NIN 94/17 - Form 12A - Prospectus for a Junior Industrial Issuer, Interim Local Policy Statement 3-17 - Registrant Due Diligence and Related Disclosure Initiatives [NIN - Rescinded]
Published Date: | 1994-10-07 |
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Effective Date: | 1994-10-05 |
The British Columbia Securities Commission is publishing Form 12A - Prospectus for a Junior Industrial Issuer, Interim Local Policy Statement 3-17 - Registrant Due Diligence ("Interim LPS#3-17") and Form 12A Summary Prospectus. This Notice provides background to Form 12A and Interim LPS#3-17 and discusses the Commission's other related disclosure initiatives.
Form 12A - Prospectus for a Junior Industrial Issuer
In NIN#94/18, the Superintendent of Brokers specifies Form 12A as the required form of prospectus for a junior industrial issuer where, under Interim LPS#3-17, an underwriter must obtain an assessment report. Although the effective date for Form 12A is January 6, 1995, issuers and their underwriters are encouraged to use Form 12A and Interim LPS#3-17 for prospectuses filed prior to that date.
Form 12A is expected to reduce the time and expense to issuers or staff's review of a prospectus of a junior industrial issuer by:
1. providing a comprehensive guide to the disclosure requirements for junior industrial issuers including cross references to, and excerpts from, the Securities Act, the Securities Regulation and relevant policies and notices;
2. incorporating in the prospectus, instead of the technical report, disclosure about the junior industrial issuer's business; and
3. incorporating in Form 12A deficiencies in disclosure that staff routinely raise.
Staff have revised Draft Form 12A, which was published for comment in July l992, to reflect comments received from industry participants and further analysis by Commission staff. Form 12A contains a number of additional disclosure requirements and a substantial number of drafting changes from the prior published draft.
Significant changes from Draft Form 12A include:
- Summary and Analysis of Financial Operations - A table summarizing key financial results for investors has been added. Disclosure must now be made of the issuer's liquidity and of variations arising from a significant or material change in the issuer's operations from the date of the information in the table. (See section 5.2 of Form 12A.)
- Marketing Plans and Strategies - Staff have accepted concerns that disclosure of certain business information could adversely affect issuers' competitive positions. Staff have therefore deleted the requirement to disclose the issuer's selling price and direct cost per unit. (Section 5.13)
- Funds Available and Principal Purposes - Disclosure is now required of any funds paid to insiders or used to reduce indebtedness and of the use of proceeds raised in any special warrant transactions. (Item 6)
- Risk Factors - A requirement has been added to rank the risks relating to the nature of issuer's business. (Item 7)
- Share Capital - Items 10 to 14 of Draft Form 12A have been significantly revised. (Item 11)
- Relationship Between the Issuer and Professional Persons - A new item has been added to require the disclosure of any direct or indirect interest in securities or property of, or position with, the issuer, or an associate or affiliate of the issuer, held by a professional person referred to in section 99 of the Securities Regulation or any associate of the professional person. (Item 17)
Interim LPS#3-17 - Registrant Due Diligence
In conjunction with Form 12A, the Commission is adopting, on an interim basis a new policy, Interim LPS#3-17, to provide guidelines and reporting requirements for registrant due diligence in respect of prospectuses for junior issuers. Effective January 6, 1995, Interim LPS#3-17 will replace Local Policy Statement 3-04 ("LPS#3-04"). LPS#3-04 is rescinded effective January 6, l995.
In May l990, the Commission published for comment Draft LPS#3-04, which was prepared in consultation with an industry committee. In July l992, the Commission published for comment a revised Draft LPS#3-04, which incorporated comments received on the first published draft. This second published draft has been reconsidered in light of comments received from industry participants and Commission staff.
The Commission has made a number of substantive changes to the requirement to file assessment reports. Interim LPS#3-17 continues to require an independent qualified consultant to investigate and review the junior industrial issuer's business, including the risks associated with the business, and the management of the issuer. However, Interim LPS#3-17 requires the underwriter, and not the issuer, to retain the independent consultant to prepare the assessment report. This is intended to assist the underwriter in determining whether to proceed with the distribution and to assess the proposed disclosure in the preliminary prospectus. Because Form 12A now requires the disclosure of information relevant to investors, which was previously disclosed in the technical report filed under LPS#3-04, Interim LPS#3-17 does not require the assessment report to be filed or made public.
An underwriter plays an important role in protecting the public interest and the integrity of the local capital market.
Interim LPS#3-17 is intended to improve and to document the due diligence of underwriters. Interim LPS#3-17 therefore requires underwriters to prepare and retain a due diligence report in respect of prospectuses for junior issuers.
As LPS#3-17 is being adopted by the Commission on an interim basis, the Commission encourages industry participants to comment on the ongoing operation of Interim LPS#3-17 and the effect it will have on the business of underwriting in the Province. The Commission is also seeking comment on whether the due diligence report should be made public.
Other Related Disclosure Initiatives
Form 12A and Interim LPS#3-17 are the first in a series of initiatives aimed at improving disclosure and streamlining the offering process for junior issuers. Other initiatives include:
Junior POP System and Form 12A Summary Prospectus Disclosure System
Under NIN#92/21, in July 1992, the Commission published for comment a proposal for a Junior POP system. The Commission was encouraged to proceed with this initiative. The Form 12A Summary Prospectus Disclosure System ("the System") is being introduced to make available to junior issuers certain features of the proposed Junior POP System. If the System proves to be successful, further features may be introduced later. The System provides investors with a shorter, user friendly prospectus and aims to make investors more informed about an issuer and its securities.
Junior industrial issuers required to file a prospectus in Form 12A may use the System. The System consists of a Form 12A Summary Prospectus, which in turn incorporates by reference a base disclosure document. The base disclosure document must be prepared in accordance with Form 12A. The System is similar in concept to the Simplified Prospectus Disclosure System for mutual funds under National Policy Statement No. 36 and the Prompt Offering Qualification System under National Policy Statement No. 47. The base disclosure document will be incorporated by reference in the Form 12A Summary Prospectus.
The Form 12A Summary Prospectus is a verbatim extract of a limited number of sections from the base disclosure document that contain the essential information necessary to make an investment decision. The Form 12A Summary Prospectus does not, of itself, meet the statutory standard of "full, true, and plain disclosure" of all material facts, which is and will continue to be satisfied in the base disclosure document.
Where a junior industrial issuer uses the System, the issuer must give the Form 12A Summary Prospectus to investors to satisfy section 66 of the Securities Act. Investors who wish to obtain from the issuer a copy of the base disclosure document will be entitled to do so at no cost.
The Commission will issue a blanket order to implement the System and will provide instructions on the use of the System in an amendment to Local Policy Statement 3-02 ("LPS#3-02"). Both the blanket order and amendment are anticipated to be published before Form 12A and Interim LPS#3-17 become effective. Industry participants that want to use the System before the blanket order is issued and the amendment to LPS#3-02 is made should apply for an exemption order from the Superintendent under section 59 of the
Securities Act.
Form 14A - Prospectus for a Junior Natural Resource Issuer
Staff are preparing a new form of prospectus for junior natural resource issuers. Form 14A will be based on Form 12A but modified to recognize the different business of a natural resource issuer. Staff will publish this form for comment in the near future.
Exchange Offering Prospectus and Delegation Agreement
The Securities Amendment Act, l992 repeals the exemption for a statement of material facts contained in section 58(1)(c) of the Securities Act. The Commission recommended the repeal of the exemption because of technical problems associated with its use. The amendment will be brought into force once a form of exchange offering prospectus and a related policy, which will replace Local Policy Statement 3-26, are finalized for junior issuers. The delegation to the Vancouver Stock Exchange of the review of exchange offering prospectuses will be governed by a new delegation agreement.
Form 30 - Information Circular
Amendments will be made to ensure that prospectus-level disclosure is provided for certain transactions requiring security holder approval, including amalgamations, mergers, arrangements, reorganisations and reverse take-overs. Consideration will be given to whether amendments are necessary to other policies and forms. The Commission will publish for comment any proposed changes.
Form 61 - Quarterly Report
Amendments will be made to require, among other things, an ongoing reconciliation of corporate operations to the issuer's stated business objectives and proposed use of proceeds, and to require the Management Discussion and Analysis section of the report to provide enhanced discussion of investor relations activities engaged in by or on behalf of an issuer. Before implementation, the Commission will publish for comment any changes.
Request for Comment
The Commission is requesting written comment on the ongoing operation of Interim LPS#3-17, the effect Interim LPS#3-17 will have on the business of underwriting in the Province, whether the due diligence report should be made public and on the other initiatives discussed in this Notice.
Comment letters should be submitted 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 October 5, 1994.
