NIN 95/34 - British Columbia Securities Commission Response to the Request for Comments from the Ontario Securities Commission Task Force on Small Business Financing [NIN - Rescinded]

Published Date:	1995-09-29
Effective Date:	1995-09-28

The Commission is publishing its response to a request for comments from the Ontario Securities Commission ("OSC") Task Force on Small Business Financing (the "Task Force"). The Task Force issued a Proposal for Comment in June 1995.

The OSC established the Task Force in June 1994. The mandate of the Task Force is to review, and make recommendations with respect to, the Ontario regulatory framework governing the raising of equity capital by small and medium-sized business enterprises ("SMEs"). The Task Force has published its Proposal for Comment at an early stage in the process to solicit discussion and comment on the securities regulatory framework governing SME equity capital formation. The Task Force intends to continue in its research with the view to preparing a final report later this year.

The Commission supports certain of the proposals of the Task Force and generally favours measures that could reduce financing costs without eroding investor protection and market integrity. However, the Commission has significant investor protection concerns with the majority of the Task Force proposals. The Commission has prepared a detailed response to the Proposal for Comment, and has strongly recommended that the Task Force seriously reconsider the direction the proposals are taking with respect to fundamental investor protection issues. Many of the proposed recommendations would significantly weaken the regulation of junior issuers at the expense of investor protection. A number of the proposals are directly contrary to the manner in which the Commission has regulated, and continues to regulate, the junior market in British Columbia. Further, in the interest of national uniformity, the Commission has urged the Task Force to involve the Canadian Securities Administrators in the development of initiatives with respect to the junior issuer market.

DATED at Vancouver, British Columbia, on September 28, 1995.

Douglas M. Hyndman
Chair

September 26, 1995


The Ontario Securities Commission
Task Force on Small Business Financing
c/o Goodman Phillips & Vineberg
250 Yonge Street, Suite 2400
Toronto, Ontario
M5B 2M6

Attention: Neill May, Secretary

Dear Sirs/Mesdames:

Re: Ontario Securities Commission ("OSC") Task Force on Small Business Financing (the "Task Force") - Proposal for Comment, June, 1995 (the "Report")

On behalf of the British Columbia Securities Commission ("BCSC") and its staff, we are responding to your request for comments on the proposals that are recommended in the Report regarding small and medium-sized business enterprises ("SMEs"). Although there are certain proposals that we do support in varying degrees, we have significant investor protection concerns with a number of the proposals. This letter identifies the proposals we support and discusses our fundamental concerns, in general, with the proposals that we do not support. We have attached as Appendix "A" staff's specific comments with respect to each proposal. We have also attached as Appendix "B" comments on the references in the Report to initiatives of the BCSC.

We have discussed our concerns with the proposals and our response to the request for comments with the members of our Securities Policy Advisory Committee (which includes representatives of issuers, registrants, venture capitalists, the legal and accounting professions and academics) and with the members of our Securities Legal Advisory Committee. Both committees generally concur with our concerns.

As we understand that the proposals are preliminary in nature, we strongly recommend that the Task Force seriously reconsider the direction the proposals are taking with respect to fundamental investor protection issues. Further, we would urge that you involve the Canadian Securities Administrators ("CSA") in the development of initiatives with respect to the junior issuer market so that the initiatives may be adopted on a uniform basis.

The proposals or suggestions that we support in varying degrees include:

• the accredited investor exemption concept;

• the development of a comprehensive prospectus form specifically for SMEs;

• under appropriate guidelines, the ability to qualify certain previously issued securities under a prospectus, including the suggestions regarding the extension of statutory liability to the secondary market;

• permitting SMEs, under appropriate guidelines, to "test the market"; and

• review of the "closed system", including suggestions to recognize reporting issuers in other Canadian jurisdictions.

The BCSC has had significant experience dealing with issues of concern in the junior issuer market. We agree with the first part of the third guiding principal of the Task Force: "The regulatory regime governing SME capital formation should both balance SMEs' capital formation needs and the investor protection and other objectives of the regulatory regime...." In our view, however, the Task Force recommendations do not achieve that balance. Many of the proposed recommendations would significantly weaken the regulation of junior issuers at the expense of investor protection. A number of the proposals are directly contrary to the manner in which British Columbia has regulated, and continues to regulate, this market. We do not agree with the following major recommendations:

• the elimination of the requirement to have an underwriter execute a certificate in a prospectus prepared by an SME, stating that to the best of its knowledge, information and belief, the prospectus contains full, true and plain disclosure of all material facts,

• the elimination of the requirement to have a registered sales representative involved in a public offering of securities of an SME,

• limiting the auditor's consent to the use of name and inclusion of the auditor's report and eliminating the requirement that the consent contain a statement as to the auditor having read the prospectus and having no reason to believe that there are any misrepresentations in the information contained in the prospectus,

• requiring less disclosure of historical information of an SME, in particular, limiting the requirement to have audited financial statements to only the most recently completed financial year end, permitting management prepared financial statements that are not subject to a review engagement report for prior financial years and eliminating the need to include audited financial statements for any acquired business that is material to the issuer,

• exempting an SME from filing interim financial statements for the first and third quarters of each year,

• eliminating the requirement for audited future-oriented financial information ("FOFI") if existing shareholders agreed to a substantive arrangement whereby some of their shares would be returned to the SME for no consideration or additional shares issued to public investors for no consideration if actual results do not meet those in disclosed FOFI,

• permitting all escrow shares to be released from escrow within one year from the date of the closing of the prospectus offering,

• permitting sales of securities in the exempt market to people who do not satisfy the "need-to-know" test for raising money without a prospectus (the only limit in the "closely-held business issuer" exemption being the number of shareholders and the total amount raised),

• permitting advertising of securities to be issued under an exemption without a mandated disclosure document, thereby opening the exemption to investors who are putting up neither "love money" nor "angel money", and

• proposed changes to the closed system with respect to SMEs only.

These proposals would erode the investor protection provided by the following four key regulatory tools: (1) registration; (2) disclosure; (3) civil remedies; and (4) escrow requirements.

1.Registration

The first key regulatory tool is the reliance on the role of the registrant. In our view, underwriters play a crucial role in the regulatory scheme. They perform a gatekeeper role in determining whether or not it is appropriate to bring an SME to market. Underwriters are also responsible for conducting due diligence with respect to the disclosure provided by an SME. The due diligence conducted by underwriters provides an independent check on misleading disclosure that may be produced by SMEs, intentionally or unintentionally. Without the involvement of the underwriter, the government regulator would be forced to play a much larger role than at present in drafting and reviewing prospectuses and in assessing the merits of offerings. This would place a strain on OSC resources at a time when the OSC already faces severe resource limitations and is reducing its involvement in prospectus reviews.

We understand that the elimination of the underwriter requirement may have been recommended in view of the U.S. position on small business. However, we note that the U.S. has other safeguards in place (e.g., limitations on the share price and on the maximum amount that may be raised) that have not been included in the proposals.

Similarly, registered sales representatives also play an important role in determining whether or not an investment is appropriate for the investor. Eliminating this safeguard will encourage unscrupulous promotion and abusive transactions. In our view, the involvement of underwriters and registered sales representatives in public offerings is much more critical in the junior issuer market than it is in the senior blue chip market.

