NIN 2000/39 - Publication for Comment - Resale of Securities [NIN - Rescinded]

The Commission, together with other members of the Canadian Securities Administrators (“CSA”), is publishing for comment a set of proposed regulatory documents that would establish new rules for the resale of securities acquired under certain exemptions and for the sale of securities by control persons. The proposed documents (collectively the “Resale Documents”), are:

• Multilateral Instrument 45-102 Resale of Securities (the “Instrument”);
• Companion Policy 45-102CP (the “Policy”); and
• Forms 45-102F1, 45-102F2 and 45-103F3 (the “Forms”).

The Resale Documents are initiatives of the CSA. The Instrument is expected to be adopted as a rule in each of British Columbia, Alberta, Ontario, Manitoba, Nova Scotia and Newfoundland, as a Commission regulation in Saskatchewan, as a policy in New Brunswick, Prince Edward Island and the Yukon Territory, and as a code in the Northwest Territories and Nunavut. It is expected that the Policy will be implemented as a policy in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, Newfoundland, Prince Edward Island, the Yukon Territory, the Northwest Territories, and Nunavut (the “adopting jurisdictions”). The Resale Documents will not be adopted in Quebec. The text of the Instrument and Policy follow, together with footnotes that are not part of the Instrument or Policy, but have been included to provide background and explanation.

Substance and Purpose of the Resale Documents

The purpose of the Instrument is to harmonize certain provincial and territorial resale restrictions that apply to the resale of securities initially acquired under exemptions from the prospectus requirement. The Instrument also harmonizes the regulation of distributions of securities from a control block and provides a prospectus exemption to permit the resale of securities of a non-reporting issuer over a foreign exchange or market.

Background

The Instrument is modelled on the System for Shorter Hold Periods for Issuers Filing an AIF (the “SHAIF System”) adopted by each of the British Columbia and Alberta Commissions in 1998. The SHAIF System provides for a reduced hold period, from 12 months to four months, for the resale of privately placed securities of an issuer that is a “qualifying issuer” and has satisfied certain other conditions, including filing a current Annual Information Form (“AIF”).

The general principle underlying both the SHAIF System and the Instrument is that where a reporting issuer provides the market with current information, securities that are distributed by the issuer without a prospectus, may be traded in the secondary market after a reduced hold period.

Summary of the Resale Documents

The Instrument imposes resale restrictions on

• trades of securities initially distributed under an exemption from the prospectus requirement for which the seller is required to have held the securities for a specified period of time (a “private placement exemption”);
• trades of securities initially distributed under an exemption from the prospectus requirement for which the issuer of the securities is required to have been a reporting issuer for a specified period of time (a “seasoning exemption”); and
• trades of securities from the holdings of a control person (“control distributions”).

With the exception of the resale restrictions for control distributions, the resale restrictions in the Instrument do not apply in Manitoba, New Brunswick, Prince Edward Island or the Yukon Territory (the “open system jurisdictions”). These jurisdictions do not impose resale restrictions on securities distributed under a prospectus exemption. It is intended that the Instrument will replace the resale provisions currently set out in the securities legislation of British Columbia, Alberta, Saskatchewan, Ontario and Nova Scotia. The method of implementation will vary in accordance with the requirements of each jurisdiction.

Similar to the current regulatory regime, under the Instrument, securities distributed by an issuer that is not a qualifying issuer, under a private placement or seasoning exemption, are subject to a 12 month hold or seasoning period, and in the case of a control distribution, a six month hold period.

The Instrument reduces, for an issuer that is a qualifying issuer at the time of the initial distribution,

• the hold period applicable to securities of the issuer distributed under a private placement exemption from 12 months to four months;
• the seasoning period applicable to securities of the issuer distributed under a seasoning exemption from 12 months to four months; and
• the hold period applicable to control distributions from six months to four months.

A qualifying issuer is defined in the Instrument as an issuer that, among other conditions is a reporting issuer in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Québec or Nova Scotia, is an electronic filer under SEDAR, has filed a current AIF, and either has a class of equity securities listed or quoted on a qualifying market, or outstanding securities that have received an approved rating.

The bright line revenue and expenditure tests included in the definition of qualifying issuer under the SHAIF System have been replaced by the requirement that an issuer must meet the continued listing requirements of the qualifying market on which its securities are listed or quoted and not be designated inactive or suspended. A qualifying issuer is required to file a certificate stating that it was a qualifying issuer at the time of the initial exempt trade.

Under the Instrument, a purchaser of securities acquired under a private placement exemption may resell the securities after the expiry of the applicable hold period, if the issuer is (i) a SEDAR filer, or (ii) a reporting issuer in the jurisdiction of the purchaser. If an issuer is a SEDAR filer, a purchaser in a jurisdiction in which the issuer is not a reporting issuer, will be able to resell the securities of the issuer, provided the issuer has been a reporting issuer in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, or Nova Scotia for at least 12 months or, in the case of a qualifying issuer, four months. This represents a departure from the current regulatory regime, which imposes an indefinite hold period on the securities if the issuer is not a reporting issuer in the jurisdiction of the purchaser. If an issuer is not a SEDAR filer and not a reporting issuer in the jurisdiction of the purchaser, the securities of the issuer acquired by the purchaser will be subject to an indefinite hold period.