Douglas M. Hyndman
Chair
Attachments
References: LPS#3-04
LPS#3-17
Form 12A
Form 12A Summary Prospectus
NIN#90-14
NIN#92-19
NIN#92-20
NIN#92-21
NIN#94-18
FORM 12A
INFORMATION REQUIRED IN PROSPECTUS OF JUNIOR INDUSTRIAL ISSUER
The prospectus required under Section 42(2) of the Securities Act for an industrial issuer where, under Local Policy Statement 3-17, the underwriter is required to obtain an assessment report, or would have been required to obtain an assessment report if the Superintendent had not waived the requirement, shall be in the following form.
Securities Act
INFORMATION REQUIRED IN PROSPECTUS OF A JUNIOR INDUSTRIAL ISSUER
GENERAL INSTRUCTIONS
1. This form provides a guideline to issuers in determining the extent of disclosure that is required to provide investors with full, true and plain disclosure of all material facts. Depending on the circumstances of the particular issuer, additional disclosure may be necessary.
2. All disclosure contained in the prospectus must be factual and non-promotional. Prospectuses are required to contain material facts. Statements of opinions, beliefs or views must not be made unless the statements are made on the authority of experts and consents are obtained and filed. The Superintendent may require verification of disclosure.
3. The disclosure contained in the prospectus must be understandable to readers and, in particular, should avoid the use of jargon. If technical terms are required, these terms shall be defined in a glossary that must be included in the prospectus.
4. This form may be used as a base disclosure document where the issuer elects to use a summary prospectus as permitted by Local Policy Statement 3-02. In that case, references to "prospectus" in this form are to be replaced by references to "base disclosure document".
5. Except where the context otherwise requires, "prospectus" refers to preliminary or final prospectus as appropriate.
6. In specific items, the instructions indicate that "issuer" includes the issuer's subsidiaries and proposed subsidiaries. In other circumstances, "issuer" may include the issuer's subsidiaries and proposed subsidiaries if the context reasonably requires. An entity can only be considered aproposed subsidiary if the entity will be a subsidiary on completion of the offering.
7. Where information as to the identity of a person is disclosed, disclose whether the person is at Arm's Length to the issuer or, if not, the relationship of the person to the issuer. Where the person is not at Arm's Length and is not an individual, disclose the name of any individual who is an insider of the person by virtue of paragraph (c) of the definition of insider in the Act.
8. Whenever disclosure is required to be made of costs paid or to be paid by the issuer, disclose the portion of the costs paid or to be paid to insiders or holders of performance shares.
9. When disclosure is required as of a specific date and there has been a significant or material change in the information subsequent to the date the information must be presented as of a date that reflects this change.
10. Each item outlines disclosure requirements. Instructions to assist you in providing this disclosure are printed in smaller type.
11. Certain terms used in this Form are defined in the Securities Act, S.B.C. 1985, c. 83 (the "Act"), Securities Regulation, B.C. Reg. 270/86 (the "Regulation") and the Interpretation Act, R.S.B.C 1979, c. 206. Certain terms defined in specific sections of this Form are in bold. Other defined terms used in this Form, which are capitalized and in bold, are as follows:
"Arm's Length" is defined in Local Policy Statement 3-07 in relation to an arm's length transaction.
"Breakdown of Costs" means a schedule of costs associated with the specific classification, separately itemizing each component that represents 10% or more of the total costs, with all other costs being grouped together under the heading "miscellaneous costs".
"Development Costs" means costs incurred by the issuer, its subsidiaries and proposed subsidiaries relating to product research and development, material acquisitions of plant, equipment, technology, and marketing rights, and does not include general and administrative costs.
"Funds Available" means the aggregate of
(a) the net proceeds to be derived by the issuer from the sale of the securities offered under the prospectus,
(b) the estimated minimum working capital available to the issuer, its subsidiaries and proposed subsidiaries as of the Most Recent Month End, and
(c) the amounts and sources of other funds that will be available to the issuer, its subsidiaries and proposed subsidiaries prior to or concurrently with the completion of the offering.
"Management" means all directors, officers, employees and contractors whose expertise is critical to the issuer, its subsidiaries and proposed subsidiaries in providing the issuer with a reasonable opportunity to achieve its stated business objectives.
"Most Recent Month End" means the latest month end prior to the date of the prospectus or revised preliminary prospectus or, where the date of the prospectus or revised preliminary prospectus is within ten days of the end of the latest month, the month end prior to the end of that month.
"Product" means any product, service or technology of the issuer
(c) on which more than 10% of the proceeds of the offering will be spent, or
(d) that is or will be the focus of the issuer's stated business objectives.
Telephone Number]
or commissions selling security-holder
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2. Only commissions paid or payable in cash by the issuer or selling security holder and discounts granted are to be included in the table. Other commissions or consideration, including warrants, options, finders fees, sponsorship fees, fiscal agency payments or other similar payments, shall be set out as a note to the table.
3. Where the issuer has granted the Agent a "greenshoe" option, disclose the number of additional securities that may be issued if the option is exercised as a note to the table.
4. Where the prospectus discloses a plan of distribution not involving an underwriting or other subscription guarantee, the closing of the distribution under the prospectus must be subject to a minimum subscription and, where the prospectus also discloses a maximum subscription that differs from the minimum subscription, totals must be provided for both the minimum and maximum subscriptions.
5. If any of the securities being offered are for the account of a security holder, provide a cross reference to "Plan of Distribution - Secondary Offering".
(a) In a preliminary prospectus, state the following:
The ___________ Exchange has conditionally listed the securities being offered under this prospectus. The listing is subject to the issuer fulfilling all of the listing requirements of the __________ Exchange, including prescribed distribution and financial requirements, on or before _________.
Where the preliminary prospectus is also being filed in another jurisdiction and that jurisdiction will not permit disclosure that a conditional listing application has been made, the statement required by (a) may be omitted provided the issuer confirms in writing to the Superintendent that a conditional listing application has been made with a stock exchange.
1.8 Foreign issuers - If the issuer is incorporated or continued under the laws of a jurisdiction other than Canada or a province or territory of Canada, state the following (with the bracketed information completed as appropriate):
In this subsection, "issuer" includes the issuer's subsidiaries, proposed subsidiaries and predecessor(s).
1.9 Agent - State the name and address of the Agent. If the issuer or selling security holder is a related or connected party of the Agent, summarize the nature of the relationship and provide a cross reference to "Relationship between Issuer or Selling Security Holder and Agent".
2. TABLE OF CONTENTS
3. SUMMARY OF PROSPECTUS
Provide a brief description of the following items:
(b) the securities offered by the issuer, including the offering price and the net proceeds expected to be realized by the issuer,
(c) the intended use of the Funds Available, including the amount allocated for each use,
(d) the stated business objectives that the issuer expects to accomplish using the Funds Available,
(e) the specific risks relating to the business disclosed in paragraph (a), and
(f) any other information considered appropriate under the circumstances.
1. Where this document is a base disclosure document used in connection with a summary prospectus, this section is not required in the base disclosure document.
2. Appropriate cross references must be made to items and page numbers in the prospectus.
4. CORPORATE STRUCTURE
4.1 Name and incorporation - Provide
(a) the full name of the issuer and the address of its registered office and its address for service in Canada;
(b) the laws under which the issuer was incorporated or organized and the date the issuer came into existence;
(c) the full name of each of the issuer's subsidiaries or proposed subsidiaries, the laws under which they were incorporated or organized and the date they came into existence;
(d) if applicable, that the issuer has been a party to any amalgamation, arrangement or continuance or has changed its name, and the laws governing the event; and
(e) relevant details of the issuer's form of organization and structure, where the issuer is not a company.
4.2 Intercorporate relationships - Illustrate by way of a diagram or otherwise the intercorporate relationships among the issuer, its parent, subsidiaries and proposed subsidiaries. For each subsidiary and proposed subsidiary, state the percentage of voting securities owned or to be owned by its parent.
5.BUSINESS OF THE ISSUER
5.1 Description and general development - Describe the business carried on and intended to be carried on by the issuer, including Products that the issuer is or will be developing or producing, and the stage of development of each of the Products.
1. In describing developments, include disclosure of the following: the nature and results of any bankruptcy, receivership or similar proceedings; the nature and results of any material reorganization; material prior litigation (including any series of proceedings based on similar causes of action); the nature and date of any prior trading suspensions or cease trade orders made against the issuer by any regulatory authority; material changes in the types of Products produced or services rendered; and any material changes in the method of conducting the business.
2. Where this document will be used as a base disclosure document, the disclosure in this section should be in sufficient detail so that when it is extracted to the summary prospectus from the base disclosure document it will provide investors with a reasonable understanding of the issuer's business.
3. In this section, "issuer" includes the issuer's subsidiaries, proposed subsidiaries and predecessor(s).
5.2 Summary and analysis of financial operations - Provide the information indicated in the table set out below with respect to the issuer's financial operations during the last two financial years and any period subsequent to the most recent financial year end for which financial statements are included in the prospectus.