2. Disclosure

The second key regulatory tool is the requirement to have full, true and plain disclosure in the public offering document and to require that disclosure be provided by reporting issuers on a continuing basis. Eliminating the requirement to have historical audited financial statements, or at least financial statements reviewed by an independent, qualified accountant, and eliminating the requirement for audited FOFI will increase the potential for misleading disclosure. Before we required FOFI to be audited, it was our experience that the assumptions underlying management prepared projections were not supportable and the projections misleading. In addition, significant resources were being wasted by staff having to critique the underlying assumptions that were not supportable.

Interim financial statements for the first and third quarters are important sources of information for investors in a junior issuer, in particular for the first year following its initial public offering ("IPO"). It has been our experience that the funding raised through an IPO is critical for most SMEs and that the business of SMEs is volatile. Therefore, shareholders and potential investors need more information rather than less for SMEs, particularly during the year following its IPO. Issuers' counsel have advised us that quarterly financial statements are not a significant burden for small issuers given that many issuers take advantage of the supplementary mailing list procedures available under National Policy Statement No. 41.

3. Civil Remedies

The third key regulatory tool is to have meaningful civil remedies available in the event of a misrepresentation. Eliminating underwriter liability and limiting auditor's liability reduces the benefits that civil remedies provide in the regulation of the market. Meaningful civil remedies provide incentives for market participants to maintain appropriate standards of conduct and business practice. Reliance on such market discipline helps in achieving the objective of a fair and efficient market. The threat of litigation provides an incentive to underwriters to follow industry standards in performing their gatekeeper function and in conducting due diligence. In the absence of meaningful civil remedies, more pressure falls on the regulator to fill the void. The market discipline provided by civil remedies is an important complement to securities regulation.

4. Escrow Requirements

The fourth key regulatory tool is appropriate escrow requirements. These requirements are important to ensure that promoters and other insiders are not in a position to issue themselves cheap shares, promote the issuer and then sell the cheap shares into the market. Permitting all escrow shares to be released within a year would increase the potential for, and rewards from, excessive promotion and market manipulation. It appears that promoters and insiders are in a position to have issued to themselves virtually an unlimited number of cheap shares and then have all of their shares free trading (out of escrow) within 12 months. This obviously creates opportunities for abusive and oppressive transactions and would likely result in significant OSC staff resources being spent on questioning the fairness of related party transactions.

From our perspective and experience, many of the proposals represent a backward step in the regulation of the junior issuer market and would negatively impact investor protection and the integrity of the capital markets. It would appear to us that the guiding principles underlying many of the proposals is simply to facilitate financing for SMEs without regard for investor protection. The proposals appear to be based on the assumption that SME investors recognize the inherently risky nature of the investments and accordingly are prepared to accept lesser standards. The problem with this assumption is that the proposals do not restrict the investors to sophisticated investors and, even where they purport to do so (e.g., the proposed accredited investor exemption for individuals meeting a net worth or net income threshold), the test for sophistication is questionable (e.g., ability to withstand a loss). Where public investors are able to participate in SME offerings, it is inappropriate from our perspective to impose a lesser standard on these offerings than is generally applicable. Historically, the main objective of securities regulation was investor protection. Although more recently the objectives of securities regulation have expanded to include promoting a fair and efficient market, this should not be at the expense of investor protection. From our perspective, strong investor protection continues to be an essential element of a fair and efficient market having the confidence of investors.

We also query the underlying premise that it is difficult for SMEs to raise money because of the regulatory burden. Listed on page 5 of the Report is a summary of inter-related practical constraints. Although included in that list is the cost of complying with regulatory requirements for small scale public financing transactions, there are certain other constraints that we would suggest impact the raising of capital by SMEs equally if not more than the regulatory burden. We understand, based on discussions with participants in our local junior market, that good SMEs do not have difficulty in raising capital. In fact, for most venture capital investors it is difficult to find good SMEs to invest in. We note that, at page 21 of the Report, the Task Force acknowledges that labour-sponsored venture capital corporations are having difficulties in finding appropriate SME investments. If this is the case, we are left wondering why the proposals recommend abolishing requirements that are fundamental to securities regulation to facilitate SME financings. A radical reduction of investor protection standards should not be considered in the absence of concrete evidence, beyond mere anecdotal comment, that SMEs experience difficulties in raising financing. It would appear to us that the proposals would promote public financings of SMEs that may not be appropriate for the public.

Without the basic gatekeeper function performed by underwriters, there is a high risk that there will be an influx of poor SMEs into the market, many of which may not be ready to go public. Start-up businesses are subject to a high failure rate and, when their securities are offered to the public, they are prone to fraud and manipulation. Many of the Task Force proposals would eliminate the fundamental regulatory requirements that have been developed over the years to address these problems. If the proposals are introduced, many more investors will be victimized by fraudulent, abusive and unfair practices in the securities market. Not only would this impact on SME financing in the future, it would affect the general perception of and confidence in the securities market, particularly where investor losses are reported by the press. Investors would not distinguish the SME market or players from the market generally. Further, where the losses are sustained by investors residing abroad, the integrity of the Canadian capital markets would be questioned and Canada's reputation for fair markets would be damaged. This would affect our ability to compete in the international market.

We do not agree with the statement that there are material differences within the regions in Canada with respect to junior issuer markets. In our view the problems that affect our local market also occur in the Ontario junior issuer market. Cases such asAatra Resources and Permanent Acceptance, and the recent press report on the Canadian Dealing Network ("CDN") ("Companies taking advantage of loose CDN rules", The Financial Post, May 26, 1995) show that the Ontario market is not immune from problems that occur in other markets. In our view, a junior issuer market is more susceptible to excessive promotion and manipulation than is a market for more senior issuers. We do not agree that increased enforcement will adequately address this issue.

We note that the Task Force's mandate is to consider ways to facilitate the raising of equity capital by SMEs in view of the importance to the local economy. Yet, the proposed recommendations are not limited to local Ontario SMEs. In our view, these initiatives, if implemented, will erode public confidence and existing national standards, and affect the regulation of the junior issuer market in every other Canadian jurisdiction as well as the reputation of the Canadian capital markets. Most international investors do not distinguish between the Ontario market and markets in other provinces. The market is viewed as the Canadian market.

If Ontario proceeds with the Task Force proposals, other jurisdictions will face a difficult choice. Deregulation of the junior issuer market in Ontario, and the reduction in the costs of complying with regulation that will result, will attract both legitimate and illegitimate SMEs. Adopting similar rules to protect our competitive position would expose our investors to the same fraud and abuse we foresee under the Ontario proposals. Failure to adopt similar rules would create disharmony and non-uniformity in securities regulation, the very problem the CSA has been trying to deal with for years, and would probably necessitate the erection of additional barriers to prevent securities issued in Ontario flowing into our jurisdiction. Either of these outcomes would be undesirable.

Further, the Task Force proposals, if implemented, would likely result in pressure by established companies for similar relief. It will be very difficult to rationalize not providing the relief. From our perspective, the elimination of requirements that are fundamental to investor protection is not appropriate for junior or senior issuers.

If Ontario wishes to liberalize the regime for small business equity financing, we suggest that a more measured approach should be adopted. In this regard, we recommend that you consider the initiatives that have been adopted in British Columbia. For example, there are several unique exemptions available under the British Columbia Securities Act and Regulation that are aimed at the junior issuer market. These include the "50 purchaser" exemption, "$25,000 purchase" exemption, and "friends and family" exemption (ss. 117(a), (b) and (i) of the Regulation). These exemptions have facilitated the raising of capital by SMEs. There have, however, been abuses. We are currently considering revisions to the exemptions to address areas of abuse.