Similarly, under the Instrument, securities acquired under a seasoning exemption may be resold, provided the issuer is a SEDAR filer and has been a reporting issuer in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Québec or Nova Scotia for at least 12 months or, in the case of a qualifying issuer, four months. If the issuer is not a SEDAR filer, it must be a reporting issuer in the jurisdiction of the purchaser for at least 12 months or, in the case of a qualifying issuer, four months before the securities may be resold.

The Instrument also provides relief from the prospectus requirement for the resale of securities initially acquired under a prospectus exemption, from an issuer that was not a reporting issuer in any Canadian jurisdiction at the date of the distribution, and has a minimal connection to Canada, provided the securities are resold over an exchange or market outside Canada.

Summary of the Policy and Forms

The purpose of the Policy is to provide information relating to a number of provisions in the Instrument, and explains how these provisions are to be interpreted or applied by the securities regulatory authorities.

The Policy confirms that the Instrument does not restrict the ability of a purchaser of securities acquired under a prospectus exemption from reselling the securities during a hold period or seasoning period in reliance upon a prospectus or a further exemption from the prospectus requirement.

The Policy advises market participants that an issuer with connections to a jurisdiction may be subject to the prospectus requirement in the jurisdiction even if the initial purchasers are not in the jurisdiction. A discussion of connecting factors is set out in Companion Policy 72-101CP Distributions Outside of the Local Jurisdiction. Accordingly, a distribution of securities may occur in more than one jurisdiction requiring the issuer to either file a prospectus, or rely on a prospectus exemption in the jurisdictions.

The Policy also advises that a trade of securities initially distributed under a prospectus exemption is a distribution, unless the resale restrictions set out in the Instrument are satisfied. Since the open system jurisdictions have not adopted the resale provisions in the Instrument, the Policy explains how the hold period provisions in the Instrument apply to subsequent trades of securities acquired under a private placement exemption, into the various jurisdictions, including the open system jurisdictions. The Policy further explains that securities subject to a hold period in the Instrument may, in certain circumstances, be resold during the hold period under the prospectus exemption provided for in proposed Multilateral Instrument 72-101 Distributions Outside the Jurisdiction (“MI 72-101”). MI 72-101 imposes restricted periods (essentially equivalent to the hold periods) on the resale of securities initially distributed under a prospectus exemption.

The Policy also provides guidance regarding the calculation of holders and securities that are directly or indirectly held of record in Canada for the purposes of satisfying the conditions for the resale of securities of a non-reporting issuer with minimal connection to Canada.

Finally, the Policy provides information regarding the filing and form of AIF under the Instrument, including the timing for filing, the AIF form requirements, and the AIF review procedures.

Form 45-102F1 must be filed under the Instrument to provide notice to the market that a person or company has ceased to be a private issuer or private company, Form 45-102F2 is a certificate required to be filed by a qualifying issuer for the purposes of the Instrument, and Form 45-102F3 must be filed under the Instrument to provide notice to the market of an intention to sell securities from a control distribution.

Alternatives Considered

The adopting jurisdictions considered maintaining the existing regime for regulating the resale of certain securities. However, in light of the problems encountered by stakeholders in dealing with the differing resale requirements across jurisdictions, the view was that it was advisable to develop a more harmonized approach to restrictions on resale. The decision of the adopting jurisdictions to model the Instrument on the SHAIF System was largely based on the experience of the British Columbia and the Alberta Commissions with the SHAIF System and the support of market participants for the reduced hold periods prescribed by the SHAIF System.

Related Instruments

The CSA, other than the Commission des valeurs mobilières du Quèbec, will be simultaneously publishing for comment MI 72-101. MI 72-101 harmonizes the approach to distributions of securities to purchasers outside the jurisdiction by providing exemptions from the registration and prospectus requirements and in some cases, imposing resale restrictions.

Anticipated Costs and Benefits

The principal benefit of the Instrument and Forms will be to harmonize the approach to regulating the resale of securities, which will provide for greater regulatory certainty. In addition, because the hold periods commence once an issuer becomes a reporting issuer in one of the specified jurisdictions, this will in most cases, result in parity for sellers of securities that are subject to hold periods. In addition, secondary market investors will be better served by more comprehensive disclosure concerning an issuer through the filing of an AIF, than by the longer hold periods required under the current regime.

The costs associated with the Instrument and Forms are the costs associated with filing an AIF and continuous disclosure materials in a jurisdiction. There will also be additional costs to prepare an AIF in order to benefit from the reduced periods of restricted resale. However, the experience in British Columbia and Alberta with the SHAIF System has demonstrated that the benefits to the industry have outweighed the costs.