TABLE
* Month Period Year Ending Year Ending
Ending * *
*
Gross profit
Research and
Development
Expenses
Sales and Marketing Expenses
General and
Administrative
Expenses
Net Income (Loss)
Working Capital
Property, Plant and
Equipment
Deferred Research
and Development
Other Intangibles
Long Term
Liabilities
Shareholders' equity
Dollar amount
Number of
securities
State the following as a note to the number of shares in the table (with the bracketed information completed as appropriate):
Also, include a discussion of liquidity on an historical and prospective basis in the context of the issuer's business and focus on the ability of the issuer to generate adequate amounts of cash and cash equivalents when needed. This discussion, at a minimum, should identify and describe the following,
(a) any known trends or expected fluctuations in the issuer's liquidity, taking into account known demands, commitments, events or uncertainties, and where a deficiency is identified indicate the course of action that has been taken or is proposed to be taken to remedy the deficiency;
(b) those balance sheet conditions or income or cash flow items that may be indicators of the issuer's liquidity condition;
(c) the requirements relating to working capital items (e.g. where significant quantities of inventory are required to be carried to meet rapid delivery requirements of customers or where extended payment terms have been provided to customers);
(d) the nature and extent of legal or practical restrictions on the ability of subsidiaries to transfer funds to the issuer and the impact such restrictions have had or are expected to have on the ability of the issuer to meet its obligations;
(e) whether the issuer is in arrears on the payment of dividends, interest, or principal payment on borrowing; and
(f) whether the issuer is in default on any debt covenants at the present time or was in default during the most recently completed financial year and any period subsequent to the most recent financial year end for which financial statements are included in the prospectus.
1. The sales and gross profit disclosed in the table must be separately presented by industry and geographic segment.
2. Net income disclosed in the table is net income after tax.
3. Where it would be meaningful to an investor, include in the table any prior periods covered by the financial statements included in the prospectus and provide an analysis of the issuer's results of operations for those periods.
4. Where the closing of the distribution under the prospectus is subject to a minimum subscription, adjust the required statement as appropriate.
5. Where the issuer has not had significant sales, the analysis must discuss all material expenditures. Related or similar types of expenditures representing in the aggregate greater than 10% of total expenditures would generally be considered material.
6. In the discussion identify any unusual or extraordinary events or transactions or any significant economic changes that materially affect income from continuing operations and describe the extent to which income from continuing operations was affected.
7. Describe in the discussion the extent to which any changes in net sales or revenues are attributable to changes in selling prices or to changes in the volume or quantity of goods or services being sold or to the introduction of new Products or services. Where the issuer knows of events that are expected to materially affect costs or revenues, describe the event(s).
8. Where there has been a significant or material change in operations from the date of the information in the table, the analysis of operations and variations in operations must discuss the change.
3. In this section, "issuer" includes the issuer's subsidiaries and proposed subsidiaries.
5.4 Milestones - Describe each significant event that must occur for the business objectives to be accomplished and state the specific time period in which each event is expected to occur and the costs related to each event.
2. The milestones must be cross referenced to the related items in the prospectus.
(a) the nature of the assets acquired or disposed of or to be acquired or disposed of,
(b) the actual or proposed date of each acquisition or disposition,
(c) the name of the vendor or purchaser and whether the transaction was or will be at Arm's Length,
(d) for an acquisition or disposition not at Arm's Length, the vendor's out of pocket costs as described in Local Policy Statement No. 3-07,
(e) the consideration, both monetary and non-monetary, paid or to be paid to or by the issuer,
(f) any material obligations that must be complied with in order to keep any acquisition or disposition agreement in good standing,
(g) how the consideration was determined (e.g. limited to out of pocket costs, valuation opinion or Arm's Length negotiations), and
(h) any valuation opinion required by a policy of a securities regulatory authority or a stock exchange to support the value of the consideration paid in connection with a transaction not previously approved by the Superintendent or the Vancouver Stock Exchange, or that has been approved within the preceding financial year and the Stub Period, including the name of the author, the date of the opinion, the assets to which the opinion relates and the value attributed to the assets.
2. The granting or acquiring of any material licence agreement by the issuer or any predecessor is considered to be an acquisition or disposition for purposes of this section.
3. In this section, "issuer" includes the issuer's subsidiaries, proposed subsidiaries and predecessor[s].
5.6 Management - Provide the following information for each member of Management:
(a) state the individual's name, age, position and responsibilities with the issuer and relevant educational background,
(b) state whether the individual works full time for the issuer or what proportion of the individual's time will be devoted to the issuer,
(c) state whether the individual is an employee or independent contractor of the issuer,
(d) state the individual's principal occupations or employment during the five years prior to the date of the prospectus, disclosing with respect to each organization as of the time such occupation or employment was carried on:
(i) its name and principal business,
(ii) if applicable, that the organization was an affiliate of the issuer,
(iii) positions held by the individual,
(iv) whether it is still carrying on business, if known to the individual,
(e) describe the individual's experience in the issuer's industry, and
(f) state whether the individual has entered into a non-competition or non-disclosure agreement with the issuer.
5.7 Organizational structure - Provide a chart setting out the number of full and part time employees currently in each department and the approximate number of full and part time employees or contractors in each department required to meet the issuer's stated business objectives.
5.8 Products - Describe
(a) the Products developed or to be developed as part of the issuer's stated business objectives,
(b) the history of development of the Products, including estimated Development Costs to the Most Recent Month End,
(c) the stage of development of the Products, including whether they are at the design, prototype, market test or commercial production stage,
(d) if the Products are not at the commercial production stage or if part of the Funds Available will be used for research and development,
(i) the stage of development that Management anticipates will be reached using the Funds available,
(ii) the major components of the proposed development program that will be funded using the Funds Available and provide a Breakdown of Costs, and
(iii) whether the issuer is conducting its own research and development, is subcontracting out the research and development or is using a combination of those methods,
(e) any material regulatory approvals that are required for the issuer to achieve its stated business objectives,
(f) where the development of documentation is considered to be necessary in the issuer's industry, the stage of development of documentation, including manuals, relating to the Products, and
(g) the potential impact of any laws, such as industry or environmental regulations or controls on ownership or profit repatriation, or economic or political conditions that may materially affect the issuer's operations.
1. The disclosure in (g) need only summarize the potential impact.
2. In this section, "issuer" includes the issuer's subsidiaries and proposed subsidiaries.
5.9 Future developments - If the Products are not at the commercial production stage or if the Products will not be in commercial production at conclusion of the proposed development program, describe the additional steps required to get to commercial production and provide an estimate of the Development Costs and time periods, to the extent known, and describe any uncertainties relating to the completion of the steps, the estimate of the costs or the time periods.
5.10 Proprietary protection - Where proprietary protection is normally obtained for products similar to the Products, describe
(a) the proprietary protection of the Products including the duration of all material patents, copyrights and trade marks,
(b) if no proprietary protection has been obtained, the steps Management intends to take to secure proprietary protection and, if known, the time periods for completing these steps, or explain why this proprietary protection has not or will not be obtained, and
(c) the steps taken by the issuer, its subsidiaries and proposed subsidiaries to protect their respective know how, trade secrets and other intellectual property, including physical possession of source codes and any use of confidentiality or non-competition agreements.
Where the issuer, its subsidiaries and proposed subsidiaries are the licensees under any material licence agreement, provide the information required by this section, where known after reasonable investigation, with respect to the licensor.
5.11 Operations - If the issuer is currently marketing its Products or will be marketing its Products as part of its stated business objectives, provide the following information regarding the production and sales of its Products:
(a) describe the actual or proposed method of production of the Products or, if the Products are services, the method of providing the services,
(b) state whether the issuer is producing the Products itself, is subcontracting out production, is purchasing the Products or is using a combination of these methods,
(c) disclose the location of existing property, plant and equipment, indicating whether the property, plant or equipment is owned or leased by the issuer,
(d) state the payment terms, expiration dates and the terms of any renewal options of any material leases or mortgages, whether the leases or mortgages are in good standing and, if applicable, that the landlord or mortgagee is not at Arm's Length with the issuer,
(e) disclose any specialized skill or knowledge requirements necessary for the Products to be produced and describe the extent that this skill or knowledge is available to the issuer,
(f) disclose sources and availability of raw materials, component parts, or finished products including factors that may have a material impact on the issuer's operations such as:
(i) dependence on a limited number of suppliers for essential raw materials, component parts, or finished products,
(ii) potential shortages of raw materials, component parts or finished products, or
(iii) any unusual payment terms under any agreements or other arrangements with the issuer's principal suppliers, that may impact on the issuer's cash flow,
(g) where any principal supplier of raw materials, component parts or finished products is not at Arm's Length with the issuer, disclose its name, relationship with the issuer and the material terms of any existing contract or arrangement with the issuer,
(h) disclose the extent to which the issuer's business is dependent upon a single or a limited number of customers,
(i) where any existing or proposed principal customer is not at Arm's Length with the issuer, disclose its name, relationship with the issuer, the material terms of any contract or arrangement with the issuer and the proportion of the issuer's total net sales made to that customer during the preceding financial year and the Stub Period,
(j) describe any unusual payment terms under any agreements or other arrangements with the issuer's principal customers that may impact on the issuer's cash flow, and
(k) disclose any proposed material changes to plant, property and equipment, manpower or sources of supply required to enable the issuer to meet its stated business objectives and provide a Breakdown of Costs for the major components of the proposed material changes that will be funded using the Funds Available.
