Securities Regulation Summary

General Introduction

Definition: The point of securities law is to govern the capital raising process. It is the body of law that governs how a business can raise money. It governs how a stock is traded, and provides for the ongoing disclosure requirements.

Securities Law has two concerns:(a) Protecting investors(b) Ensuring efficiency

…and possibly a third concern—confidence in markets

Three Approaches to Security Law

1. Neoclassical Law and EconomicsIndividuals should be left alone to bargain. If someone accepts to buy X security at Y price that is because they want; they are best situated to know that that is a good bargain, not a third party. Voluntary exchanges are the best way to ensure proper distribution as everyone pursues his or her self-interest. Neoclassical economists are skeptical as to the ability of government to control regulatory exchanges efficiently. Where there is a goal, it should be efficiency. Efficiency is defined as where at least one party, if not both are better off by the exchange. Where a party is worse off, inefficiency has resulted. Some role for government where the market does not work best (i.e. in disclosing information).

2. Behavioural FinanceQuestions the view that people are rational actors. Believes legal rules should respond it irrational behaviour. Examples include that people will often prefer the status quo, even if the quo is not efficient, that people will get rid of good investments too early, will keep bad investments too long and deal with all bad problems at once.

3. Socio-legal PositionFocuses on the regulators. Wonders about who the winners and losers are when the rules are made. Scholars try to calculate who wins and who loses when issuers are required to issue 100 page prospectuses.

Sources of Security Law

StatuteOntario Securities Act

National Instruments- Issued by the X, these are not binding but most provinces choose to follow them- Require ratification from the provincial government

Local Rules- Can be issued by the regulator without comment from the provincial government

Policies- Not binding- Often issued in conjunction w/ NIs to act as a guideline or explanation

Admin Law Note:

Rules are subject to a notice and comment procedure

HistorySecurities law has moved away form its caveat emptor roots. In the early 20th century, Canada introduced “blue sky” legislation, meaning to focus on the sellers and on fraud issues. Later, regulators realized that they needed to do more front-end and back-end. In the mid 40s and mid 60s as a result of the Kimber committee, security regulation moves from front end concern with initial offering information but with ongoing release disclosure requirements. Today, securities regulation is marked by vigorous front- and back-end securities regulation.

Our Federal System

Provinces have clamed authority for securities regulation under s. 92, while the federal government makes claims under . 91

Feds as trade and commerce Provinces as property and civil rights History shows the provinces asserting their authorities

Mayland and Mercury Oils Limited v. Lymburn and Frawley (1932)

The defendant argued that it would be difficult for federally incorporated companies to operate under various provincial regimes and that such authority was ultra vires. The Privy Council confirms that regulating securities is within the provincial government’s powers.

IRWIN LAW says: “…the PC held that properly crafted provincial securities laws could indeed apply to federal companies. Specifically, such laws are valid as long as they do not require federal companies to register provincially before they sell securities.”

R v. Smith (1960)

The defendant was charged w/ issuing a false prospectus. The defendant argued that the provincial sanctions were too similar to criminal charges and were therefore ultra vires. The SCC ruled that this was complementary, not contradictory. The Criminal Code had no provisions for what a prospectus should contain, whereas the provincial code did. The

SCC affirms the province’s authority to regulate securities and to sanction violations under s. 92.

IRWIN LAW says: “In Smith, the court determined that there was “no repugnancy” between what is now section 400 of the Criminal Code and the legislative predecessor to what is now section 122 of the OSA….the OSA and the Criminal Code provisions could continue to co-exist because the provincial provision was not one “the pith and substance of what is to prohibit an act with penal consequences.” The main purpose of the provincial enactment was instead “to ensure the registration of persons and companies before they are permitted to trade in securities themselves.”

R. v. W. McKenzie Securities Limited 1966

Ontario broker solicits sales in Manitoba via mail. Manitoban teacher purchases, complains and ultimately buys more. Purchaser took action against said broker for not registering in Manitoba. The defendant argued that Manitoba would be overstepping its authority by regulating an Ontario broker, which maintained no Manitoba office. The Court of Appeal rules that by soliciting and selling securities to Manitobans, the defendant was subject to Manitoban security regulation. Evidence that the court is going to broadly define working within a province. NOTE: A broker, not an issuer. Multiple Access Ltd. v. McCutcheon (1982)

Ruled that federal and provincial regime need not be exclusive. As long as compliance with one does not put one at odds with the other, there is no conflict or authority. Duplication in laws is defined as acceptable. Thus, regulators have a variety of remedial options available.

