NIN 94/06 - Proposed Interpretation Note on Sections 31(2)(21) and 55(2)(18) of the Securities Act Request for Comment [NIN - Rescinded]

Staff intends to recommend that the Commission issue an Interpretation Note to clarify its position on the availability of the exemptions in sections 31(2)(21) and 55(2)(18) of the Securities Act, S.B.C. l985, c. 83 (the "Act") (the "exemptions") for the indirect acquisition of properties or interests in them. Comment is being sought on staff's preliminary views set out below.

Background

The exemptions provide relief from registration and prospectus requirements where a trade is made

"by an issuer in a security of its own issue as consideration for the acquisition of mining, petroleum or natural gas properties or any interest in them so long as the seller of those properties enters into an escrow or pooling agreement in the required form when ordered by

Staff have received a number of queries about whether it is appropriate for an issuer to rely on the exemptions where the issuer of the securities does not directly acquire the mining, petroleum or natural gas properties (the "properties") or any interest in them. The queries raise concerns about how to interpret the term "interest" and whether the exemptions are available for the indirect acquisition of properties or interests in them.

For example, questions have been raised about whether or not an issuer can rely on the exemptions:

(a) to distribute its securities in consideration for the acquisition by its wholly-owned subsidiary of a resource property or property interest;

(b) to distribute securities of its parent in consideration for a resource property or property interest; or

(c) to distribute its securities in consideration for the acquisition of some or all of the securities of another issuer that owns a resource property or property interest.

The exemptions permit an issuer to acquire properties or property interests using the issuer's securities as consideration, thus encouraging and facilitating natural resource exploration. Prospectus filing and registration are not required for several reasons, among them the nature and knowledge of the parties generally involved and the balanced position of the parties with respect to the valuation of the assets exchanged. In the past, shares issued under the exemptions have not generally been subject to escrow or pooling requirements and are not subject to statutory hold periods.

The term "interest" recognizes that transactions dealing with the exploration of natural resources do not generally involve the transfer of 100% of the property to one person. Rather, transactions may often involve the acquisition of a joint venture interest, a leasehold interest or an interest in profits derived from properties, such as a net profit interest or a net smelter interest.

Staff's Preliminary View of the Availability of the Exemptions for Indirect Acquisitions

Given the nature and extent of the relief provided by the exemptions, staff believe that the exemptions warrant narrow interpretation. The exemptions are clearly available where the properties or property interests, as described above, are acquired directly by the issuer of the securities. It is staff's view, however, that the exemptions do not apply to other forms of transaction that result in "indirect" acquisitions. Specifically, staff believes that the exemptions are not available in circumstances where:

(a) an issuer distributes its securities in consideration for the acquisition of a property or property interest by its wholly-owned subsidiary;

(b) an issuer distributes securities of its parent in consideration for the acquisition of a property or property interest by the issuer; and

(c) an issuer distributes its securities in consideration for the acquisition of some or all of the securities of another issuer that holds a property or property interest (either as its sole asset or with other assets).

Provided there are no other exemptions available, the Superintendent is prepared to consider applications for relief in circumstances where the properties or property interests are acquired by the issuer's wholly-owned subsidiary or, in limited circumstances, where the issuer of the securities acquires all of the outstanding securities of a private issuer that holds a property or property interest as its sole asset. An application will, however, be necessary and staff will assess applications on a case by case basis.

Request for Comment

Staff are seeking public and industry comment on the views set out above regarding the availability of the exemptions, on the policy rationale that does or should support the exemptions, and on the issues that should be most important to staff in considering applications for discretionary relief. Comment would also be appreciated on whether there are any common forms of indirect property acquisition that, in light of the Legislature's policy and investor protection objectives, warrant consideration for blanket relief or statutory amendment.

Staff expect to recommend to the Commission that an Interpretation Note be issued after consideration of the comments received.

Comment letters should be submitted by July 22, 1994 to:

Susan Adams
A/Director, Policy & Legislation
British Columbia Securities Commission
1100 - 865 Hornby Street
Vancouver, B.C.
V6Z 2H4

Comment letters submitted in response to Requests for Comment are placed in the public file and form part of the public record, unless confidentiality is requested. Although comment letters requesting confidentiality will not be placed on the public file, freedom of information legislation 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 June 8, 1994.

Dean E. Holley
Superintendent of Brokers