In this section, "issuer" including the issuer's, its subsidiaries and proposed subsidiaries.
5.12 Market - Provide the following information regarding the market for the Products:
(a) describe the market segment and specific geographical area in which the issuer is selling or expects to sell its Products as contemplated by its stated business objectives or intends to sell its Products upon completion of its product development,
(c) describe the competition within the market segments and specific geographical areas referred to in paragraph (a) including, to the extent known after reasonable investigation by the issuer,
(i) names of the issuer's principal competitors,
(ii) a comparison of the principal aspects of competition (e.g. price, service, warranty or product performance) between the issuer and its principal competitors, and
(iii) potential sources of significant new competition,
(d) disclose the extent of market acceptance of the Products and the method used to determine whether market acceptance exists (e.g. market testing or surveys), including the names of the parties who performed the appropriate procedures and, if not at Arm's Length with the issuer, their relationship with the issuer,
(e) if applicable, state that obsolescence is a factor in the issuer's industry and describe how the issuer intends to maintain its competitive position,
(f) describe the effect of any material market controls or regulations within the market segment and specific geographical area referred to in paragraph (a) that may affect the marketing of the Products (e.g. marketing boards or export quotas), and
(g) describe the effect of any seasonal variation within the market segment and specific geographical area referred to in paragraph (a) that may affect the sales of the Products.
1. In this section, "issuer" means the issuer, its subsidiaries and proposed subsidiaries.
2. In discussing competition, consideration must be given to substitute or alternative products that may impact on the issuer's ability to meet its stated business objectives.
5.13 Marketing plans and strategies - If the issuer is currently marketing its Products or will be marketing its Products in order to achieve its stated business objectives, provide the following information regarding the issuer's marketing plans and strategies:
(a) describe when, how and by whom the Products are or will be marketed and, if not at Arm's Length with the issuer, their relationship with the issuer,
(b) disclose any marketing programs actual or proposed to meet the issuer's stated business objectives and the major components of the marketing programs (e.g. trade shows, magazines, television or radio advertising),
(d) disclose the issuer's pricing policy (e.g. at market, discount or premium), and
(e) where after sales service, maintenance or warranties are a significant competitive factor, describe the differences between the issuer's policies and those of its principal competitors.
In this section, "issuer" means the issuer, its subsidiaries and proposed subsidiaries.
5.14 Administration - Provide
(a) the estimated aggregate monthly and total administration costs that will be incurred in order for the issuer to achieve its stated business objectives, the time period during which these costs will be incurred and any anticipated variations in the monthly amounts during that period, and
(b) a Breakdown of Costs of the monthly administration costs disclosed in paragraph (a), including any anticipated variations.
Administrative support includes professional fees, transfer agent fees, management fees, rent, travel, investor relations and other administrative costs, such as those costs required to maintain a reporting issuer in good standing, whether incurred by the issuer or its subsidiaries.
6. USE OF PROCEEDS
6.1 Funds Available - Provide a breakdown of Funds Available as follows:
(a) the net proceeds to be derived by the issuer from the sale of the securities offered under the prospectus,
(b) the estimated working capital available to the issuer, its subsidiaries and proposed subsidiaries as of the Most Recent Month End, and
(c) the amounts and sources of other funds that will be available to the issuer, its subsidiaries and proposed subsidiaries prior to or concurrently with the completion of the offering.
1. In each prospectus and revised preliminary prospectus, the amount of working capital must be updated to the Most Recent Month End.
2. Where other sources of funds will be available to the issuer, identify the material terms, including the timing, and identity of the person providing the funds.
6.2 Principal purposes - Provide, in tabular form, a description of each of the principal purposes, with amounts, for which the Funds Available will be used. Where the closing of the distribution under the prospectus is subject to a minimum subscription, provide separate columns disclosing the use of proceeds for the minimum and maximum subscriptions.
State the following (with the bracketed information completed as appropriate):
2. Statements as to principal purposes for which the Funds Available are to be used must be specific and be cross referenced to the estimated costs disclosed in Item 5. Where the issuer has had no sales or limited sales, the table must include the administrative costs required for the issuer to achieve its stated business objectives.
3. Funds Available not allocated to one of the principal purposes must be identified as "Working Capital To Fund Ongoing Operations" and must be sufficient to fund the issuer's operations during the offering period and, following completion of the offering, to maintain the issuer as a reporting issuer during the time frame contemplated by its stated business objectives.
4. Where Funds Available will be paid to an insider or holder of performance shares, identify, either in the table or by way of a note to the table, the person, amount of the payments and principal purposes to which the payments relate.
5. Where more than 10% of the Funds Available will be used to reduce or retire indebtedness and where the indebtedness was incurred within the two preceding years, the principal purposes for which the indebtedness was used must be disclosed and where the creditor is an insider to the issuer or is a holder of performance shares, identify the creditor and the nature of the relationship to the issuer.
6. Where the prospectus is used in connection with a special warrant or similar transaction, the principal purposes for which the funds raised in such transaction must be disclosed. Where all or a portion of these funds have been spent provide a cross reference to the detail discussion in Item 5 and explain how the funds were spent. The Funds Available must include the balance of the funds, if any, raised by the special warrant or similar transaction that have not been spent.
6.3 Conflicts of interest - Where the issuer is a related party or connected party of the Agent, or where the securities to be offered are out of the holdings of a selling security holder who is a related party or connected party of the Agent, provide a summary of the nature of the relationship between the Agent and the issuer, or the Agent and the selling security holder, as the case may be.
State the extent to which the proceeds of the distribution will be applied, directly or indirectly, for the benefit of the Agent or any related party of the Agent. Where the proceeds will not be applied for the benefit of the Agent or any related party of the Agent, so state. Provide a cross-reference to the information required by Item 16.
1. For example, disclosure would be required in most cases where the issuer received a loan from the Agent and thus would be a connected party of the Agent. Reference should be made to section 167.4 of the Regulation for further requirements.
2. For the purposes of this section, reference to an Agent includes a special selling group member, as defined in section 167.4 of the Regulation.
7. RISK FACTORS
List the risks that could be considered to be material to an investor as follows:
(a) risks relating to the nature of the business of the issuer,
(b) risks relating to the nature of the offering, and
(c) any other risks.
1. Risk factors may include but are not limited to such matters as cash flow and liquidity problems, inexperience of Management in start up operations, inexperience of Management in the particular industry in which the issuer operates, dependence of the issuer on an unproven Product, environmental regulations, economic or political conditions, absence of an existing market for the Product, absence of an operating history, absence of profitable operations in recent periods, an erratic financial history, significant competition, conflicts of interest with Management, reliance on the efforts of a single individual, the arbitrary establishment of the offering price and any material differences between the laws governing the incorporation, continuance or organization of the issuer and the B.C. Company Act relating to security holders' rights and remedies.
2. With respect to (a), the most significant risk factors should be disclosed at the top of the list.
3. In this Item, "issuer" means the issuer, its subsidiaries and proposed subsidiaries.
8. DIRECTORS, OFFICERS AND PROMOTERS
1. In this Item, "issuer" includes the issuer's subsidiaries and proposed subsidiaries.
2. In sections 83 through 86, the Superintendent may require information for periods prior to those indicated in the section depending upon the materiality of the events.
3. Provide the information required by this Item for each proposed nominee for election as a director of the issuer and indicate clearly that the individual is a proposed nominee.
8.1 Name, address, occupation and security holding - List the names and the municipality of residence of all directors, officers and promoters of the issuer and, for each person, disclose
(a) the current positions and offices with the issuer,
(b) the principal occupations during the five years prior to the date of the prospectus and, where the principal occupation is that of an officer of a company other than the issuer, state the name of the company and the principal business in which it was engaged, and
(c) the number of securities of the issuer beneficially owned, directly or indirectly, indicating the number of performance shares held in escrow and the percentage of the class to be held on conclusion of the offering.
Where a director, officer or promoter is an associate of another director, officer or promoter, disclose as a footnote the relationships.
1. The Superintendent may waive the disclosure required by this section where the operations of a subsidiary or a proposed subsidiary are not material to the issuer's operations.
2. The description of the principal occupation of a director, officer or promoter must be specific. The terms "businessman" or "entrepreneur" are not sufficiently specific.
3. Where the director, officer or promoter is a member of Management, the information in (b), other than a current occupation, may be disclosed by a cross reference to the page on which the information required by section 56 is disclosed.
4. If there is a maximum subscription that differs from the minimum subscription, disclose the percentage of the class held by the directors, officers and promoters on both a minimum and maximum basis.
8.2 Aggregate ownership of securities - State the aggregate number of each class of voting securities of the issuer that at the completion of the offering are beneficially owned, directly or indirectly, by all directors, officers and promoters of the issuer, as a group, as of the completion of the offering and then state the percentage that number will represent of the total issued and outstanding voting securities of the issuer upon the completion of the offering.