Irwin Law quotes: “Parliament has not yet enacted any comprehensive scheme of securities legislation. To date the Canadian experience has been that the provinces have taken control of the marketing of securities, differing in this respect from the U.S. where the Securities and Exchange Commission has regulated trading and primary distribution of securities. I should not wish by anything said in this case to affect prejudicially the constitutional right of Parliament to enact a general scheme of securities legislation pursuant to its power to make laws in relation to interprovincial and export trade and commerce. This is of particular significance considering the interprovincial and indeed international nature of the securities industry.

Quebec (Sa Majeste du Chef) v. Ontario Securities Commission SCC [Asbestos]

American company took over the defendant by agreement. Minority shareholders, however, did not get an offer for their shares. Ontario minority shareholders sued. Question: Was the fact that some of the shareholders were Ontarians enough to warrant OSC involvement?

The SCC rules that by selling shares to Ontario purchasers, the Quebec defendant had brought itself within the ambit of OSC regulation. NOTE: This case is perhaps on the outer limit. Raises questions as to how many Ontario purchasers need to be involved and concerns for extra-national corporations.

Irwin Law says: “The court ruled that not even a transactional nexus to Ontario is required to trigger Ontario’s constitutional jurisdiction. All that is required to invoke the public interest powers, as a matter of constitutional law, is that the transaction have an effect on Ontario shareholders sufficiently to prejudice the public interest.”

“It appears that the public interest sanctions in the OSA may be invoked even where there is no security, and even where the transaction in question takes place outside the jurisdiction, so long as the transaction has a prejudicial impact on Ontario security holders.”

CRITICISM OF THIS DECISION:

“Briefly, critics were concerned that the court sanctioned the application of provincial securities laws to extraprovincial actions in circumstances where such actions had, at most, an indirect effect on Ontario residents (in this case, those minority shareholders of ACL who resided in Ontario).” Says two problems:

“First, it could seriously erode the traditional Canadian constitutional division of powers. [i.e. when things cross provincial borders, the feds take over; however, any such transaction has a tangential effect on any province it steps into]”“Second, the same transaction may have indirect effects on the residents of several provinces, thus exposing market actors to several different, and perhaps contradictory, provincial regulatory schemes.”

Global Securities Corp v. British Columbia (Securities Commission)

B.C. securities regulator provided information on an issuer to the S.E.C. Q: Was providing data on an issuer to the American regulator ultra vires? The SCC rules that it is necessary for Canadian regulators work with each other and with foreign regulators to ensure the efficiency and stability of the securities market. The SCC emphasizes the minor role of helping the U.S. and pays less attention to the matter of “due administration of securities law in B.C.”

Irwin Law says: OSC has the power to both order an investigation and examination not only to enforce Ontario securities law, but also “to assist in the due administration of the securities laws or the regulation of the capital markets in another jurisdiction.”

“The constitutional validity of this extraterritorial aspect of the comparable investigation power in the B.C. Securities Act was recently upheld by the SCC in Global…”

“Going Federal”: can we and should we?

Pro: Governor of the Bank of Canada, most issuers, foreign trading partners and economists. Con: Quebec and B.C.

Several reports and studies on this topic. Most famous include the Porter Report and the Wise Persons Committee. All have recommended a federal system. While many have issued legal opinions that it is possible, the concerns are that constitutional challenges may prevent the federal government from assuming this power and the provinces, with 70 years of jurisprudence affirming their authority in securities matters, may fight it to continue garnering revenue. Some argue that were the Federal government to create a federal regulator, it could assume dominance through the doctrine of primacy to render the existing legal framework inoperable.

Why Provincial? Opportunities for complaints

being filed in separate markets Avoids the Toronto-centric

approach a federal regulator would likely adopt

Being new might result in a painful transition period

Why Federal? Ease of markets Harmony of practices and

efficient markets Increased foreign involvement by

issuers and purchasers skeptical of Canada’s varying jurisdictions

Costly and inefficient duplication Inconsistency of prov. schemes

Markets

The primary market is for the initial offering of securities, whether in an IPO or a PO

The secondary market is for the trading of seasoned securities among investors

The involved parties are the issuers, the purchasers and the intermediaries (underwriters).