We have also developed two new prospectus forms (Forms 12A and 14A), primarily aimed at the junior issuer market, with detailed instructions that provide a comprehensive guide to the disclosure requirements. The intention was to create a form that provides the issuer with the information it needs to produce a prospectus that meets the regulatory requirements and thus reduce the time and expense to the issuer for staff's review of the prospectus. The forms have been well received by the industry. We also understand that prospectuses prepared on the basis of these forms have been well received in the U.S. for cross-border offerings. We are currently working on two new exchange offering prospectus forms based on Forms 12A and 14A. In our view these new prospectus forms will not only reduce the time and expense to issuers and improve the quality of disclosure but they will further the Commissions main objective of investor protection.

Conclusion

As noted, there are a number of proposals that we do support in varying degrees. With respect to the balance of the proposals, we are of the view that there are significant flaws from a regulatory perspective. We understand that the proposals are preliminary in nature and that the Task Force intends to continue its research with a view to preparing a final report later this year. In our view, the Task Force should seriously reconsider the direction that the proposals are taking and focus more attention on investor protection issues. Further, we suggest that given the impact the proposals are likely to have on the integrity of the Canadian capital markets and on Canada's international reputation, the CSA should be involved in the development of a national initiative with respect to the junior issuer market.

If you have any questions concerning the above, please do not hesitate to call me. We are willing to discuss our concerns further with members of the Task Force.

Yours truly,

Douglas M. Hyndman
Chair

I. Exempt Offerings

1. We recommend the creation of a new prospectus exemption for issuances of securities by "closely-held business issuers". The exemption could be used only by issuers who have fifty or fewer security holders, after giving effect to the proposed financing but exclusive of accredited investors (as described below). The lifetime aggregate amount of securities sold under this exemption would be limited to $3 million per related group of issuers.

We have significant concerns with this proposal.

The purpose of the prospectus requirement is to ensure that a public investor is provided with accurate and comprehensive information so as to enable the investor to make an informed investment decision. Exemptions from the prospectus requirement are available where the "need-to-know" test is otherwise satisfied by, for example, the sophistication of the investor or relationship to the issuer. It appears that the sole purpose of the proposed exemption is to help the issuer without regard for the "need-to-know" test.

The proposed exemption does not require investors to be sophisticated or familiar with the issuer or business. It does not exclude the public from participating nor does it restrict participation to specific types of investors. We query the logic in not requiring that investors meet some criteria particularly since it is aimed at "love" investors (as defined in the Report at page 24, to be friends, relatives and business associates) and "angel" investors (as defined in the Report at page 25, to be informal venture capitalists). If the purpose of the proposal is to address problems with the interpretation of concepts in existing exemptions, (e.g., "offered for sale to the public", "net worth and investment experience") it would appear to us that perhaps the solution is to better define the concept rather than eliminate the requirement.

The Task Force indicates at page 41 of the Report that the proposal is similar to the U.S. Securities and Exchange Commission ("S.E.C.") Rule 506 of Regulation D under the U.S. Securities Act of 1933. However, we understand that Rule 506 requires that the issuer: (1) reasonably believe prior to making a sale to a non-accredited investor that the investor has the knowledge and experience in financial and business matters such that he is capable of evaluating the merits and risks of the prospective investment, (2) provide some disclosure to the investor, and (3) not engage in general advertising.

In our view, the proposal needs to be rethought. It should be limited to the target investors identified in the Report, i.e., "love" and "angel" investors. We suggest that the proposed prospectus exemption should:

1. be restricted to "love" and "angel" investors, or continue to require the distributions not be made to the public but include a safe harbour definition of individuals that would not be considered the "public" (e.g., see B.C. NIN#89/29);

2. require an offering memorandum be provided to investors that do not qualify as "love" investors; and

3. preclude advertising unless an offering memorandum is provided.

We agree that there is a potential for unscrupulous promoters to rely upon the exemption given there are no restrictions of any nature on the type of investor to whom an SME can issue securities. Accordingly, we recommend as discussed above that the class of investors be restricted. Further, we agree that an anti-avoidance provision limiting the number of times that a promoter uses the exemption should be adopted so that promoters are precluded from circumventing the limitations by establishing separate issuers all of whose assets are directed to the same business enterprise. We acknowledge, however, that such a provision is difficult to enforce.

It is unclear why the Task Force did not adopt the requirement under the "private" issuer exemption that requires restrictions on the transferability of securities be incorporated in the issuer's constating documents or, alternatively (as permitted in B.C.), in one or more agreements between the issuer and the holders of its securities. Further, it is unclear what resale restrictions would apply to this exemption.

In British Columbia, we have three unique exemptions available to most "love" and "angel" investors. These are the "50 purchaser" exemption (s.117(a)), the "$25,000 purchase" exemption (s.117(b)) and the "friends and family" exemption (s.117(i)). Section 117(a) of the Regulation permits an issuer to distribute securities to not more than 50 different purchasers over a 12 month period where:

(a) the purchaser is:

1 a sophisticated purchaser; or

2 a spouse, parent, brother, sister or child of a senior officer or a director of the issuer, or of an affiliate of the issuer, held directly or through a holding company;

(b) there is no advertising; and

(c) an offering memorandum prepared in accordance with the required form is delivered to the purchaser.

Section 117(b) of the Regulation permits an issuer to distribute securities to a sophisticated purchaser where the aggregate acquisition cost to the purchaser is not less than $25,000 and an offering memorandum prepared in accordance with the required form is delivered to the purchaser.

Section 117(i) of the Regulation permits issuers listed solely on the Vancouver Stock Exchange ("VSE"), known as "exchange issuers", to issue securities to not more than 25 different purchasers over a 12 month period where:

(a) the purchaser is a spouse, parent, brother, sister, child or close personal friend of a senior officer or director of the issuer or an affiliate of the issuer, held directly or through a holding company;

(b) there is no advertising;

(c) if an offering memorandum is delivered to the purchaser, it must be in the required form; and

(d) the amount raised under the exemption during the 12 month period does not exceed $250,000.
We have been reconsidering the definition of sophisticated purchaser. Currently the definition focuses on the ability of the purchaser, by virtue of his net worth and investment experience or his consultation with or advice from a registrant, to evaluate an investment on the basis of information respecting the investment provided by the issuer. The definition does not include a bright line test. As a result, there have been problems.

Accordingly, we are proposing to add a bright line test that adopts the following net worth and net income thresholds:

(a) the purchaser, either individually or jointly with the purchaser's spouse, has a net worth of not less than $400,000, or

(b) the purchaser has in each of the 2 most recent calendar years, and reasonably expects to have in the current calendar year, an annual net income, before taxes, of not less than $75,000, or jointly with the purchaser's spouse, of not less than $125,000.

Our proposed definition of sophisticated purchaser is set out in Appendix "C".

The availability of the three exemptions has assisted SMEs in raising capital. Based on an internal study, we estimate that, during the 1994 calendar year, the following amounts were raised in British Columbia under each of the exemptions:

ExemptionMillions

S. 117(a) - 19.77
S. 117(b) - 220.59
S. 117(i) - 18.88

We suggest that the Task Force give serious consideration to the adoption of similar exemptions in lieu of the proposed closely-held business issuer exemption. In our view, these exemptions better balance the SME's need for capital and investor protection concerns

2. We recommend that SME issuers be required to provide a generic information statement about the nature of SME investments to each investor (other than accredited investors) to whom securities are sold by such issuer or selling security holder in reliance upon the closely-held business issuer prospectus exemption.