In this section, "issuer" does not include the issuer's subsidiaries and proposed subsidiaries.
8.3 Other reporting issuers - Where any director, officer or promoter of the issuer is, or within the five years prior to the date of the prospectus has been, a director, officer or promoter of any other reporting issuer, state the name of the individual, the number of reporting issuers for which the individual acted, the names of those issuers and the periods during which the individual has so acted.
8.4 Corporate cease trade orders or bankruptcies - Where any director, officer or promoter of the issuer is, or within the five years prior to the date of the prospectus has been, a director, officer or promoter of any other issuer that, while that person was acting in that capacity,
(a) was the subject of a cease trade or similar order or an order that denied the issuer access to any statutory exemptions for a period of more than 30 consecutive days, state the fact and describe the reasons and whether the order is still in effect, or
(b) was declared bankrupt or made a voluntary assignment in bankruptcy, made a proposal under any legislation relating to bankruptcy or insolvency or been subject to or instituted any proceedings, arrangement, or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold the assets of that person, state the fact.
8.5 Penalties or sanctions - Where any director, officer or promoter of the issuer has, within the ten years prior to the date of the prospectus, been subject to any penalties or sanctions imposed by a court or securities regulatory authority relating to trading in securities, promotion or management of a publicly traded issuer, or theft or fraud, describe the penalties or sanctions imposed.
1. Penalties or sanctions include charges that have been laid or notices of hearing that have been issued as of the date of the prospectus.
2. The Superintendent may require information relating to other penalties and sanctions depending on the materiality of the events.
8.6 Individual bankruptcies - Where any director, officer or promoter of the issuer has, within the five years prior to the date of the prospectus, been declared bankrupt or made a voluntary assignment in bankruptcy, made a proposal under any legislation relating to bankruptcy or insolvency or been subject to or instituted any proceedings, arrangement, or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold the assets of that individual, state the fact.
8.7 Conflicts of interest - Disclose particulars of any existing or potential conflicts of interest of any of the directors, officers or promoters of the issuer as a result of their outside business interests.
9. INDEBTEDNESS OF DIRECTORS, OFFICERS, PROMOTERS AND OTHER MANAGEMENT
State the name of each director, officer, promoter and member of Management and each of their respective associates or affiliates who is or has been indebted to the issuer at any time during the preceding financial year and the Stub Period and state, for each person,
(a) the largest amount of indebtedness outstanding at any time,
(b) the nature of the indebtedness and the purpose for which it was incurred,
(c) the amount presently outstanding,
(d) the rate of interest paid or charged,
(e) the terms of repayment,
(f) the nature of any security granted to the issuer, and
(g) if the person is an associate or affiliate of a director, officer or member of Management, the person's relationship to the director, officer or member of Management of the issuer.
1. In this Item, "issuer" includes the issuer's subsidiaries and proposed subsidiaries.
2. Provide the information required by this Item for each proposed nominee for election as a director of the issuer and indicate clearly that the individual is a proposed nominee.
10. PAYMENTS TO INSIDERS AND PROMOTERS
In this Item, "issuer" includes the issuer's subsidiaries and proposed subsidiaries.
10.1 Executive compensation - Provide the information required by Form 41 with the following changes:
(a) disclosure must be provided for each of the issuer's four most highly compensated executive officers, in addition to the CEO, regardless of the amount of their compensation, and
(b) in addition to the periods required under Form 41, disclosure must be provided for the Stub Period.
The Superintendent may require disclosure of compensation paid to persons other than executive officers.
10.2 Related party transactions - Where, during the five preceding financial years and the Stub Period, or such shorter period as the issuer may have been in existence, the issuer has acquired assets or services from an insider, promoter or member of Management and their respective associates or affiliates, disclose the following for each acquisition:
(a) the name of the individual,
(b) the nature of the assets or services,
(c) the form and value of the consideration, and
(d) where the issuer has acquired assets,
(i) the cost of the assets to the seller, and
(ii) where the consideration referred to in paragraph (c) above exceeds the seller's out-of-pocket costs, a cross reference to the valuation opinion disclosed in section 55.
1. Information with respect to executive compensation need not be disclosed in this section.
2. Any debt settlement made by the issuer to any insider or promoter must be disclosed in this section.
3. For acquisitions where the consideration is not in excess of the greater of 10% of the aggregate compensation or consideration paid to the individual under sections 101and 102 or $5,000, the information required by this item may be aggregated together and classified as "miscellaneous".
4. As an alternative to the disclosure required in (b), provide a cross reference to the page(s) of the prospectus where the required disclosure is made.
10.3 Proposed compensation - Where known, provide the information required by Form 41 as modified by section 101 with respect to the amounts that the issuer anticipates it will pay during the 12 month period following completion of the offering.
The amounts referred to in this section include the forms of compensation referred to in sections 101 and 102 above.
11. SHARE CAPITAL
11.1 Existing and proposed share capital - Provide, in the tabular form indicated or, where appropriate, in notes to the table, particulars of the share capital of the issuer.
TABLE
Column 1 Column 2 Column 3
(a) Prior sales of securities
______ ______
(b) Issued as of [the Most
Recent Month End]
(c) Offering ______ ______
(d) To be issued if all securities
being offered are sold [N/A]
1. Where the consideration for any of the prior sales included in the table is other than cash, describe in a note cross referenced to the prior sale set out in (a) of the table the method of determining the value of the consideration (e.g. out of pocket costs, valuation opinion, Arm's Length negotiation or, in the case of services, determination by directors based on estimated fair market value).
2. Set out in the table or a note thereto the number of securities of each class authorized to be issued.
3. In columns 1 and 3 of the table, (b) is equal to the total of (a), and (d) is equal to the total of (b) and (c).
4. The information shall be updated to the Most Recent Month End.
5. In (a) of the table list prior sales aggregated on the basis of the same price per security and type of consideration.
6. If there is a minimum subscription, disclose the number of securities that are offered and that would be issued on both a minimum and maximum basis.
7. A separate table shall be prepared for each class or kind of securities that the issuer has issued or will have issued upon completion of the offering.
8. As a note to the table, indicate whether there are any restrictions on the transferability of the securities (e.g. hold periods, escrow or pooling agreement) and summarize the nature of the restrictions. Where the information is provided elsewhere the disclosure may be provided by a cross-reference to the page in the prospectus where the disclosure is contained.
11.2 Options and other rights to purchase securities
(a) Disclose, as of the Most Recent Month End prior to the date of the prospectus, the following information respecting each option that is held or will be held upon completion of the offering by any person:
(i) the name of each person and the reasons that the option was granted,
(ii) the name of the grantor and the nature of the option granted to each person (e.g. options, Agent's warrants or other warrants),
(iii) the designation and number of the securities subject to the option,
(v) the expiration date of the option, and
(vi) if there is a published market for the securities, the market value of the securities subject to the option as of the date of grant and the Most Recent Month End.
(b) State the aggregate number of each class or kind of securities that are subject to options described in paragraph (a)(iii) above.
(c) State the following:
2. In this section, "issuer" includes the issuer's subsidiaries and proposed subsidiaries.
3. The information shall be updated to the Most Recent Month End.
11.3 Fully diluted share capital - Provide the information indicated in the table set out below for each class of securities of the issuer.
TABLE
Recent Month End
(b) Offered under
the prospectus
(c) Securities reserved for
future issue as of
the Most Recent
Month End
________ _______
Total 100
1. (a) is the amount indicated in (b) of column 1 of the table in section 111.
2. If there is a minimum subscription, disclose the number of securities offered and total on both a minimum and maximum basis.
3. (c) is the amount indicated in paragraph (b) from section 112
4. A separate table shall be prepared for each class or kind of securities that the issuer has issued or will have issued upon completion of the offering.
5. The information shall be updated to the Most Recent Month End.
11.4 Principal holders of voting securities - Provide as of the Most Recent Month End, the information indicated in the table set out below for each person who has, or is known by the issuer to have:
(a) direct or indirect beneficial ownership of,
(b) control or direction over, or
(c) a combination of direct or indirect beneficial ownership of and of control or direction over
voting securities that will constitute more than 10 per cent of any class of such securities upon completion of the offering.
TABLE
Name and Number of Percentage of class Percentage of class
municipality securities prior to the offering after the offering
of residence
1. Where a person that is not an individual is shown by the issuer as owning directly or indirectly more than 10 per cent of any class of such securities, identify the individual shareholders of the person as required by General Instruction 7. The name of such individuals should be disclosed in a note to the table.
2. If voting securities will be issued prior to, concurrently with or immediately following the offering, indicate as far as practicable the respective holding of voting securities that will exist after giving effect to the issue.
3. If there is a maximum subscription that differs from the minimum subscription, disclose the percentage of the class held by the principal holders on both a minimum and maximum basis.