“issuer” means a person or company who has outstanding, issues or proposes to issue, a security; (“émetteur”)

“underwriter” means a person or company who, as principal, agrees to purchase securities with a view to distribution or who, as agent, offers for sale or sells securities in connection with a distribution and includes a person or company who has a direct or indirect participation in any such distribution, but does not include,

(a) a person or company whose interest in the transaction is limited to receiving the usual and customary distributor’s or seller’s commission payable by an underwriter or issuer,

(b) a mutual fund that, under the laws of the jurisdiction to which it is subject, accepts its shares or units for surrender and resells them,

(c) a company that, under the laws of the jurisdiction to which it is subject, purchases its shares and resells them, or

(d) a bank listed in Schedule I, II or III to the Bank Act (Canada) with respect to securities described in paragraph 1 of subsection 35 (2) or to such banking transactions as are designated by the regulations; (“souscripteur à forfait”)

Canada’s Markets

Canada has a variety of markets. However, there is a general trend toward competition and consolidation (including privatization).

Exchanges are different from electronic trading systems.

Exchanges guarantee the execution of a sale according to its listed price. Consequently, exchanges have a listing component. If the exchange cannot find a buyer or a seller, they will act as a principle to do so themselves. In practice, this means various dealers take on the responsibility to fulfill this function with various securities as buyers/sellers of last resort.

TSX (Toronto)Canada’s largest and most seasoned market, dealing in blue chip companies. Canada’s largest issuers, senior equities, rely on this exchange. The TSX is privatized. It is regulated by RS (Market Regulation Services), of which it is a major shareholder.

TSX Venture (Calgary)

Handles junior equities and is considered a specialized market for oil, gas and resource corporations. Has less onerous listing requirements and often features that do not yet qualify for TSX. Micro-cap issuers represent 76 percent of issuers and small-cap 23 percent.

NGX

A TSX exchange market for the trading and clearing of natural gas and electricity contracts.

CNQ

A new (2004) CDN stock exchange specializing in equity securities for emerging companies using innovative trading technologies. It is web-based. Offers issuers reduced costs in raising capital, streamlined regulatory process and a market model that maximizes liquidity by offering features of an auction market and dealer market.

Bourse de Montreal (Montreal)

The Montreal Exchange trades in derivatives, which are securities, such as an option or futures contract, whose value depends on the performance of an underlying security or asset. Considered a risky but essential part of the modern market. Prices are usually determined by supply and demand and most commonly, futures and options are traded.

WHAT IS THE DIFFERENCE BETWEEN DERIVATIVES AND SHARES?

The subtle, but crucial, difference is that while shares are assets, derivatives are usually contracts (the major exception to this are warrants and convertible bonds, which are similar to shares in that they are assets).

So what? Well, we can define financial assets (e.g. shares, bonds) as: claims on another person or corporation; they will usually be fairly standardised and governed by the property or securities laws in an appropriate country.

On the other hand, a contract is merely: an agreement between two parties, where the contract details may not be standardised.

Possibly because it is thought that investors may be wary of the woolly definition of derivatives, one frequently comes across references to "derivatives securities" or "derivatives products". These "securities" and "products" sound fairly solid, tangible things. But in many cases these terms are rather inappropriately applied to what are really contracts.

An option contract allows the holder to buy (call option) or sell (put option) a specified underlying asset by a specified date at a specified price.

A futures contract requires the seller to deliver a specific asset (or cash equivalent) to the buyer on the specified date for a predetermined price.

Irwin Law says: “In fact, every derivative security, no matter how complex, can be characterized as either an option contract, a future (or forward) contract, or a (frequently elaborate) combination of the two. The term derivative security is an umbrella term used to refer to a vast range of different types of financial instruments whose values vary with the underlying interests.”

Canadian Derivatives Clearing Corporation

The issuer, clearinghouse, and guarantor of interest rate, equity and index derivative contracts on the Bouse (as well as other markets on a contractual basis). Members must maintain margin deposits to cover market risk.

Winnipeg Commodity Exchange

The national commodities futures and option exchange.

NASDAQ Canada

America’s largest electronic stock market in the world. Entered the CDN market to link CDN issuers and institutional investors w/ a global trading network. NOTE: NASDAQ runs all of its operations in the U.S. and seems to have had limited success in Canada.

Issuers

“issuer” means a person or company who has outstanding, issues or proposes to issue, a security; (“émetteur”)

Canada has only a small group of issuers that are national and international in scope. Indeed, only 100 CDN sellers are cross-listed w/ U.S. markets. There are roughly 777 companies w/ a market capitalization above $500 mil.

Issuers flock to certain markets based on area of specialty. Alberta—oil and gas and mining; B.C.—micro-cap issuers looking for less than $300,000; Ontario—financial expertise.