In our view, the generic information statement would not provide a public investor (permitted to participate in offerings under the proposed closely-held business issuer prospectus exemption) with sufficient information to make a determination as to whether or not the particular investment is appropriate. The exemptions available in British Columbia for "angel" investors (ss.117(a) and (b) of the Regulation) not only require an offering memorandum, but also require that the offering memorandum be prepared in accordance with a form specified under the Regulation. Further, in our view, a statement in the generic document informing potential investors in general as to what information the investor should ask the issuer for and assess before making an investment decision is not sufficient to provide any comfort that the "need-to-know" test has been met. Most unsophisticated investors will not understand or act upon this statement. In our experience, many public investors willingly execute statements acknowledging their sophistication without appreciating the meaning of the statement.

We agree with the suggestion that investors making claims against issuers or selling security holders should be deemed to have relied (or, alternatively, a rebuttable presumption of reliance) on an information statement containing specific information regarding the issuer. Without information about the issuer, deemed reliance is meaningless and may indeed be used against the investor (e.g., if the statement warns investors to ask for additional information and the investor does not inquire further, this may be held against the investor in a negligence action where reliance must be proved).

3. We recommend the establishment of a new exemption from the prospectus requirements of the Securities Act for a class of "accredited investors", which class shall include (i) a list of prescribed institutions, (ii) corporations having $5 million or more in assets, (iii) persons with a net worth of not less than $1 million or net income over a specified threshold and (iv) the issuer's management. There would be no limitation on the number of solicitations, number of purchasers, or on the number of times the exemption could be relied upon. Generally, no disclosure materials would be required to be provided to accredited investors.

In general, we support the establishment of a new exemption from the prospectus requirements for a class of "accredited" investors.

With respect to the inclusion of investors that meet a particular net worth or net income threshold in the classes of accredited investors, set out in paragraphs (h) and (i) on page 45 of the Report, we note that the thresholds selected are higher than the thresholds currently proposed for our "sophisticated purchaser" definition. (See Appendix "C"). The higher threshold may be appropriate given the lack of an offering memorandum. However, we query limiting the test to a net worth or net income bright line test. In our view, having the resources to withstand a loss is not an adequate proxy for sophistication. We suggest the financial test be supplemented by an additional requirement that the individual have the knowledge or experience to evaluate the investment opportunity. Our proposed definition of "sophisticated" purchasers (see Appendix "C") would require an investor to execute an acknowledgment that he or she is both:

(a) able to evaluate the risks and merits of the prospective investment; and

(b) meets the net income or net worth test.

The issuer may not rely on this acknowledgment where the issuer has reasonable grounds for believing the acknowledgment is false.

We question the inclusion of certain relatives and spouses in paragraphs (k) and (l) on page 46 of the Report as classes of accredited investors.

We further question the inclusion of directors and officers in paragraph (i) on page 45 of the Report as a class of accredited investors. The employee exemption in the Ontario Securities Act combined with the exemption in Ontario's rules (In the Matter of Trades by an Issuer in Securities of its own issue to Senior Officers, Directors, Personal Holding Companies and Registered Retirement Savings Plans and a Controlling Shareholder in Securities of an Issuer to Employees, Senior Officers, Directors, Personal Holding Companies and Registered Retirement Savings Plans, issued 14/11/94) covers directors and officers.

We query the proposal that a disclosure requirement need not be mandated for accredited investors, in particular where advertising is permitted. In our view advertising should only be permitted where an offering memorandum that includes a contractual right of action is provided by the issuer. Further, in our view, an offering memorandum should be required for certain categories of accredited investors. We note that our legislation requires an offering memorandum to be delivered to sophisticated purchasers where the SME intends to rely on the "50 purchaser" exemption or the "$25,000 purchase" exemption. To address concerns that an offering memorandum requirement means a prospectus-like document, we have adopted a form of offering memorandum, Form 43, that sets out the items of disclosure required.

It is unclear why the exemption is limited to prospectus requirements in view of the proposals to provide registration exemptions for public offerings of SMEs. Was this intentional?

4. We propose that the existing "private company", prescribed institution, exempt purchaser, $150,000, seed capital and government incentive securities exemptions and related provisions be eliminated.

We query the need to eliminate the exempt purchaser exemption. The ability to designate an investor as an exempt purchaser provides the regulator with the ease and flexibility to address specific circumstances on a case by case basis. It allows the regulator to test whether or not it is appropriate to extend the definition of accredited investor to include a new class of investors without having to make a definitive decision that cannot easily be changed given the formalities of the rule-making process.

In general, we question the proposals regarding changes to the exemptions being considered for SMEs only. It would appear to us that since the proposal covers exemptions that are an integral part of the "closed system", they should be considered as part of the reassessment of the "closed system". We suggest that additional research on the impact of the proposals in the market needs to be undertaken.

5. In addition, the Task Force recommends generally that the liberalization of securities marketing reflected in Draft National Policy Statement No. 43 of the CSA should be equally applicable to exempt offerings made to accredited investors. The growing variety of marketing media may facilitate SME capital formation and should be accessible to SMEs seeking to raise equity capital without requiring the preparation and delivery of an offering memorandum with prospectus-like disclosure (thereby undermining the benefits of the prospectus exemption).

We disagree that unrestricted advertising ought to be applicable to the two proposed exemptions. In our view, where an issuer intends to advertise an exempt offering an offering memorandum should be provided. To address concerns that an offering memorandum means a prospectus-like document, we suggest the OSC adopt a form of offering memorandum similar to our Form 43.


II.Small Public Offerings

1. We recommend the development and adoption of a revised prospectus form (the "Small Business Prospectus Form") which utilizes a simplified question and answer format and includes comprehensive instructions concerning completion of the form. The disclosure requirements of the form would be oriented to issues relevant to SMEs and/or to investors in SMEs. The Small Business Prospectus Form could only be used by an issuer with not more than $10 million in gross revenues in its most recently completed financial year. There would be no limit on the amount of money which could be raised using the Small Business Prospectus Form. Offerings under the form would be limited to offerings of common shares.

We support the development and adoption of a revised prospectus form for SMEs and indeed have already developed such forms.

The BCSC has recently adopted two new forms, Form 12A and Form 14A, applicable to junior industrial issuers and natural resource issuers, respectively. The forms were developed using the comprehensive instructions incorporated in the SCOR Q&A format adopted by the U.S. S.E.C. and the majority of the U.S. States. We initially focused on a narrative format that would provide sufficient instructions so that issuers could develop a comprehensive and defensible prospectus document. At that time we considered the Q&A format. We issued a request for comment on whether the format adopted should be changed to a Q&A format. As little response to the request for comment was received and we were very close to finalizing the form, we continued with the narrative format. In our view, the definitive instructions of Forms 12A and 14A, are comparable to the Q&A format. It is the Q&A instructions that make the document useful to preparers of prospectuses.

Both forms have been well received by the industry. We understand that cross-border offerings using prospectuses prepared on the basis of the forms have also been well received in the U.S. We are working on finalizing two exchange offering prospectuses based on the two forms. We anticipate that the time spent by staff in reviewing prospectuses prepared using these forms should be reduced.

To provide investors with a shorter, user friendly document, we have also developed a Summary Prospectus Disclosure System similar to the simplified prospectus and annual information form available to mutual fund issuers.

We encourage the Task Force to consider these initiatives as part of its continuing review.