4. If, to the knowledge of the issuer or the Agent, more than 10 per cent of any class of voting securities of the issuer are held or are to be held subject to any voting trust or other similar agreement/arrangement, state the designation of such securities, the number or amount held or to be held and the duration of the agreement. Give the names and addresses of the voting trustees and outline briefly their voting rights and other powers under the agreement.
5. Where a person identified in the table is a control person of the issuer and is not a director, officer or promoter of the issuer, provide the disclosure required for sections 83 - 86 for the control person. If the control person is a corporation, the disclosure must be provided for the control persons of the corporation.
6. A separate table shall be prepared for each class or kind of voting securities that the issuer has issued or will have issued upon completion of the offering.
7. The information shall be updated to the Most Recent Month End.
11.5 Performance shares or escrow securities - Where the issuer has performance shares or escrow securities issued as of the date of the prospectus, state
(a) the number of performance shares or escrow securities,
(b) the estimated percentage that the performance shares or escrow securities will represent of the total issued and outstanding voting securities of the issuer, upon the completion of the offering,
(c) the names of the beneficial owners of the performance shares or escrow securities and the number of performance shares or escrow securities owned by each and why the person is a principal as defined in Local Policy Statement No. 3-07,
(d) the name of the escrow agent,
(e) the date of the escrow agreement and the conditions governing the transfer, release and cancellation of the performance shares or escrow securities, and
(f) the rights or obligations of a person who ceases to be a principal, dies or becomes bankrupt to retain, transfer or surrender to the issuer for cancellation the performance shares or escrow securities.
If there is a maximum subscription that differs from the minimum subscription, disclose the percentage that the performance shares or escrow securities will represent on both a minimum and maximum basis.
12. PLAN OF DISTRIBUTION
12.1 Terms of the distribution agreement - With respect to the agreement entered into between the issuer and the Agents, state
(a) the names of the Agents,
(b) the date of the agreement,
(c) the nature of the Agents' obligation to take up and pay for any of the securities being offered,
(d) the number of securities expected to be sold by each of the Agents,
(e) the number of additional securities that may be issued, if the issuer has granted the Agent a "greenshoe" option,
(f) the conditions, if any, under which the Agent may "market out",
(g) the nature of the consideration to be paid to the Agent,
(h) the conditions, if any, under which any of the proceeds are to be held in trust or escrow pending completion of the offering, and
(i) the number of days following the completion of the offering by which issuer will receive the net proceeds of the offering from the Agents or the date by which the Agents are to purchase the securities.
12.2 Minimum and maximum subscription - Where the prospectus discloses a plan of distribution not involving a firm underwriting or other subscription guarantee, it must also disclose the amount of the minimum and maximum subscriptions.
12.3 Secondary offering - If any of the securities being offered are for the account of a security holder, name the security holder and state the number of the securities owned by that security holder, the number to be offered and the number to be owned by that security holder after the completion of the distribution. State the portion of the expenses of distribution to be borne by the selling security holder.
12.4 Extraprovincial offerings - Disclose whether there are any agreements or arrangements to sell any portion of the offering outside of British Columbia. If so, disclose in what other jurisdictions the offering may be sold, the identity of the person who will be selling the securities in the other jurisdictions and the estimated portion of the offering, if any, to be sold outside of Canada.
Agreements or arrangements include those made with a selling group outside of the British Columbia or with clients of the Agents who are not residents of British Columbia.
13. DESCRIPTION OF SECURITIES OFFERED
13.1 Terms - Describe the securities being offered and summarize their material attributes and characteristics, including, if applicable:
(a) dividend rights;
(b) voting rights;
(c) liquidation or distribution rights;
(d) pre-emptive rights;
(e) conversion rights;
(f) if the securities are subscription warrants or rights, the period during which, and the price at which, the warrants or rights are exercisable;
(g) redemption, purchase for cancellation or surrender provisions;
(h) sinking or purchase fund provisions; and
(i) provisions as to modification, amendment or variation of any such rights or provisions.
If the rights attaching to the securities being offered are materially limited or qualified by the rights of any other class of securities, or if any other class of ranks ahead of or equally with the securities being offered, include information regarding such other securities in order to enable investors to understand the rights attaching to the securities being offered.
13.2 Modification of terms - If the rights of holders of the securities may be modified otherwise than pursuant to a mechanism provided for by governing legislation relating to the securities, briefly describe the method by which those rights may be modified.
14. SPONSORSHIP AND FISCAL AGENCY AGREEMENTS
If the issuer has entered into any agreement with any registrant to sponsor the issuer or to provide corporate finance services for the issuer or its securities, either now or in the future, disclose the following information regarding these services:
(a) the date of the agreement,
(b) the name of the registrant,
(c) the consideration, both monetary and non-monetary, paid or to be paid by the issuer, and
(d) a summary of the nature of the services to be provided, including the period during which the services will be provided, activities to be carried out and, where market making services will be provided, whether the registered broker or dealer will commit its own funds to the purchase of securities of the issuer or whether the registered broker or dealer will act as agent for others to do so.
15. INVESTOR RELATIONS ARRANGEMENTS
If the issuer has entered into any written or oral agreement or understanding with any person to provide any promotional or investor relations services for the issuer or its securities, either now or in the future, disclose the following information regarding these services:
(a) the date of the agreement and the anticipated date that the services will commence,
(b) the name, principal business and place of business of the person providing the services,
(c) the background of the person providing the services,
(d) whether the person has, or is known by the issuer to have:
(i) direct or indirect beneficial ownership of,
(ii) control or direction over, or
(iii) a combination of direct or indirect beneficial ownership of and of control or direction over
(f) the consideration both monetary and non-monetary paid or to be paid by the issuer, including whether any payments will be made in advance of services being provided,
(g) if the issuer does not have sufficient funds to pay for the services, how the issuer intends to pay for the services, and
(h) the nature of the services to be provided, including the period during which the services will be provided.
1. Include any arrangements made by the issuer or any other person on behalf of the issuer or on the person's own initiative where the issuer knows, after reasonable enquiry, that such an arrangement exists.
2. The disclosure in (c) and (h) need only summarize the background and nature of services.
3. If there are no promotional or investor relations arrangements, so state.
16. RELATIONSHIP BETWEEN ISSUER OR SELLING SECURITY HOLDER AND AGENT
Where the issuer is a related party or connected party, as defined in the Regulation, of an Agent or where the securities to be offered are out of the holdings of a selling security holder who is a related party or connected party of the Agent, describe
(a) the nature of the relationship or connection between the issuer and the Agent or the selling security holder and the Agent, as the case may be, including
(i) the basis on which the issuer or selling security holder is a related party or connected party of the Agent,
(ii) the name of each relevant related party of the Agent,
(iii) the details of the ability of the Agent or any related party of the Agent to affect materially the operations of the issuer, and
(iv) whether the issuer is indebted to the Agent or any related party of the Agent and, if so, provide particulars of such indebtedness, and
(b) the extent to which the proceeds of the issue will be applied, directly or indirectly, for the benefit of the Agent or any related party of the Agent. (For example, where the issuer has received a loan from the Agent, the issuer would be a connected party of the Agent and would have to comply with section 167.4 of the Regulation.)
1. For the purpose of this item, reference to an Agent includes a special selling group member as defined in section 167.4(1) of the Regulation.
2. In this item, "issuer" means the issuer, its subsidiaries and proposed subsidiaries.
17. RELATIONSHIP BETWEEN ISSUER AND PROFESSIONAL PERSONS
Disclose the nature and extent of any beneficial interest, direct or indirect, in any securities or property, of the issuer or of an associate or affiliate of the issuer, held by a professional person referred to in section 99(2) of the Regulation, or any associate of the professional person. Also, disclose whether the professional person or any associate of the professional person, is or is expected to be elected, appointed or employed as a director, senior officer or employee of the issuer, or of an associate or affiliate of the issuer, or is a promoter of the issuer, or of an associate or affiliate of the issuer.
1. The interest of a professional person and all associates of that professional person may be shown in the aggregate. Disclosure of the interest in or position with the issuer or an associate or affiliate of the issuer held by an associate of the professional person is only required where known by the professional person after reasonable inquiry.
2. In this section, "issuer" includes the issuer's subsidiaries and proposed subsidiaries.
18. LEGAL PROCEEDINGS
Describe any outstanding and, if known, contemplated legal proceedings that are material to the business and
affairs of the issuer.
Include the name of the court or agency, the date the proceedings were instituted, the principal parties to the proceedings, the nature of the proceedings, the amount claimed, if any, whether the proceedings are being contested, the present status of the proceedings and, if a legal opinion is referred to in the prospectus, the name of counsel providing that opinion.
19. AUDITOR
State the name and address of the auditor of the issuer.
20. REGISTRAR AND TRANSFER AGENT
State the name of the issuer's registrar and transfer agent Where the issuer has branch registers for transfers of its securities, state the location (by municipalities) of the registers.
21. MATERIAL CONTRACTS
21.1 Particulars of material contracts - Disclose all material contracts to which the issuer is a party, including
(a) the date of each contract,
(b) the parties to each contract,
(c) the consideration paid or payable by or to the issuer, and
(d) the general nature of each contract.
