NIN 92/21 - Proposed Junior POP System Request for Comment [NIN - Rescinded]

Published Date:	1992-07-16
Effective Date:	1992-07-16

INTRODUCTION

The British Columbia Securities Commission proposes to develop a system for junior issuers (the "Junior POP System") similar to the prompt offering qualification system (the "POP System") currently available to certain senior issuers on a national basis. Draft National Policy Statement No. 47 with respect to the POP System was published for comment in the Weekly Summary of December 20, 1991 under NIN#91/24.

The Commission recognizes that the current process for raising funds from the public is both expensive and time consuming. This is a particular problem for the junior issuers that comprise most of the listings on the Vancouver Stock Exchange (the "Exchange"). The Junior POP System addresses this problem by establishing a procedure that would allow issuers using the system quick access to the public capital markets.

BRIEF DESCRIPTION OF THE JUNIOR POP SYSTEM

As currently proposed, the Junior POP System is optional and available only for securities of issuers listed on the Exchange. In order for its securities to be distributed under the Junior POP System, the issuer must

• have been a reporting issuer for at least 18 months,

• have been in the same business for the last 18 months and met the business objectives of its most recent public offering,

• not have been cease traded or on the list of delinquent reporting issuers for failure to file required records at any time during the last 18 months,

• not have met the criteria to be considered inactive as set out in the Exchange's Listing Policy Statement No. 17 at any time during the last 18 months,

• have filed audited financial statements with respect to its current business covering a period of at least 12 months, and

• be in compliance with all filing and disclosure requirements of the Securities Act, the Securities Regulation and national and local policy statements, including requirements to file material change reports, news releases, quarterly reports and financial statements ("Continuous Disclosure").

The issuer would file an annual information form for junior issuers (the "Junior AIF"), on a yearly basis, and a short form exchange offering prospectus ("Short Form EOP") at such times as the issuer or a selling security holder wished to distribute its securities to the public. The Short Form EOP would be considerably shorter, and would be reviewed more quickly, than a long form prospectus or exchange offering prospectus. While the Commission anticipates that, at least initially, filings under the Junior POP System cannot be used for distributions in other Canadian jurisdictions, issuers may be able to use the Junior POP System to distribute securities in certain countries outside of Canada.

The Junior AIF would be based on the new forms of local prospectus currently being developed. The first of these is Draft Form 12A, the proposed form of prospectus for junior industrial issuers, which is published concurrently with this notice under cover of NIN#92/20. While the Junior AIF would be modelled on the new prospectus forms, the exact nature of the information to be included in the Junior AIF is still under review. See "Information in the Junior AIF" below. The chief executive officer, chief financial officer and two directors of the issuer would be required to sign a certificate attached to the Junior AIF stating

"The foregoing, together with any documents incorporated by reference, constitutes full, true and plain disclosure of all material facts required to be disclosed in this Junior Annual Information Form."

Whether the Junior AIF would be subject to a due diligence review conducted by an independent person is still under review. See "Independent Due Diligence at the time of the Junior AIF" below. As currently proposed, both initial and subsequent Junior AIFs would be subject to review by the Superintendent of Brokers.

An issuer proposing to make a public offering using the Junior POP System would file a Short Form EOP simultaneously with the Superintendent and the Exchange. The Exchange would carry out the primary review of a Short Form EOP by issuers entitled to use an EOP and would be required to provide comments within ten business days of the date of filing. The nature of the information that should be included in the Short Form EOP is under consideration. See "Information in the Short Form EOP" below. The Short Form EOP would include a certificate signed by the chief executive officer, chief financial officer and two directors of the issuer stating:

"The foregoing, together with the documents incorporated by reference, constitutes full, true and plain disclosure of all material facts relating to the securities offered by this short form exchange offering prospectus as required by the securities laws of British Columbia."

The Short Form EOP would also include a certificate signed by a registered dealer that is a member of the Exchange stating:

"To the best of our knowledge, information and belief, the foregoing, together with the documents incorporated by reference, constitutes full, true and plain disclosure of all material facts relating to the securities offered by this short form exchange offering prospectus as required by the securities laws of British Columbia."

ISSUES ON WHICH THE COMMISSION IS SEEKING COMMENT

The specific issues on which the Commission is seeking comment are discussed below. However, the Commission encourages comments on any aspect of the Junior POP System.

Eligibility criteria for Junior POP System

As currently proposed, the Junior POP System would be available to issuers listed on the Exchange that have been in the same business for at least 18 months, have not been cease traded or on the list of defaulting reporting issuers for at least 18 months, have not met the criteria to be considered inactive for at least 18 months, have filed the required audited financial statements and are in compliance with their obligation to file Continuous Disclosure.

The first requirement for use of the system is that the issuer must be listed on the Exchange. Permitting listed issuers that are also listed on other exchanges to use the Junior POP System raises questions regarding legislative and regulatory requirements in other jurisdictions that may limit the ability of these issuers to use the system.

Two of the additional limitations are that the issuer must have been a reporting issuer for at least 18 months and in the same business for at least 18 months. The purpose of these limitations is to ensure that Continuous Disclosure relating to the issuer's current business has been available to the market for a minimum period of time.

The Commission invites comments on

• the proposed eligibility criteria for the Junior POP System,
  
• whether other eligibility criteria (e.g. issuers listed on the senior board of the Exchange) would be more appropriate, and
  
• whether interlisted issuers would utilize the Junior POP System.