With respect to the recommendations regarding the general disclosure requirements, we note the following:

1. We disagree with the view that historical information is generally of limited relevance when assessing an investment in an SME. Historical information provides investors with important information regarding the track record of the issuer and of its management. In general, an SME's historical financial performance is spotty. In our view, poor performance should not be hidden from investors. Further, in our experience, the business of an SME is volatile and therefore there is a need for more information rather than less. The lack of historical information may increase the potential for promotional information being included in the prospectus.

We do agree that an SME should provide information regarding its business plans, the obstacles it anticipates in realizing business goals and its overall strategy in the prospectus. We refer you to our Form 12A, which requires disclosure of business objectives expected to be accomplished with the proceeds of the offering and milestones. We note, however, that where information that meets the definition of FOFI is provided, it is required to be prepared in accordance with National Policy Statement No. 48.

2. We disagree with the proposal to limit the historical financial information and to eliminate the requirement to audit the financial information beyond one year. Although we have in the past, on a case-by-case basis, waived the audit requirement set out in Section 104 of our Regulation, we have done so only where the issuer includes financial statements for each of its last 5 financial years, and:

(a) at least the last completed financial year has been audited;

(b) the prior periods are subject to a review engagement report; and

(c) any FOFI provided complies with National Policy Statement No. 48.

Notwithstanding our willingness to provide the relief, we seldom receive requests for the relief.

Audits, or at least a review by an independent qualified accountant, provide an independent assessment of the financial information prepared by management and, accordingly, comfort to investors as well as the regulator that the financial information presented is prepared in accordance with generally accepted accounting principles ("GAAP"). This independent assessment is important particularly in light of the information asymmetry referred to on page 27 of the Report. Further, the Task Force acknowledges on page 60 of the Report that most misrepresentations in prospectuses are either in the financial statements themselves or the financial information derived from the financial statements. In our view, eliminating the independent review requirement will increase the potential for misleading disclosure and result in significantly more staff resources being spent on assessing the management prepared financial statements.

We note that currently there are problems with audited financial statements. The 1994/1995 Final Review Program Report issued by OSC staff found that a number of the annual and interim financial statements, and management discussion and analysis ("MD&A") prepared by the 100 companies whose statements were subject to review by OSC staff, had significant deficiencies in the choice of accounting policies, application of GAAP or disclosure in the financial statements and MD&A. There are likely to be even more serious problems with management prepared financial statements that are not subject to an independent review.

We do not understand the suggestion that for comparison purposes previous years unaudited information can be compared with audited information. In our view, there is little value in comparing information prepared using different standards.

We query the premise that a liberal waiver ought to be granted on the basis that issuers have encountered practical difficulties in providing historical information and audited information. It has been our experience that practical difficulties arise only in the context of business acquisitions that are divisions of another issuer. In these circumstances, issuers generally have been able to provide audited operating statements of the business acquired.

We also disagree with the proposal that a liberal waiver be provided with respect to audited information regarding significant acquired businesses. In our view where the acquired business is material, comparative audited balance sheets and audited income statements for the last 3 years should be provided.

3. Our Forms 12A and 14A do not require the disclosure of dilution. However, both forms require disclosure of the percentage of the issued and outstanding voting securities, as at the completion of the offering, to be held by insiders (including promoters and holders of escrow securities) as a group and the public as a group.

4. We are of the view that the $10 million dollar gross revenue selected as the threshold for SMEs eligible to use the Small Business Prospectus Form, is a high threshold. Most, if not all, natural resource issuers (including SMEs with very large market capitalizations) and biotechnology issuers would be able to meet that threshold.

2. We propose that the rule against pre-marketing be modified to permit issuers whose securities are not publicly traded to test the market for their securities prior to the filing of a preliminary prospectus.

We support further consideration of this proposal. Additional work needs to be undertaken to develop appropriate guidelines. At a minimum, the guidelines should prohibit solicitation of consideration and the conclusion of a binding agreement or commitment prior to the delivery of a prospectus, and should mandate a cooling off period. We agree that the use of pre-marketing should be limited to IPOs to preclude investors who are solicited in advance of a preliminary prospectus capitalizing on their knowledge of the intended issue.

We note, however, pre-clearance of pre-marketing documents would require additional resources of the regulator. In our view, it would be preferable that pre-marketing materials not be pre-cleared, but that the SME be required to advise regulators of its intention to "test the market".

3. The Task Force proposes that the form of auditors' consent to be filed together with a prospectus prepared in accordance with the Small Business Prospectus Form require a consent only to the reference to the auditor's name and inclusion of the auditor's report in the prospectus and that such consent need not include any statement as to the auditor having read the prospectus and having no reason to believe that there are any misrepresentations in the information contained therein.

We disagree with the proposal that the auditor's consent need not include a statement as to the auditor having read the prospectus and having no reason to believe that there are any misrepresentations. As the statement simply provides comfort that the financial information presented in the prospectus is consistent with the financial statements which the auditor's report relates, in our view the requirement is not onerous. As noted by the Task Force, most misrepresentations in prospectuses are either in the financial statements themselves, or the financial information derived from the financial statements. Requiring auditors to read the prospectus is an important check on the financial disclosure in the prospectus that should be encouraged by requiring the statement in the consent.

Although we disagree that auditors' statutory liabilities ought to be limited to errors or omissions in the financial statements themselves, we do agree that some consideration ought to be given to limiting in some manner auditor liability in proportion to their responsibility for misrepresentations in the prospectus.

4. The Task Force proposes that SMEs be exempt from the requirement to file and distribute to its security holders interim financial statements for the first and third quarters of each financial year.

We disagree with the recommendation that SMEs be exempt from the requirement to file interim financial statements for the first and third quarters of each financial year. It is both prudent and good business practice to prepare financial statements on a monthly basis, or at least on a quarterly basis. Since most SMEs prepare the interim financial statements regardless of whether they are filed, there is no significant additional cost in filing the statements. Filing the statements with the regulator makes the statements available to the public. We understand from issuers' counsel that preparing and filing such statements is not a significant burden for small issuers.

There are additional costs associated with the requirement to deliver interim financial statements to security holders. However, issuers that comply with the supplementary mailing list requirements of National Policy Statement No. 41 are exempt from the requirements to deliver interim statements to security holders who have not specifically requested the statements. Accordingly, there is a mechanism in place currently that addresses the cost concerns.

As previously noted, since an SME's business is volatile there is a need for more information rather than less, in particular for the first year following the IPO. Eliminating the filing of interim statements leaves the market without any information for a long period of time. Not only do we require issuers to file interim financial statements, we require exchange issuers in British Columbia to file quarterly reports. Exchange issuers are required to provide a reconciliation of the actual use of proceeds with the statements in the prospectus regarding the use of proceeds, limited MD&A of financial results and a discussion of investor relation activities in their quarterly report.

We note that in the OSC 1994/1995 Final Review Program Report, staff found that in comparison to disclosure provided by U.S. issuers, the interim financial disclosure provided by Canadian issuers was deficient. Accordingly, OSC staff is considering adopting more rigorous standards. The Task Force proposal appears to be inconsistent with OSC staff direction.

III. Future Oriented Financial Information

1. The Task Force understands that staff of the Commission may propose changes to National Policy 48; accordingly, the Task Force is not proposing specific changes to the FOFI regime applicable to SMEs at this time. Generally, however, the Task Force believes that substantive restrictions should not be imposed on FOFI used in connection with offerings made under the closely-held business issuer or accredited investor exemptions. Disclosure regarding the considerations in assessing FOFI should be included in the generic information statement referred to in paragraph I.2 above if FOFI is provided.

