Form.
7.4 Sales of Securities from Outside the Control Base
A control person who has established a control base by filing a supplement in compliance with Section 7.3.2 may proceed to trade in securities outside the "control base" pursuant to the blanket Section 59 Order attached hereto as Appendix C.
8.0 GENERAL RULES
8.1 Documentation to be Submitted
An application for a Section 59 order should be made by letter addressed to the Superintendent of Brokers, 865 Hornby Street, Vancouver, B.C. V6Z 2H4. The letter should furnish a brief explanation of why the Section 59 order is being requested. The letter should also delineate the documentation submitted. Each application for a Section 59 order should be accompanied by:
8.1.1 A cheque made payable to the Minister of Finance in the amount of $150.00.
8.1.2 A draft Section 59 order. Orders should be typewritten in form for signature by the Superintendent on 8 1/2" x 11" plain paper, single spaced, with room left at the top of the page for letterhead of the Superintendent. Each draft order, or set of orders, should be submitted, unfolded in a brown manila envelope marked "Section 59 Order".
8.1.3 For a listed issuer, a copy of any filing statement or statement of material facts submitted to the Exchange in support of the proposed transaction.
8.1.4 For an unlisted issuer a copy of the investment letter, purchase agreement, creditors' settlement agreement or other relevant document supporting the proposed transaction.
8.2 Minimum Price Per Share
The minimum price for which shares may be issued is 15 cents per share.
8.3 Non-Resident Placees, Vendors, etc.
Where placees, vendors, etc., are resident outside British Columbia, the issuer should keep in mind that an application may also have to be made to the jurisdiction in which the placees, vendors etc., are resident.
8.4 Timely Disclosure Compliance
Before applying for an order with respect to an issue of securities:
8.4.1 The Issuer should be up-to-date in its filings with the Superintendent's Office and with the Registrar of Companies.
8.4.2 All material changes in the affairs of the issuer must have been reported to the shareholders and to the public.
8.5 Where the applicant has completed an offering through a prospectus and has not applied for listing on the Vancouver Stock Exchange, issuance of securities will not normally be given favourable consideration unless the parties involved are on an arm's-length basis.
8.6 All certificates representing shares which are subject to a "hold" period as a condition of the Section 59 order must have imprinted on the face page the following:
"This certificate is non-transferable until
(Termination date of hold period)
8.7 It should be noted that the provisions of this Local Policy Statement are not intended to abrogate other specific restrictions which may exist against an applicant trading in any specific securities or any securities of a specific issuer.
DATED at Vancouver, B.C. this___________ day of__________ , 19___.
B.C. Securities Commission