Rules to be Repealed or Amended

In British Columbia, adoption of the Instrument and Forms will require the repeal of sections 132, 140, 141, 142, and 143 of the Securities Rules (B.C.) and Form 23. Consequential amendments will also be made to sections 136 and 137 of the Securities Rules (B.C.).

In addition British Columbia Local Policy Statement 3-27 and Blanket Order #98/7 relating to the SHAIF System, and Blanket Order #95/17 will be revoked upon implementation of the Resale Documents.

Specific Request for Comment

In addition to welcoming submissions on any provision in the Instrument, Forms, and Policy, the adopting jurisdictions seek comment on the specific matters referred to below.

Requirement that a Legended Certificate Representing the Securities Distributed be Provided to Investors

The Instrument provides that in order to reduce the hold period on securities distributed under a private placement exemption, the certificate representing the securities must carry a legend stating that, subject to securities legislation, the holder of the securities shall not trade the securities before the expiry of the appropriate hold period. In many jurisdictions, there is currently no requirement to legend certificates. Under the SHAIF System, certificates must bear a legend stating that the securities may not be traded during the hold period.

The adopting jurisdictions believe that, while the legending requirement may represent a change in current commercial practice in some jurisdictions, this requirement will ensure more effective regulation of the exempt market.

Comment is sought as to whether the legending requirement is workable. Should the Instrument specify that issuers of securities in uncertificated form could satisfy the legending requirements by any means reasonably designed to notify holders and subsequent purchasers of the applicable resale restrictions, such as notices of the restriction to investors on confirmations, use of global securities held in a depository or restrictions on trading through the use of restricted CUSIP numbers?

Provision for a Four Month Hold Period for Investment Grade Securities

The Instrument provides for a four month hold period for investment grade securities of a qualifying issuer (i.e., debt, asset backed securities, preferred shares) acquired under an exemption from the prospectus requirement. This is broader than the relief provided for under the SHAIF System and departs from the “legal for life” criteria for private placement hold periods in some jurisdictions.

Comments

Interested parties are invited to make written submissions with respect to the Instrument, Forms and Policy. Submissions received by December 8, 2000 will be considered.

Submissions should be sent to the securities regulatory authorities listed below in care of the Saskatchewan Securities Commission, in duplicate, as indicated below:

British Columbia Securities Commission
Alberta Securities Commission
Saskatchewan Securities Commission
Manitoba Securities Commission
Nova Scotia Securities Commission
Ontario Securities Commission
c/o Dean Murrison, Committee Chair
Saskatchewan Securities Commission
800, 1920 Broad Street
Regina, Saskatchewan S4P 3V7
Telephone: (306) 787-5879
E-mail:dmurrison@ssc.gov.sk.ca

A diskette containing the submission (in DOS or Windows format, preferably WordPerfect) should also be submitted to the Chair of the Committee.

Comment letters submitted in response to requests for comments are placed on the public file in certain jurisdictions and form part of the public record, unless confidentiality is requested. Comment letters will be circulated amongst the securities regulatory authorities, whether or not confidentiality is requested. Although comment letters requesting confidentiality will not be placed on the public file, freedom of information legislation in certain jurisdictions may require the securities regulatory authorities in those jurisdictions 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 letters.

Questions may be referred to the Committee Chair and any of the following members of the Committee:

Margaret Sheehy or Brenda Leong
British Columbia Securities Commission
865 Hornby Street, 2nd Floor
Vancouver, British Columbia V6Z 2H4
Telephone: (604) 899-6650 / (604) 899-6647 or (800) 373-6393 (in B.C.)
E-mail: msheehy@bcsc.bc.ca
bleong@bcsc.bc.ca

Marsha Manolescu
Alberta Securities Commission
20th Floor, 10025 Jasper Avenue
Edmonton Alberta T5J 3Z5
Telephone: (780) 422-1914
E-mail: Marsha.Manolescu@seccom.ab.ca

Chris Besko
The Manitoba Securities Commission
1130 - 405 Broadway
Winnipeg, Manitoba R3C 3L6
Telephone: (204) 945-2561
E-mail: cbesko@cca.gov.mb.ca

Margo Paul or Jean-Paul Bureaud
Ontario Securities Commission
20 Queen Street West, Suite 1900, Box 55
Toronto, Ontario M5H 3S8
Telephone: (416) 593-8136 / (416) 593-8131
E-mail: mpaul@osc.gov.on.ca
jbureaud@osc.gov.on.ca

Shirley Lee
Nova Scotia Securities Commission
1690 Hollis Street
P.O. Box 458
Halifax, Nova Scotia B3J 3J9
Telephone: (902) 424-5441
E-mail: leesp@gov.ns.ca


DATED at Vancouver, British Columbia, on September 7, 2000.


Douglas M. Hyndman
Chair

Ref: NIN#98/52
LPS#3-27
BOR#98/7
BOR#95/17

This NIN 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.