As an alternative to the disclosure required in this section, provide a cross reference to the page(s) of the prospectus where the required disclosure with respect to a particular contract is made.
21.2 Inspection of material contracts - State a reasonable time and place in the Province at which a copy of any material contract may be inspected during distribution of the securities being offered under the prospectus.
22. OTHER MATERIAL FACTS
Give particulars of any other material facts relating to the securities proposed to be offered and not disclosed elsewhere in the prospectus.
23. PURCHASERS' STATUTORY RIGHTS
State the following:
24. FINANCIAL STATEMENTS, REPORTS AND OTHER EXHIBITS
Include the financial statements, reports and other exhibits required by applicable local policy statements or by the Act and Regulation.
25. CERTIFICATES
Provide the certificates of the issuer, Agent and promoter as required by the Act and Regulation.
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IT IS AN OFFENCE FOR A PERSON TO MAKE A STATEMENT IN A DOCUMENT REQUIRED TO BE FILED OR FURNISHED UNDER THE ACT OR THE REGULATION THAT, AT THE TIME AND IN THE LIGHT OF THE CIRCUMSTANCES UNDER WHICH IT IS MADE, IS A MISREPRESENTATION.
INTERIM LOCAL POLICY STATEMENT 3-17
REGISTRANT DUE DILIGENCE
PART 1 IMPLEMENTATION
1.1 Effective date - This local policy statement comes into effect on January 6, 1995.
1.2 Defined terms - Terms defined in the Securities Act, S.B.C. 1985, c. 83 (the "Act"), the Securities Regulation, B.C. Reg. 270/86 (the "Regulation") and the Interpretation Act, R.S.B.C. 1979, c. 206 and used in this local policy statement have the same meaning as in the Act, the Regulation and the Interpretation Act. Other terms defined in this local policy statement are capitalized and in bold.
1.3 Issuers listed on the Exchange - Where an issuer has obtained a listing of its securities on the Vancouver Stock Exchange (the "Exchange"), any reference in this local policy statement to the Superintendent, other than the reference in sections and , should be read as a reference to the Exchange.
PART 2 APPLICATION OF POLICY
2.1 Distribution by junior issuers - This local policy statement applies to distributions by prospectus or statement of material facts ("Offering Document"), where the issuer, whether or not listed on the Exchange, does not meet the initial minimum listing requirements for the senior board of the Exchange.
2.2 Rationale - An underwriter plays an important role in protecting the public interest and the integrity of the local capital market. In view of the importance of this role, each underwriter, which signs a certificate in an Offering Document for a distribution to which this local policy statement applies (a "Junior Issuer Underwriter"), must undertake a due diligence process and prepare the due diligence report described in Part 5 (the "Due Diligence Report").
2.3 Junior Issuer Underwriter group - Where there is more than one Junior Issuer Underwriter, each Junior Issuer Underwriter must prepare a Due Diligence Report. Where required under Part 6, only one assessment and specialist's report need be obtained to support the Due Diligence Reports.
PART 3 DUE DILIGENCE PROCESS
3.1 Due diligence - One defence available to an underwriter against potential liability for misrepresentation in an Offering Document is that the underwriter has conducted reasonable investigations to provide reasonable grounds for belief that there is no misrepresentation in the Offering Document. This defence is commonly known as due diligence and the reasonable investigations as the due diligence process.
3.2 Importance of underwriter's due diligence process - The due diligence process should provide the underwriter with a thorough understanding of the business of the issuer and the risks associated with the issuer's business. The understanding gained from this process puts the underwriter in a better position to decide whether to proceed with a distribution and to sign the underwriter's certificate in the Offering Document.
3.3 Due diligence process - The due diligence process is not a mechanical process. It must be tailored to the particular issuer and distribution. The nature and extent of the due diligence review performed by an underwriter will vary depending on a number of factors, including
(a) the stage of development of the business of the issuer,
(b) the stage of development of the issuer's product, service or technology, and
(c) where applicable, the stated business objectives of the issuer contained in the Offering Document.
PART 4 REQUIREMENT FOR DUE DILIGENCE REPORT
4.1 Undertaking with final Offering Document - In accordance with section 45(1) of the Act, the Superintendent requires a Junior Issuer Underwriter to file with the final Offering Document an undertaking addressed to the Superintendent to file the certificate and undertaking referred to in section by the earlier of the offering date or 10 days after the date of the final Offering Document.
4.2 Notarization of Due Diligence Report - The Due Diligence Report must be notarized as at the date no earlier than the date of the certificate and undertaking referred to in section .
4.3 Filing of certificate and undertaking - Within the time period specified in section , the Junior Issuer Underwriter must file a certificate and undertaking addressed to the Superintendent. The certificate and undertaking must state that
(a) the Junior Issuer Underwriter has prepared and executed the Due Diligence Report,
(b) the Due Diligence Report has been notarized, and
(c) the Junior Issuer Underwriter undertakes to file the notarized copy of the Due Diligence Report when requested by the Superintendent.
4.4 Retention of Due Diligence Report - The Junior Issuer Underwriter must retain the notarized copy of the Due Diligence Report and all supporting documentation for a period of six years after the distribution contemplated by the Offering Document.
4.5 Superintendent's request for Due Diligence Report - The Superintendent may require the Junior Issuer Underwriter to produce the notarized copy of the Due Diligence Report either in the context of an investigation or the renewal of an underwriter's registration as an underwriter under the Act.
PART 5 CONTENT OF DUE DILIGENCE REPORT
5.1 Due diligence procedures - The Due Diligence Report must reflect the due diligence process undertaken by the Junior Issuer Underwriter up to the date of the report. At a minimum, the Due Diligence Report must identify the individual(s) who participated in the due diligence process and describe the procedures performed to complete the process.
5.2 Consideration of assessment and specialist's reports -Where an assessment report is required to be obtained under Part 6, the Due Diligence Report must state that the Junior Issuer Underwriter has fully considered the findings of the consultant and, where applicable, the specialist contained in their report(s).
5.3 Reasons to sponsor - The Due Diligence Report must include a brief description of the reasons why the Junior Issuer Underwriter considers that it is appropriate to proceed with the distribution.
5.4 Signature of Due Diligence Report - The Due Diligence Report must be signed by a director of the Junior Issuer Underwriter.
PART 6 REQUIREMENT FOR ASSESSMENT OR SPECIALIST'S REPORT
(b) has been in business for three or more financial years but has not had net income after income taxes in each of its last two financial years, calculated by reference to its audited financial statements, or
(c) is raising funds to develop or intends to acquire, directly or indirectly, a new business, product or service that is unrelated to the issuer's existing business operations and that management anticipates will be a material part of its future business operations.
The circumstances described above are intended to serve as a general guide. The Superintendent may require any Junior Issuer Underwriter to obtain an assessment report, particularly where the issuer or the business it is acquiring has had insignificant cash sales or net income.
(a) a Junior Issuer Underwriter had previously obtained an assessment report relating to the issuer's business and filed the certificates required under Part 9, or where the issuer has previously filed a technical report under prior Local Policy Statement 3-04 relating to the issuer's business, and the issuer has accomplished the business objectives contemplated by the prior assessment report or technical report, or
(b) the issuer is an investment issuer and will be complying with Local Policy Statement 3-13, "Policy Guidelines for a Venture Capital Issuer Planning to Make a Distribution".
6.3 Information required with waiver request - A Junior Issuer Underwriter requesting a waiver must provide the Superintendent with the following information and documentation prior to the filing of a preliminary Offering Document:
(a) reasons for the requested waiver,
(b) financial statements of the issuer and any business to be acquired
(i) for each of the last three financial years, with at least the most recent financial year being audited, and
(d) where a Junior Issuer Underwriter had previously obtained an assessment report relating to the issuer's business and filed the certificates required under Part 9, or where the issuer has previously filed a technical report under prior Local Policy Statement 3-04 relating to the issuer's business, a description of the issuer's achievement of the business objectives that were contemplated by the prior assessment report or technical report, and
(e) a description of the proposed use of proceeds.
6.4 Requirement for specialist's report - The Junior Issuer Underwriter must retain a specialist to provide it with a report in support of its Due Diligence Report relating to the feasibility of the issuer's technology where
(a) the Junior Issuer Underwriter is required to obtain an assessment report,
(b) the issuer has an unproven or unique technology that is critical to its business, and
(c) the Junior Issuer Underwriter considers that its consultant or any specialist retained by its consultant does not have the necessary technical expertise.
7.1 Content of assessment report - Where the Junior Issuer Underwriter is required to obtain an assessment report, the assessment report must contain, at a minimum, the consultant's findings relating to the issuer's management, product or service or technology, operations, market, marketing plans or strategies and financial plan. Where the Junior Issuer Underwriter has retained a specialist to prepare a specialist's report in accordance with section 64, the consultant's findings may be qualified to state that the consultant has not analyzed the feasibility of the issuer's technology.
