National Private Placements 101

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National Private Placements 101
Wayne Redwick Paul Visosky Susan Toews Denise
Duifhuis David Johnston Don Gordon

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Seminar Scope

• Overview of complex rules
• Framework for structuring private placements
• No discussion of TSX Exchange policies

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Canadian Securities Regulatory System

• Provincial securities regulation
• No federal securities regulator
• Lack of uniform rules across provinces
• There are differences be careful

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Disclosure Based System

• Regulation flows from Securities Act
• Current, accurate information is fundamental
• Enables investors to make investment decisions
• Disclosure concept found in the private placement
  rules

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Registration Prospectus Requirements

• Issuance of securities is a distribution
• Issuer must comply with law (not purchaser)
• For every distribution issuers must
• file a prospectus with the BCSC and
• deal with investors through a broker

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Exemptions

• A prospectus and broker not always required
• About 60 exemptions available
• What issuers rely on to carry out private
  placements

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Consequences of Using Exemptions

• Restrictions on resale
• Legend on the share certificate
• Must make filings with Commissions

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What Laws Apply?

• Must know what laws apply to know exemption
• Laws of jurisdiction in which purchaser resides
• BC laws for issuers with a significant
  connection to BC
• 72-702 Distributions of Securities to Persons
  Outside BC

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Significant Connection to BC- Factors

• Mind and management is primarily located in BC
• BC head office or key officers and directors
  resident in BC
• BC operations
• Acts in furtherance of the distribution take
  place in BC

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Exemption for Distributions Outside BC

• 72-503 Distribution of Securities outside BC
• Exempts distributions to persons outside of BC
• Must be listed on a qualified market

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Qualified Market 45-102

• TSX
• TSX Venture Tier 12
• Bourse de Montréal Inc.
• Amex
• NASDAQ National Small Cap
• NYSE
• London Stock Exchange

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BC Exemptions

• Common exemptions include
• Director and employee stock options
• Asset acquisitions
• Takeover bids
• Amalgamations and other reorganizations
• Short form offering documents

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Capital Raising Exemptions Recent Changes
Ontario

• Ontario 45-501
• Closely-held issuer exemption
• Accredited investor exemption

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Capital Raising Exemptions Recent Changes BC
Alberta

• Private issuer exemption
• Family, close personal friends, close business
  associates
• Accredited investor
• Offering memorandum
• Proposed expansion of 45-103

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Resale 45-102

• Past different hold periods
• Today 45-102 Resale of Securities
• November 30, 2001
• Harmonized resale

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Resale 45-102 Framework For Analysis

• Under which exemption was the security initially
  distributed?
• Was issuer a qualifying issuer on date of
  distribution?
• Is seller a control person?

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Resale 45-102

• Was issuer qualifying issuer on distribution
• date?
• Reporting in major jurisdiction
• Listed on qualified market
• Technical reports
• Current AIF filed on SEDAR

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Resale 45-102

• What is a current AIF?
• AIF under NI 44-101, NP47 or SHAIF
• SEC 10K or 20F
• Prospectus if it includes audited F/S most
  recent year end
• CPC info circular

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Resale 45-102

• Other
• Legending requirements
• Filing requirements

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Framework for Analysis

• What laws apply?
• What exemptions are available?
• What resale rules apply?
• What legends are required?
• What filings must be made?

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(No Transcript)
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Amazing Story of LBC Cryogenics

• BC Company
• Operations Richmond Montreal
• IPO June 30 2001 year end F/S
• TSX Venture
• Reporting BC Alberta
• Open facility in Montreal
• No AIF

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What laws apply to BC purchasers?

• BC
• Alberta
• Ontario
• Quebec
• All of the above

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BC 97,000 Exemption

• Must purchase as principal
• OM not required Do not file one with BCSC
• Staying for now would like feedback

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BC Private Issuer Exemption

• Not a reporting issuer
• 50 or fewer shareholders
• Can issue shares to a limited group of people
• No documents filed with BCSC

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BC Family, Friends Business Associates
Exemption

• Can sell to
• director, senior officer or control person
• family member
• close personal friend
• close business associate

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BC Family, Friends Business Associates Exemption

• No limits
• No disclosure
• Report to Commission
• Presumption of no advertising

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BC Family, Friends Business Associates Exemption

• Who is a close personal friend?
• Known for enough time
• Able to assess capabilities trustworthiness

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BC Family, Friends Business Associates Exemption

• Who is close business associate?
• Prior business dealings
• Able to assess capabilities trustworthiness

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Capital Raised Family, Friends Business
Associates April September millions
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BC Accredited Investor Exemption

• No limits
• No disclosure
• Report to BCSC

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Who is an Accredited Investor?