We disagree with the suggestion that restrictions not be imposed on FOFI used in connection with exempt offerings. As noted in the Report at page 64, two OSC staff surveys tracking the actual operating results of selected reporting issuers that had previously used FOFI in connection with distributions, found FOFI figures for revenues and net earnings tend to significantly exceed actual results. This finding is higher for issuers classified as start-up issuers. Permitting the use of unaudited FOFI in offering memoranda in light of the evidence that the audited figures tend to be unreliable does not appear to be prudent. The use of unaudited FOFI increases the potential for misleading information. As previously noted, prior to requiring FOFI to be audited, our experience has shown us that assumptions underlying management prepared projections were not supportable and projections misleading.

2. The Task Force believes that FOFI is generally more important for SMEs than for larger enterprises. At the same time, the requirements of National Policy 48 impose a relatively greater burden on SMEs since SMEs will often have more difficulty in preparing FOFI and auditing the FOFI will be more time-consuming and costly, if it can be audited at all. As a result, the Task Force believes that reform may be necessary. The Task Force believes that more frequent use of ranges for FOFI by SMEs might mitigate the above problems and also result in more appropriate FOFI being presented. The Task Force also believes consideration should be given to developing approaches to FOFI that would not require it to be audited. In that context, the Task Force considered an approach to the use of FOFI by SMEs that it believes should be given further consideration. Under this approach, SMEs would not be required to have FOFI audited if existing shareholders agreed to a substantive arrang ement whereby some of their shares would be returned to the SME for no consideration or additional treasury shares would be issued to public investors for no consideration if actual results do not meet those in the disclosed FOFI. The terms of the arrangement would normally be a matter for negotiation between the shareholders of the SME and the prospective investors (represented by an underwriter if an underwriter is involved).

We strongly disagree with the proposal that restrictions should not be imposed on SMEs who use FOFI in prospectuses. There are problems with start-up issuers using audited FOFI given the lack of a track record to base FOFI on. The fact that audit firmsfind it difficult or are unable to express an audit opinion on an SMEs FOFI indicates that FOFI by SMEs tend to be unreliable. Eliminating the audit requirement because of cost issues does not appear to be prudent in light of the evidence provided by the OSC staff surveys that FOFI tends to be unreliable. Without the audit requirement, we expect that there will be an increase in the problems with the use of FOFI. We anticipate that FOFI prepared without the independent assessment of an auditor will generally not be realistic and will likely be used by unscrupulous promoters to "hype" the share price. The potential for abuse is further compounded where an underwriter is not involved.

Prior to requiring FOFI to be audited, significant resources were being wasted by our staff having to critique the underlying assumptions that were not supportable. If the audit requirement of FOFI were eliminated, significant OSC staff resources would be required in order for the OSC to satisfy itself that the FOFI was not misleading.

In our view, the use of ranges where FOFI is unaudited would not mitigate the unreliability of the data. The use of ranges in the context of audited FOFI is a proposal that is worth further consideration to address current concerns with audited FOFI.

We do not agree that a requirement to have existing shareholders agree to a substantive arrangement whereby (1) some of their shares would be returned to the SME for no consideration, or (2) additional treasury shares would be issued to the public investors for no consideration, where actual results do not meet those in the disclosed FOFI, is sufficient to mitigate the unreliability of the data. The OSC staff survey results cited show that FOFI will almost always exceed actual results. These results are based on a review of FOFI that is audited. Thus, the agreed upon arrangements would likely almost always be invoked.

Further, the remedies provided under these arrangements are not satisfactory from our perspective. Imposing requirements on existing shareholders is not appropriate when FOFI is used by an SME after the SME has gone public. Requiring the existing shareholders to return their shares, in our view, is a meaningless deterrent when the shareholder will likely have sold the shares (which are not subject to hold periods or onerous escrows under the Task Force proposals) in response to the increase in share price once positive FOFI figures have been released. Requiring additional securities of a worthless issuer to be issued to the public security holder is also, in our view, a meaningless deterrent.

To our knowledge the Canadian Institute of Chartered Accountants is the only organization that has created any meaningful discipline for the preparation of FOFI.

We understand that the safe harbour provisions currently being contemplated in the U.S. for FOFI would not apply to "penny stocks" or "blank check" offerings. Many issuers that fit the definition of SME in the proposal are excluded from the U.S. safe harbour for FOFI.

As previously noted, we do agree that certain forward-looking information ought to be provided. Under our Form 12A , issuers are required to state their business objectives expected to be accomplished with the proceeds of the offering and milestones and provide a description of how they intend to achieve those milestones. We do not, however, relieve issuers from the requirement to comply with National Policy Statement 48 where the information qualifies as FOFI.


IV. Escrow Requirements

1. The regulatory escrow requirements should be changed in the following respects:

A. The credit for net tangible assets should be eliminated from the calculation of the number of shares subject to escrow requirements, and clause 38(1)3 of the Regulation should be repealed.

B. The escrow release requirements should be standardized for all issuers, to provide that one-third of the shares are free from escrow, one-third are to be released six months after the closing date of the offering, and the remaining one-third are to be released on the first anniversary of the closing date.

C. Escrow requirements should apply to Related Security Holders (as defined in OSC Policy 5.9) individually so that two-thirds of each Related Security Holders shares are escrowed without any possibility of one Related Security Holder agreeing to escrow more so that another can have all or a larger percentage of his, her or its shares free from escrow. Transfers among Related Security Holders should be permitted only for compassionate reasons, including death or bankruptcy.

In addition, for the reasons discussed below, we recommend the repeal of sector-specific regulatory regimes, including OSC Policy 5.2 which includes escrow requirements for junior natural resource issuers.

We have significant concerns with respect to this proposal. Although we agree that escrow calculations ought to be simple, the solution recommended is tantamount to no escrow at all. In our view escrow requirements are necessary to fulfill two objectives: (1) to ensure that cheap shares issued to insiders are not sold to the public at inflated prices; and (2) to provide an incentive for management to diligently support the affairs of the issuer.

We strongly disagree with reducing the escrow period to one year. In our view, the one year escrow period is inappropriately liberal. The imposition of a one year escrow does not provide any incentive for management to support the issuer beyond one year. Most juniors need more than a year to become successful. Further, start-up issuers are easy targets for manipulation. A short escrow period makes it easier for unscrupulous promoters to engage in manipulation.

We agree that credit for net tangible asset is not necessarily appropriate, particularly for high-tech issuers with few assets. However, the use of net tangible asset in terms of validating the decision to permit a certain number of the cheap shares issued to be free from escrow, does provide some comfort. The elimination of this requirement without some replacement measure is, in our view, inappropriate. Requiring that one-third of each related security holder's shares be escrowed for 6 months and one-third of each related security holders' shares be escrowed for a year does not address the concern that promoters and issuers are in a position to issue themselves shares at prices significantly below the price at which the shares are sold to the public, then promote the issuer and sell the shares within one year to the public at inflated prices.

We suggest the determination of whether or not the shares ought to be escrowed should depend on whether fair consideration has been paid for the shares. We note that the VSE's new seed share matrix requires shares to be held for varying lengths of time depending on the price paid relative to the IPO price and the length of time the shares have been held prior to the IPO.

