NIN 97/47 - Shorter Hold Period with Annual Information Form, Eurobond Offerings and Distributions to Persons Outside B.C. [NIN - Rescinded]

One of the most difficult issues in the administration of the closed system has been the regulation of distributions to offshore purchasers by issuers located in or connected to British Columbia. The Commission in British Columbia has always taken the position that the Securities Act applies to any distribution made from the province, and that any issuer making a distribution from British Columbia is required to comply with the registration and prospectus requirements of the Securities Act, or rely on exemptions from those requirements, and to comply with the general prohibitions against fraud and misrepresentation.

Issuers have complained that the Commission’s approach to this issue, while technically sound, is inconsistent with the more liberal regulation of offshore private placements in certain other Canadian provinces and the United States. Those jurisdictions have allowed offshore purchasers to resell privately placed securities back into the jurisdiction after 40 days, whereas domestic purchasers are required to hold the securities for much longer periods.

The Commission has declined to adopt the approach of these other jurisdictions because it creates an unjustified advantage for foreign purchasers over domestic purchasers and has been a source of abusive practices. These problems have been recognized by the United States Securities and Exchange Commission, which is proposing to amend its Regulation S to equalize hold periods for domestic and foreign purchasers of privately placed equity securities.

The Commission considers that the best solution to the problem of regulating offshore private placements lies in an integrated disclosure system, which would simplify the process of distributing securities and give issuers the option of qualifying private placements to eliminate hold periods. As indicated in news releases issued by the Canadian Securities Administrators in June and September 1997 (see NR#97/17 and NR#97/29), the Canadian Securities Administrators are studying the feasibility of an integrated disclosure system.

In the meantime, the Commission is taking an interim step to provide shorter hold periods for issuers that comply with enhanced disclosure standards and meet certain other qualifications. Securities distributed under exemptions by these issuers, to either domestic or foreign purchasers, would be eligible for a 4 month hold period, in place of the current 12 month hold period.

At the same time, the Commission is issuing an interpretation note to provide guidance to issuers as to when the Securities Act applies to an offshore distribution and is creating a blanket exemption for non-convertible debt sold in the Eurobond market.

Effective December 1, 1997, the Commission is adopting an Interpretation Note (NIN#97/48) setting out the Commission’s views on when a distribution to persons outside British Columbia is a distribution in British Columbia (the "Distribution NIN") and a Blanket Order BOR#97/11 dealing with non-convertible debt offerings in the Eurobond market (the "Eurobond BOR"). Effective December 1, 1997, the Commission is also adopting and concurrently publishing for comment Interim Blanket Order BOR#97/12 providing for a shorter hold period for qualified issuers that have filed an annual information form ("AIF") (the "Interim SHAIF BOR") and Interim Local Policy Statement 3-27 - "Shorter Hold System with Annual Information Form" (the "Interim Policy"), which provides guidance on the application of the Eurobond BOR and the Interim SHAIF BOR.

The Commission anticipates that the Alberta Securities Commission will be publishing for comment a similar initiative within the next month or so.

The Distribution NIN

The Distribution NIN provides guidance on when a distribution of securities to persons outside of British Columbia is considered a distribution within British Columbia and, therefore, subject to the Securities Act. It discusses both distributions from British Columbia and indirect distributions into British Columbia and sets out factors to be considered in determining whether a distribution is occurring in B.C.. It also sets out certain steps that an issuer outside of British Columbia, but that has certain ties to British Columbia, may take to ensure securities distributed to persons outside British Columbia remain outside British Columbia during the applicable hold period.

The Eurobond BOR

The Eurobond BOR is primarily intended to facilitate Eurobond financing by British Columbia issuers. Specifically, the Eurobond BOR provides an exemption from the registration and prospectus requirements of the Securities Act for non-convertible debt securities if the conditions set out in the Eurobond BOR are complied with. If these conditions are met, the hold period for certain non-convertible debt securities sold to persons outside of Canada is reduced from 12 months to 40 days. This exemption is only available where the debt is accepted for listing on a genuine market, as defined in the Eurobond BOR, outside of Canada.

The Interim SHAIF BOR

The Interim SHAIF BOR applies to a qualifying issuer (the "Qualifying Issuer"), as defined in the Interim SHAIF BOR. In order to be a Qualifying Issuer, the issuer must have its equity securities listed on a recognized market and must have met certain revenue or expenditure tests as set out in the Interim SHAIF BOR. In order to be entitled to offer securities with a 4 month hold period, instead of the usual 12 month hold period, the Qualifying Issuer must meet other conditions in the Interim SHAIF BOR, including filing an AIF and amending it if the issuer undertakes a major transaction.

The Interim Policy

The Interim Policy provides guidance on the use of the Eurobond BOR and the Interim SHAIF BOR. It sets out what is a recognized market and provides guidance on the definition of Qualifying Issuer in the Interim SHAIF BOR. In addition, the Interim Policy outlines when a prospectus can be used as an initial AIF, what supporting documents are required to be filed with an AIF, including when an independent engineering report is required, and what is considered to be a substantial transaction requiring the issuer to file an amended AIF. The Interim Policy also notes that the Executive Director may exercise the discretionary power to disqualify an issuer from offering purchasers the shorter hold period provided in the Interim SHAIF BOR where the issuer has sold the business or resource property that entitled it to be a Qualified Issuer.

Request for Comments

The Commission is requesting comments on the Interim SHAIF BOR and the Interim Policy as well as on the Eurobond BOR and the Distribution NIN. Interested persons are encouraged to direct written comments by February 1, 1998 to

Brenda J. Benham
Director
Policy and Legislation
British Columbia Securities Commission
1100 - 865 Hornby Street
Vancouver, British Columbia 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 November 27, 1997

Douglas M. Hyndman
Chair