Reliance on Continuous Disclosure System

It is crucial to the effectiveness of the Junior POP System that issuers using the system be in compliance with their obligation to file Continuous Disclosure, namely that all filings have been made in accordance with both the timing and content requirements of the Act, the Regulation and national and local policy statements. The Superintendent will not accept a Junior AIF nor issue a receipt for a Short Form EOP where the Superintendent considers that the issuer has not complied with the obligation to file Continuous Disclosure.

What steps can be taken to ensure that issuers using the Junior POP System are providing adequate Continuous Disclosure?

Independent Due Diligence at the time of the Junior AIF

The question has been raised whether independent due diligence at the time of preparation of the Junior AIF is necessary to ensure that this basic disclosure document contains full, true and plain disclosure of all material facts. In addition, a concern has been raised that, if the registered dealer that will ultimately conduct the offering under the Short Form EOP is not involved at the time of filing the Junior AIF, the time for an issuer to obtain a receipt for the Short Form EOP, including the time required for a registered dealer to carry out its due diligence, may significantly reduce the benefits of the Junior POP System.

The Commission invites comment on

• whether independent due diligence at the time of the Junior AIF should be required,
• whether the Commission should specify who should perform any independent due diligence on the Junior AIF (registered dealers or other qualified persons),
• what evidence of due diligence should be required at the time the Junior AIF is filed (e.g. certificate, comfort letter or other evidence), and
• whether the Junior POP System will still be of benefit to issuers, if the registered dealer conducting the offering has not carried out a due diligence review at the time of the Junior AIF.

Cost of using Junior POP System

There are certain costs associated with the use of the Junior POP System. The major costs identified by the Commission are the annual fee for the filing of the Junior AIF and the professional fees for the preparation of this comprehensive disclosure document. Issuers may encounter cash flow problems because these expenses will be incurred at a time when no financing is in process.

For an issuer whose securities are registered with the Securities and Exchange Commission of the United States ("SEC"), many of these costs are already incurred and the cash flow problems already dealt with because the issuer is required to file an annual report on Form 20-F or Form 10-K with the SEC. The Commission anticipates that the issuer could prepare its AIF using its annual report on Form 20-F or Form 10-K as a basis.

The Commission invites comments on whether

• there are other expenses that would increase the cost of using the Junior POP System, and
• the costs and cash flow problems of using the Junior POP System would be offset by the ability to access the market quickly and to provide purchasers with free trading shares.

Delivery of documents to purchasers

Under the POP System, issuers are required to deliver only the prospectus to purchasers. The AIF and other continuous disclosure material must be made available to purchasers at their request and without charge. The rationale for permitting this under the POP System is that issuers entitled to use it have a sufficiently large public float that material changes in their affairs will be reported in the financial press and promptly assessed by the investment community.

Issuers entitled to use the Junior POP System are unlikely to receive the same level of coverage on a regular basis. The Commission's view is that purchasers should receive both the Short Form EOP and the Junior AIF.

The Commission invites comments on whether

• prospective purchasers need to receive the Junior AIF or whether it would be sufficient to make the Junior AIF available on request, and
• requiring delivery of the Junior AIF, in addition to the Short Form EOP, when considered with the other costs of using the Junior POP System, would cause issuers to be unwilling to use the system.

Information in the Junior AIF

The Junior AIF would be a "snapshot" of the issuer and its business at a particular time each year. The Junior AIF would include the issuer's most recent annual audited financial statements but would not include information relating to the offering of any particular securities.

The new Form 12A for junior industrial issuers would be used as the basis for development of the Junior AIF for those issuers. A new form of prospectus for junior natural resource issuers is being developed that will likely mirror Form 12A, except that Item 9 of current Form 14 (to be redrafted) will replace Item 5 of Form 12A. This new natural resource prospectus for junior issuers would form the basis for development of a Junior AIF for use by natural resource issuers.

The Commission invites comments on

• whether certain information required in the Form 12A (such as prior sales) should not be required in the Junior AIF of an industrial issuer,
  
• whether information that is not required in the Form 12A should be required in the Junior AIF of an industrial issuer, and
  
• what changes would be needed in the Junior AIF of a natural resource issuer, assuming the new form of natural resource prospectus is based on Form 12A.

Information in the Short Form EOP

The Short Form EOP should include a description of the offering, including distribution spread, use of proceeds, plan of distribution and details of the offering. As well, there should be a brief description of the issuer's business, the risk factors associated with the business, interim financial statements since the date of the Junior AIF and a discussion of any material changes since that time.

The Commission invites comment on whether the proposed information to be included in the Short Form EOP is appropriate and whether other information should also be provided.

REQUEST FOR COMMENT

The Commission is requesting written comments on the proposed Junior POP System, particularly on the issues raised in this notice. Comment letters should be submitted by September 30, 1992 to

Adrienne Wanstall
Executive Director, Policy & Legislation
British Columbia Securities Commission
1100 - 865 Hornby Street
Vancouver, B.C. V6Z 2H4

In order to provide the maximum benefit to the Commission, comments should identify the specific issue being addressed and, where applicable, fully explain any problems with the proposed provision and provide an alternative solution.

Comment letters submitted in response to Requests for Comment are placed in a public file and form part of the public record, unless confidentiality is requested. Although comment letters requesting confidentiality will not be placed in the public file, freedom of information legislation in future may require the Commission 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 letter.


DATED at Vancouver, British Columbia, on July 16, 1992.