It appears that under the proposal, virtually an unlimited number of cheap shares could be issued to promoters and insiders. We suggest that a cap be imposed on the number of cheap shares that can be issued to address this concern.

Our current escrow requirements are more onerous than the OSC's escrow requirements imposed under OSC Policy Statement 5.9. Release under B.C.'s escrow requirements is not time based. Rather, for industrial issuers it is based on performance measures. The Task Force's proposals makes the differences more extreme. We are reconsidering our current requirements to provide some flexibility in the release mechanism applicable. In particular, we are considering the adoption of a part-time, part-performance release mechanism similar to the Toronto Stock Exchange Founder Stock Policy. We would be pleased to work with the CSA in developing a national policy on escrow requirements for SMEs. In our view, this area requires harmonization of regulation so as to preclude forum shopping.

V. Registration Requirements

1. We recommend that the requirement that an underwriter sign a certificate in a prospectus prepared by an SME stating that to the best of its knowledge, information and belief,the prospectus contains no misrepresentation be eliminated.

We strongly disagree with the recommendation that an underwriter not be required to sign a certificate in a prospectus prepared by an SME. As noted above, underwriters play a crucial role in the regulatory scheme. In addition to their gate-keeping role in determining whether it is appropriate to bring the SME to market, they also perform a due diligence function with respect to the accuracy of the disclosure. Meaningful civil remedies provide an incentive for market participants to maintain appropriate standards of conduct and business practice. Reliance on market discipline helps in achieving the objectives of a fair and efficient market. The threat of litigation provides an incentive to underwriters to follow industry standards in performing their gatekeeper function and in conducting due diligence. In the absence of meaningful civil remedies, it will be incumbent on the OSC to fill the void. This will place a strain on OSC resources at a time when the OSC already faces severe resource limitations.

We question the proposed elimination of a fundamental regulatory requirement on the basis of anecdotal comment that there is a general disinclination in the national dealer community to participate in the financing of SMEs. In British Columbia, there are a number of dealers who serve that market. We query how the proposal can purport to achieve the right balance between SME's capital formation needs and investor protection when the proposal takes away investor rights. We also note that the remedies available to investors where the due diligence requirements have not been met, in most instances, is the only real remedy for aggrieved investors where the issuer is insolvent.

If the intent of the proposal is to reduce the cost of using registrants, in our view the elimination of the due diligence requirement will not likely reduce these costs where a registrant is still involved. Underwriting fees or commissions will likely remain at the current levels. Further, in our view, in the absence of a mandatory requirement, it is likely that SMEs will not involve underwriters or registered sales representatives in SME public offerings because of costs. Moreover, it is unlikely that unsophisticated investors will demand the involvement of an underwriter.

We also note that where SMEs choose not to use a registered sales representative in view of the proposal to eliminate the requirement, it is unlikely that underwriters would want to be involved.

Without the involvement of an underwriter, there is a high risk that there will be an influx of poor SMEs into the market. Given the high failure rate of SMEs and the high risk of manipulation of small capitalization securities, it is likely that many unsophisticated investors will lose their investments, damaging confidence in the market and regulatory system.

Given the definition of SMEs is based on a high gross revenue threshold, we note that virtually all natural resource issuers and biotechnology issuers would be able to take advantage of this exemption since it is frequently many years before an issuer earns revenues from successful projects.

We understand that this proposal may be based on the U.S. position. However, we note that the U.S. imposes limitations on the available exemptions that has not been incorporated in the proposal (e.g., limits on share price and the amount that may be raised). Further, we understand that a great deal of resources are expended by U.S. State regulators to assist in preparing prospectuses under the SCOR Q&A format where there is no professional advisor. Accordingly, any proposal to adopt a similar type of prospectus together with eliminating the involvement of registrants should contemplate the additional resources that the OSC would require to process such prospectuses.

2. The requirement that a registrant must be involved in a public offering in its professional sales role should be eliminated.

We disagree with the proposal that the registration requirement be eliminated for SMEs and their officers and directors. The registration requirement seeks to ensure that industry participants not only meet proficiency requirements, but will conduct activities with integrity and with the interest of the client in mind. Registered sales representatives play an important role in assessing the suitability of an investment for their clients. The threat of loss of registration is an important deterrent against misconduct by registrants. This threat acts as an incentive for registrants to adopt appropriate standards of conduct. The absence of a registrant will open the door for unscrupulous promotion. This will require increased enforcement measures that will further strain OSC resources.

Replacing the requirement that a registrant be involved in public offerings of SMEs with mandated, cautionary language in the prospectus, is not sufficient. It is naive to assume that unsophisticated investors read prospectuses. Further, disclosure does not address the issue of suitability.

3. To bridge the gap between users and suppliers of SME equity capital in the exempt market a number of investment matching services have developed. The Task Force is considering exempting the services provided by investment matching services from the registration requirements of the Securities Act, but only in circumstances where:

(i) the investment matching service is sponsored by a governmental or quasi-governmental agency, chamber of commerce or board of trade;

(ii) the investment matching service operates on a cost recovery, not-for-profit basis; and

(iii) the fees charged by the investment matching service consist solely of membership or subscription fees (as opposed to transaction-oriented "success fees") which do not vary based on the size or success of the proposed transaction.

We have no comment.

VI. Hold Periods

1. The Task Force proposes that all previously issued securities should be permitted to be qualified for distribution under a prospectus whether or not the holders have any immediate intention to resell their securities.

This proposal merits further consideration. There are a number of complex issues that would need to be resolved. Further work needs to be undertaken to develop appropriate guidelines and to consider the impact on the "closed system".

We note that with the elimination of hold periods, appropriate escrow requirements are imperative to fill the void. Currently, in British Columbia, the seasoning requirements and hold period applicable to securities of exchange issuers, previously issued prior to the IPO, are waived once the issuer becomes an exchange issuer. However, there are escrow requirements imposed on securities held by principals of the issuer. Release from escrow is based on meeting performance measures. We are proposing revisions to the requirements that make the waiver conditional upon the seller holding securities listed on an exchange for the time required by "recognized resale requirements". The BCSC will recognize the VSE new seed share matrix for the purpose of this provision when it comes into force. The VSE seed share matrix requirement imposes hold periods for varying lengths of time depending on the price paid relative to the IPO price and length of time the securities were held prior to the IPO. The requirements regarding escrow will remain unchanged.

We also agree that statutory liability ought to extend to purchasers who purchase securities in a secondary market transaction at or about the same time as the prospectus offering We acknowledge that there is an inconsistency in statutory civil liability remedies available to investors who purchase securities under a prospectus and investors who purchase the same securities in the secondary market. Further, there have been problems with misrepresentations in continuous disclosure documents. We note that work has been undertaken by the OSC as well as our own Commission with respect to adopting a statutory civil liability provision applicable to continuous disclosure documents. However, the extension of statutory civil remedies has not proceeded to date because there is no simple or straightforward legislative solution. There are a number of very complex issues that need to be resolved, such as (1) determining the appropriate basis of liability (e.g., deemed reliance or rebuttable presumption of reliance), (2) defining the class of investor entitled to bring an action, the class of parties an action may be brought against and the class of documents the action may be based on, (3) determining the standard of care applicable and defenses available to defendants, and (4) considering the appropriate mechanism for the calculation and apportionment of damages.

2. The Director under section 61 of the Securities Act (or the Commission by rule) should reconsider whether or not it appears to be in the public interest to continue issuing receipts for prospectuses which qualify for distribution common shares (or other securities) to be issued upon the conversion of special warrants (or other similar convertible securities) if the proposal described in paragraph N.1 [VI.1] above is implemented.