7.2 Required review procedures - The consultant must use professional judgment to determine what procedures are appropriate in the circumstances to be able to provide the findings contained in an assessment report to the Junior Issuer Underwriter. Every consultant who prepares an assessment report must perform at least the following procedures:
(a) analyze and discuss with management the issuer's business plan relating to the issuer's principal business,
(b) analyze the issuer's financial statements,
(c) investigate the relevant background, including confirmation of educational credentials, of those of the directors, officers, employees and contractors of the issuer whose expertise is critical to the issuer in providing it with a reasonable opportunity to achieve its stated business objectives,
(d) analyze the stage of development of the issuer's product, service or technology,
(e) where the Junior Issuer Underwriter has not obtained a specialist's report, analyze the feasibility of any technology that is critical to the issuer's business,
(f) inspect the issuer's material assets, whether owned or leased, including, but not limited to, property, plant, equipment and inventory used, or to be used, in connection with the issuer attempting to achieve its stated business objectives,
(g) if applicable, analyze the issuer's production methods,
(h) if applicable, investigate a third party's ability to supply a product, service or technology, where the third party supplies to the issuer a unique product, service or technology that is not readily available from other sources at the cost to be paid by the issuer,
(i) investigate the issuer's relationships with its existing or proposed principal suppliers, customers and creditors to the extent appropriate in the circumstances,
(j) analyze the business aspects of all material contracts relating to the business of the issuer,
(k) if applicable, analyze the business aspects of all legal proceedings, including proceedings known to be contemplated, involving the issuer,
(l) analyze the business aspects of any legislation or publicly available proposed legislation, such as industry or environmental regulations or controls on ownership or profit repatriation, or economic or political conditions that may, in the consultant's professional judgement, materially affect the issuer's operations,
(m) investigate the industry and target markets in which the issuer's business operates or management anticipates it will operate, and
(n) analyze the issuer's financial plan.
(i) an arm's length third party, or
and only with respect to the procedures in (h) or (i) above.
(a) Management - education; business experience; expertise and experience in the issuer's industry; ability to commit sufficient time to the issuer.
(c) Operations - if the issuer is currently marketing its product or service or will be marketing its product or service in order to achieve its stated business objectives; actual or proposed method of production; historical levels of production; dependence on subcontractors; location and condition of existing plant, property and equipment; terms and conditions of mortgages or leases; availability of skilled personnel; sources and availability of raw materials, component parts and finished products, including dependence on a limited number of suppliers or customers; existing and planned capacity; warranties and quality control; production costs; production cycles; any proposed material changes to any of the above.
(d) Market - market segment and specific geographical area in which the issuer is selling or is expecting to sell its product, service or technology; trends within that market segment or specific geographical area; competition within that market segment or specific geographical area, including principal competitors and their relative size and aggregate market share, principal aspects of competition and significant potential sources of competition; market share or market acceptance of the issuer's product, service or technology; likelihood of product or technological obsolescence; market controls or regulation; seasonal variations.
(e) Marketing plans and strategies - if the issuer is currently marketing its product or service or will be marketing its product or service in order to achieve its stated business objectives; distribution channels; actual or proposed marketing programs; pricing policy; after-sales service, maintenance or warranties.
(f) Financial plan - historical and anticipated costs related to research and development, production, distribution and marketing of the issuer's product, service or technology; historical and anticipated general and administrative costs, including costs required to maintain a reporting issuer in good standing with the Commission and the Exchange; payment terms under agreements or other arrangements with suppliers; potential revenues and payment terms under agreements or other arrangements with principal customers; costs of financing; royalty obligations; long term liabilities; working capital requirements; availability of credit and other financing alternatives.
PART 8 QUALIFICATIONS OF CONSULTANT AND SPECIALIST
8.1 Qualifications of consultant - The Junior Issuer Underwriter is responsible for determining that the consultant possesses the business experience and education appropriate in the circumstances to enable the consultant to sign the consultant's certificate required by section 91.
8.2 Qualifications of the specialist - The Junior Issuer Underwriter is responsible for determining that the specialist has the appropriate qualifications to assess the feasibility of the technology.
8.3 Conflict of interest - The Junior Issuer Underwriter must satisfy itself that the consultant and any specialist do not have a relationship with the issuer or Junior Issuer Underwriter that, under the circumstances, may lead a reasonable person to conclude that the consultant's or specialist's independence or objectivity could be compromised. Regardless of the conclusion reached above, the consultant and specialist must not own any direct, indirect or contingent interest in any of the securities or assets of the issuer or of any associate or affiliate of the issuer.
PART 9 CERTIFICATES
9.1 Consultant's certificate - Where the Junior Issuer Underwriter is required to obtain an assessment report, each individual, except as provided for in section , who has both prepared any part of the report and is responsible for any of the findings expressed in the report, must sign a separate certificate stating
(a) the individual's name, address and occupation,
(b) the individual's relevant educational background, including areas of principal studies,
(c) the individual's relevant employment history, including a description as to how it relates to the material aspects of the principal business of the issuer,
(d) the individual's consulting experience in the areas of corporate planning and financial analysis,
(e) the individual's membership in any professional organization,
(f) that the individual has carried out all of the review procedures required by section of Local Policy Statement 3-17 and considered all of the factors in section of Local Policy Statement 3-17 that relate to the findings that are the responsibility of the individual,
(g) the period during which the review procedures were carried out,
(h) that the individual has no conflicts of interest as the result of a relationship with the issuer or the Junior Issuer Underwriter, and
(i) that the individual does not own any direct, indirect or contingent interest in any of the securities or assets of the issuer or of any associate or affiliate of the issuer.
Where a consultant is not able to carry out a procedure as provided for in section , the information required by item (f) of the consultant's certificate may state to what extent and the reasons that the procedures were not carried out.
9.3 Specialist's certificate - Where a Junior Issuer Underwriter has retained a specialist, the specialist must sign a certificate that includes the information required by paragraphs (a), (b), (c), (e), (g), (h) and (i) of section 91 and states what procedures were conducted to arrive at the specialist's findings regarding the feasibility of the issuer's technology. DATED at Vancouver, British Columbia, on October 5, 1994.
Douglas M. Hyndman
Chair
The summary prospectus for an industrial issuer where the issuer is required to file a prospectus on Form 12A shall be in the following form. The summary prospectus may be filed under Section 42(2) of the Securities Act with a base disclosure document that complies with Form 12A.
FORM 12A - SUMMARY PROSPECTUS
Securities Act
INFORMATION REQUIRED IN SUMMARY PROSPECTUS OF A JUNIOR INDUSTRIAL ISSUER
GENERAL INSTRUCTIONS
1. The summary prospectus prepared in accordance with this form is a verbatim extract of those sections of the base disclosure document identified below, except where otherwise indicated below.
2. References to "base disclosure document" in the sections required to be extracted from the base disclosure document must be replaced by references to "summary prospectus".
3. Where cross references are included in the sections extracted from the base disclosure document and the item referred to is not included in the summary prospectus, the cross reference should be deleted.
1. FACE PAGE DISCLOSURE
1.1 Extract sections 1.1, 1.2 and 1.3 verbatim from the base disclosure document.
1.2 State in substantially the following form:
2. NAME AND INCORPORATION
3.2 Extract all of section 5.2 verbatim from the base disclosure document excluding the analysis discussion.
3.3 Extract sections 5.3, 5.4, 6.1, 6.2, 6.3, 5.14(a) and 5.6 verbatim from the base disclosure document.
4. RISK FACTORS
Extract sections 8.1(a) and (c), 8.3, 8.4, 8.5, 10.1, 10.2 (a)-(c), 10.2(d)(i) and 10.3 verbatim from the base disclosure document.
6.2 If a principal holder is other than a director, officer or promoter, extract section 11.4 verbatim from the Form 12A base disclosure document.
7.1 Extract section 12.3 verbatim from the base disclosure document.
8. INVESTOR RELATIONS ARRANGEMENTS
Extract item 18 verbatim from the base disclosure document.
Extract section 21.2 verbatim from the base disclosure document.
Extract item 22 verbatim from the base disclosure document.
Extract item 23 verbatim from the base disclosure document.
13.1 The preliminary summary prospectus and summary prospectus must include a certificate in the following form signed by the chief executive officer, the chief financial officer and, on behalf of the board of directors of the issuer, any two directors of the issuer, other than the chief executive officer and chief financial officer, duly authorized to sign and any person who is a promoter of the issuer:
13.2 Where an underwriter is in a contractual relationship with the issuer or holder of securities offered by the summary prospectus, the preliminary summary prospectus and summary prospectus must include a certificate in the following form signed by the underwriter:
Attach the table of contents from the base disclosure document as an appendix.
IT IS AN OFFENCE FOR A PERSON TO MAKE A STATEMENT IN A DOCUMENT REQUIRED TO BE FILED OR FURNISHED UNDER THE ACT OR THE REGULATION THAT, AT THE TIME AND IN THE LIGHT OF THE CIRCUMSTANCES UNDER WHICH IT IS MADE, IS A MISREPRESENTATION.