• Financial institution
• Corp., LP, trust or estate with net assets gt 5M
• Individual with
• financial assets gt 1 million
• net income gt 200,000 in each past 2 years
  (300,000 with spouse)

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How to calculate financial assets

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Capital raised Accredited investor April
September Billions
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BC OM Exemption

• Part 4 of 45-103
• Big change - new forms of OM
• Not intended to be prospectus level disclosure
• Plain language disclosure

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BC OM Exemption

• 2 forms of OM
• Qualifying non-qualifying issuers
• Qualifying incorporates continuous disclosure
  by reference

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BC OM Exemption

• Need to keep OM current
• Disclosure must be current when OM signed given
  to investor
• Old rules - no requirement to keep current
• Refer to section 4.4 of 45-103 for the update
  rules

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BC OM Exemption

• Certificate
• Certificate signed by 2 directors, CEO, CFO and
  promoters
• This offering memorandum does not contain a
  misrepresentation.
• Includes all info incorporated by reference

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Misrepresentation

• An untrue statement of a material fact, or
• An omission to state a material fact that is
• (i) required to be stated, or
• (ii) necessary to prevent a statement that is
  made from being false or misleading in the
  circumstances in which it was made

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Material Fact

• A fact that could reasonably be expected to
  significantly affect the market price or value of
  the issuers securities
• Difficult decision at times
• When in doubt, disclose

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When to Amend an OM

• Certificate is no longer true
• Change in a material fact causes disclosure to be
  untrue
• Must give to investor and file it with BCSC

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BC OM Exemption Important Changes

• Can sell in any amount - to anyone - during any
  time frame
• Can advertise
• No limit on commissions or selling expenses

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BC OM Exemption Important Changes

• Must hold the funds in trust until midnight on
  the second day after the investor signs the
  subscription agreement
• Investor must sign risk acknowledgement
  andissuer must retain for 6 years
• Must give OM before investor commits to buy

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Statutory Right of Action

• Now in the BC Securities Act  
• New rights in section 132.1 of the Act
• No longer contractual and no longer restricted
  to issuer
• Liability extends to signing officers and all
  directors personally

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BC OM Exemption

• Regulatory review
• No prior review by BCSC or TSX
• Must file within 10 days of the date of
  distribution
• BCSC selectively reviews OMs for compliance

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Offering Memorandum Capital Raised April
September millions
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Total Capital Raised Activity April September
Millions
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Short Form Offering Exemption Capital Raised
April September millions
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Piers Hazel Pick an Exemption

• LBC picks OM exemption
• OM costs (Reporting) 2,500 - 15,000
• Most cost lt 10,000
• SFO costs more takes longer

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Resale Rules Flow Chart of 45-102

• Please go to Tab 3 of your materials

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Resale Rules Flow Chart of 45-102

• Under which exemption was security
• initially distributed?
• Appendix D or E
• Was issuer a qualifying issuer on date of
• distribution?

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Resale Rules Flow Chart of 45-102

• Who is a qualifying issuer?
• Reporting in a major jurisdiction
• Listed on qualified market
• Technical reports
• Current AIF filed on SEDAR

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Resale Rules Flow Chart of 45-102

• What is a current AIF?
• AIF under NI 44-101, NP47 or SHAIF
• SEC 10K or 20F
• Prospectus if it includes audited F/S most
  recent year end
• CPC info circular

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Re-sale Rules Flow Chart of 45-102

• Control person (s.2.8)
• Is issuer a qualifying issuer?
• Additional requirements

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Hazels AIF OM A Work Of Art

• AIF
• LBCs IPO prospectus is not a current AIF
• Why? - No F/S most recently completed financial
  year
• LBC OM
• 500,000 min. - 1 million max

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Practice Tips OM

• Use your common sense
• Description of business keep it brief
• To use other form of OM you must
• provide X-ref to all info required by 45-103F2
• cross reference table
• modify the certificate

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Practice Tips OM

• Working capital deficiency OK to adjust
• Fully explain adjustments
• Disclose how you intend to eliminate or manage
  the deficiency.

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What might make certificate no longer true?

• Piers resigns
• 1 billion lawsuit against LBC
• LBC acquires fish farm
• LBCs Richmond storage facility
  destroyed
• All of the above

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Practice Tips OM

• Amendments
• Amendment or revised OM new OM
• Certificate must be true at date you give out OM
  
• Material change would trigger amendment
• New certificate signed dated

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Practice Tips OM

• You can update your OM with a material change
• report
• Provide purchasers with a copy of the MCR.
• Attach newly signed and dated certificate to
  MCR.
• Certificate must refer to OM other amendments

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Certificate to Material Change Report

• The offering memorandum dated November ,
  2002 together with this material change report
  does not contain a misrepresentation

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Practice Tips OM

• Mandatory amendment when you file
• Audited F/S  
• AIF
• You do not need to update an OM for
• interim F/S unless necessary to prevent
• misrepresentation

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BC Legending Requirements

• Part 6 - 45-103 pulls you into 45-102 resale
  rules
• Section 2.5 of 45-102 applies to all exemptions,
  except private issuer
• Depends on if issuer was qualifying on date of
  distribution
• Legend required in all provinces except Quebec

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BC Filing requirements

• Within 10 days after distribution
• Form 45-902F (old Form 20) in paper
• OM in paper
• Only with OM exemption
• Form 45-102F2 Qualifying Issuer Certificate
• File on SEDAR

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Practice Tips 45-902F

• Confidentiality name address
• Can keep confidential
• Exception insiders registrants
• Give reasons when you file
• Part 5 See part 6 that is a separate schedule
• No fee

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Practice Tips 45-902F

• Confidentiality other
•  Formal application to LMI Division

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Practice Tips 45-902F

• Phone and email numbers
• Make reasonable effort to get
• If unsuccessful state unable to obtain
• Proceeds from non-cash transactions
• Asset acquisitions debt settlements
• Proceeds FMV of asset or debt.