We note that there are a number of practical considerations and issues that need to be resolved under the first proposal of this section before this proposal can be acted upon. We do, however, agree that it may be appropriate to reconsider whether or not it would be in the public interest to consider issuing receipts for special warrant prospectuses. However, such consideration should be tied to the overall reassessment of the "closed system" and should be undertaken on a national basis.

3. An overall reassessment of the closed system (if it does not result from the TSE Task Force on Civil Liability for Continuous Disclosure) should be commenced as soon as possible by way of an OSC staff study or by another task force.

We agree that an overall reassessment of the "closed system" is required and should be conducted on a national basis. However, given that OSC resources are tied up on the OSC reformulation project, it is unlikely that this will happen for several years.

VII. Secondary Market Trading

1. The Task Force believes that the attractiveness and credibility of CDN, in view of its significance to SME issuers, are very importantfor SME capital formation.

We agree that the ability of SMEs to attract equity capital is affected by liquidity in the secondary market. Staff of the BCSC will generally not issue a receipt for a prospectus of a junior issuer unless the issuers' securities are to be listed on an acceptable exchange. Not only does this provide liquidity to investors, it also provides market transparency in pricing and regulatory oversight of disclosure and corporate governance matters. Having securities quoted on CDN does not currently meet our requirement of listing because CDN does not provide regulatory oversight of the issuer and the issuers transactions (e.g., reverse take over, director options, etc.). In our view, both the VSE and the Alberta Stock Exchange have better regulations and systems in place to regulate the junior market.

2. We make no specific recommendations concerning the future of CDN, nor any comments concerning recommendations made by various commentators to lower the listing requirements of The Toronto Stock Exchange (the "TSE") or to create a second tier of trading on the TSE, as those issues are the responsibility of and are being dealt with by the TSE. Our leaving these issues to be dealt with by the TSE is not in any way based upon non-recognition of their importance to facilitating the raising of equity by SMEs. The Task Force recognizes that few investors will be interested in buying securities unless there is a reasonable prospect of profit from resale. It is because of the significance of secondary market trading activity that the Task Force felt that the issue would be best addressed by those who are primarily involved in this activity.

We suggest that the OSC should participate in the review of CDN. We query the view that the regulated should conduct its own review without the involvement of the government regulator.

VIII. Sectoral Strategies

1. Financing requirements for issuers under the existing regulatory regime vary to a certain extent depending on the particular issuer's industry sector. The Task Force is of the view that financing requirements should not vary based upon an issuer's industry, for two reasons. First, the Task Force believes that securities regulatory requirements should not be used to further collateral government policy initiatives. Secondly, and perhaps more importantly, the Task Force believes that in formulating securities regulatory requirements, there is no longer a need to develop sector-specific regulatory regimes. Accordingly, the Task Force proposes that sector-specific components of the existing regulatory regime be repealed.

We agree that financing requirements for industrial issuers and natural resource issuers under existing regulatory regime should not vary based on the issuer's industry, unless there is a particular reason to apply different requirements because of the industry. We do, for example, apply different requirements to industrial issuers and natural resource issuers with respect to disclosure requirements and with respect to technical report requirements. We also have different escrow requirements applicable to natural resource issuers and industrial issuers, although we are currently reconsidering the need for different escrow requirements.

Page 14 - References to the BCSC initiatives are missing the initiatives issued in our Weekly Summary for the week ending October 7, 1994. These include:

• NIN#94/13 - Summary of Legislative and Policy Initiatives
• NIN#94/14 - Proposed Amendments to the Securities Act
• NIN#94/15 - Proposed Amendments to the Securities Regulation
• NIN#94/16 - Draft Amended Local Policy Statement 3-22 - Registration Requirements
• NIN#94/17 - Form 12A - Prospectus for Junior Industrial Issuer, Interim Local Policy Statement 3-17 - Registrant Due Diligence and Related Disclosure Initiatives
• NIN#94/18 - Specification of Form 12A - Prospectus for Junior Industrial Issuer

With respect to the initiatives listed on page 14, the citations are incorrect. The numbers relate to NIN numbers not the edition of the Weekly Summary. NINs are notices and interpretation notes. The first two numbers of a NIN reflect the year it was issued. The last one or more numbers reflect the sequential number of the NIN issued that year. For example, NIN#94/13 is the 13th NIN issued in 1994. Also, the reference to 94/39 is incorrect. It should be NIN#95/3.

Since NIN#95/20, there have been other initiatives released relating to junior issuers.

These include:

• NIN#95/28 - Securities Amendment Act (No. 2) 1995
• NIN#95/31 - Form 12A and Form 14A Summary Prospectus Disclosure System, Amendments to Local Policy Statement 3-02, BOR#95/3, BOR#95/4

Pages 16-17 - The definition of "junior issuer" cited from Local Policy Statement 3-17 does not necessarily reflect the definition of junior issuer for the purposes of the British Columbia regulatory regime generally. It only applies to industrial issuers for the purposes of determining whether a technical assessment report is required. Different tests are used for other requirements (e.g., the requirement under LPS 3-17 to prepare a due diligence report applies to junior issuer defined as an issuer, whether or not listed on the VSE, that does not meet the initial minimum listing requirements for the senior board of the VSE; escrow requirements under Local Policy Statement 3-07 apply to shares issued by issuers prior to the IPO where the shares were issued for less than $.25; filing requirements under Local Policy Statements 3-02 and 3-03 distinguish between junior and major companies on the basis that major companies generally have a history of at least 5 years of dividend payments to shareholders).

Page 48 - The definition of sophisticated purchasers included in the October 7, 1994 publication does not reflect our current views. The definition in the draft Regulations published for comment under NIN#94/15 has been revised. The proposed version, set out in Appendix "C", requires the investor to be able to evaluate the risks and merits of the prospective investment in addition to meeting certain net worth and net income tests.

Page 55 - With respect to footnote 55, the reference to Blanket Order #91/4 is incorrect. The correct reference for the private issuer exemption is Section 32(j) and 58(1)(a) of the British Columbia Securities Act. "Private issuer" is defined in Section 1(1). Blanket Order #91/4 deals with resale of securities acquired pursuant to certain exemptions, where the issuer no longer qualifies as a private issuer but is not a reporting issuer. Further, NIN#89/29 discusses the interpretation of the term "public" for the purpose of the private issuer exemption.

Page 63 - The definition of sophisticated purchaser set out in footnote 63 has been revised from that included in the Weekly Summary in the week ending October 7, 1994 (See Appendix "C").

"Sophisticated purchaser" means a purchaser that, in connection with a distribution, gives an acknowledgment under section 135 to the issuer, where the issuer does not believe, and has no reasonable grounds to believe, that the acknowledgment is false, acknowledging both that

(a) the purchaser is able, on the basis of information about the investment furnished by the issuer, to evaluate the risks and merits of the prospective investment because of

(b) the purchaser is one of the following:

(iv) a corporation in which all of the voting shares are beneficially owned by sophisticated purchasers or of which the majority of the directors are sophisticated purchasers;

(v) a general partnership in which all of the partners are sophisticated purchasers;

(vi) a limited partnership in which a majority of the general partners are sophisticated purchasers;

(vii) a trust in which all of the beneficiaries are sophisticated purchasers or the majority of the trustees are sophisticated purchasers.