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McMoney Comes Through

• Crystal sells 270,000 units
• 16 purchasers in BC
• 1 purchaser in Switzerland

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Hazel finds investors in Alberta

• 5 potential Alberta purchasers
• Agree to close BC portion
• Closing not a material change

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Alberta Exemptions

• 97,000 exemption
• Found in Alberta Act
• 45-103 exemptions
• Identical to BC for
• Private issuer
• Family, friends and business associates
• Accredited investor

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Alberta OM Exemption

• OM exemption differences
• OM must include Alberta rights of action
• Anyone can purchase up to 10,000
• Over 10,000 must be eligible investor

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Alberta OM Exemption

• Who is an eligible investor?
• Person or company with
• pre-tax net income gt 75,000
• (125,000 with spouse) or
• 400,000 net assets or
• advice from an investment or securities dealer
• Includes an accredited investor

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Alberta Resale Rules

• Flow Chart 45-102
• Under which exemption was security initially
  issued?
• Was issuer a qualifying issuer on date of
  distribution?
• What are the hold periods?

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Alberta Legending Requirements

• Same as for BC

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LBCs Alberta Filing Requirements

• Within 10 days after distribution
• BC Form 45-902F (old Form 20) with BCSC in paper
• Alberta Form 20 with ASC in paper
• Form 45-102F2 Qualifying Issuer Certificate
• File on SEDAR
• OM in paper with ASC

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McMoney Finds a Fat Cat - Sabertooth

• Can use same OM in Alberta
• New investor Sabertooth Venture Capital
  Corporation
• Ontario investment company
• Net assets gt 50 million
• Sabertooth reads OM

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LBC Ontario Private Placement

• BC laws apply if connection to BC
• Possible exemptions
• BCI 72-503
• 45-103 OM exemption
• 97,000 exemption

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Ontario Exemptions

• OSC Rule 45-501
• Closely held issuer exemption
• Accredited investor exemption

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Ontario Closely Held Issuer Exemption

• Part 2 of 45-501
• Can issue trade on an exempt basis
• Similar to BC private issuer exemption except
  proceeds must be lt 3,000,000

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Ontario Closely Held Issuer Exemption

• Definition of closely held issuer
• Restrictions on transfer of shares
• Must have lt 35 beneficial security holders
• Exclude accredited investors current or former
  directors, officers, employees or consultants

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Ontario Accredited Investor Exemption

• No limits
• No disclosure
• Report to OSC

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Ontario Accredited Investor Exemption

• Similar to BC definition
• Includes some family and promoter

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Ontario Accredited Investor Exemption

• Financial institution
• Corp., LP, trust or estate with net assets gt 5M
• Individual with
• financial assets gt 1 million
• net income gt 200,000 in each past 2 years
  (300,000 with spouse)

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Ontario Offering Memorandum Issues

• No OM exemption
• If you give out materials may OM- Rights of
  action apply- Must file OM with OSC

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Ontario Resale Rules

• Flow Chart 45-102
• Under which exemption was security
• initially distributed?
• Was issuer a qualifying issuer on date of
  distribution?
• What are the hold periods?

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Ontario Legending Requirements

• Same as for BC

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LBCs Ontario Filing Requirements

• Within 10 days after trade
• BC Form 45-902F (old Form 20) with BCSC in paper
• Ontario Form 45-501F1 with OSC in paper
• Form 45-102F2 Qualifying Issuer Certificate
• File on SEDAR
• OM in paper with OSC

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La prochaine fois, nous irons au Québec

• Make filings with BCSC, ASC OSC
• Interest in Quebec
• Quebec???

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Quebec Maintains Status Quo

• Has not adopted exemption regimes from other
  provinces
• Has broad discretionary powers

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Quebec Exemptions

• Based on identity of purchaser- pension funds-
  banks- money managers
• 150,000 minimum purchase
• Discretionary order

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Quebec - Resale

• Reporting issuer 12 months
• CVMQ blanket order permits some reporting issuers
  the benefits of 45-102

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Filings with CVMQ

• OM
• Distribution report
• Language issues

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Its easy to become a reporting issuer in Quebec

• What you need to file
• Language issues

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The Do It Right Team are off to the Jolly Taxpayer
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Piers Hazel are on Vacation
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