Broker

“dealer” means a person or company who trades in securities in the capacity of principal or agent; (“courtier”)

This is the intermediary who assists in the trade. On the purchaser’s behalf, the broker buys or sells a security on the market. Online brokerages do not trade on the market; rather, they do your trade on your behalf at a third-party market. The law requires that they be registered, which requires a minimum of tested competence.

There is a distinction between a full service brokerage which offers competent financial advice and charges a premium on trades and discount brokerages which hold out their services as nothing beyond effecting trades.

Pearson v. Boliden (2002)

Albertan purchasers wished to sue under Ontario law (preferable to Albertan laws) w/ a class of Ontarian plaintiffs. The court ruled that purchasers must sue under their own provincial regime. The real answer to this problem is to instigate national standards.

Mutual Reliance (National Policy 43-201)

Ostensibly, an issuer would only have to seek approval from home province regulator and other provincial regulators would rubberstamp approval. In practice, however, provinces could opt out, causing delays to the issuer. This could add serious transaction costs to the issuer as well as resulting in the issuer missing a window of opportunity (capital markets are time sensitive). This led to the passport system.

The Passport System

The Passport System is a response to the criticisms of the Wise Persons Committee. This results from NI 11-101. The province of the head office of each issuer would become its

principle regulator. All provinces who have ratified NI 11-101 would accept the approval of the regulatory province.

Ontario has refused to participate, noting that this system does move toward a unilateral federal system.

Consequently, Ontario issuers have, until the near future, had to seek approval by either B.C. or Quebec, depending on the issue. As of March 2008, if your principle regulator is Ontario, Ontario is the only province from which an issuer needs approval. Cynics are concerned that this move will prevent a future national security scheme from being implemented.

Enforcement concerns

RCMP has authority to persecute securities violations under the Criminal Code.

The Ontario Securities Act includes offences in s. 122: 122. (1) Every person or company that,

(a) makes a statement in any material, evidence or information submitted to the Commission, a Director, any person acting under the authority of the Commission or the Executive Director or any person appointed to make an investigation or examination under this Act that, in a material respect and at the time and in the light of the circumstances under which it is made, is misleading or untrue or does not state a fact that is required to be stated or that is necessary to make the statement not misleading;

(b) makes a statement in any application, release, report, preliminary prospectus, prospectus, return, financial statement, information circular, take-over bid circular, issuer bid circular or other document required to be filed or furnished under Ontario securities law that, in a material respect and at the time and in the light of the circumstances under which it is made, is misleading or untrue or does not state a fact that is required to be stated or that is necessary to make the statement not misleading; or

(c) contravenes Ontario securities law,

is guilty of an offence and on conviction is liable to a fine of not more than $5 million or to imprisonment for a term of not more than five years less a day, or to both. 1994, c. 11, s. 373; 2002, c. 22, s. 181 (1).

Exemption

(1.1) Clauses (1) (a) and (b) do not apply to a statement made or given to the Commission in a submission in respect of a proposed rule or policy. 1994, c. 33, s. 7.

Defence

(2) Without limiting the availability of other defences, no person or company is guilty of an offence under clause (1) (a) or (b) if the person or company did not know and in the exercise of reasonable diligence could not have known that the statement was misleading or untrue or that it omitted to state a fact that was required to be stated or that was necessary to make the statement not misleading in light of the circumstances in which it was made. 1994, c. 11, s. 373.

Directors and officers

(3) Every director or officer of a company or of a person other than an individual who authorizes, permits or acquiesces in the commission of an offence under subsection (1) by the company or person, whether or not a charge has been laid or a finding of guilt has been made against the company or person in respect of the offence under subsection (1), is guilty of an offence and is liable on conviction to a fine of not more than $5 million or to imprisonment for a term of not more than five years less a day, or to both. 1994, c. 11, s. 373; 2002, c. 22, s. 181 (2).

Fine for contravention of s. 76

(4) Despite subsection (1) and in addition to any imprisonment imposed under subsection (1), a person or company who is convicted of contravening subsection 76 (1), (2) or (3) is liable to a minimum fine equal to the profit made or the loss avoided by the person or company by reason of the contravention and a maximum fine equal to the greater of,

(a) $5 million; and

(b) the amount equal to triple the amount of the profit made or the loss avoided by the person or company by reason of the contravention. 2002, c. 18, Sched. H, s. 11; 2002, c. 22, s. 181 (3); 2002, c. 22, s. 188 (3).

Same

(5) If it is not possible to determine the profit made or loss avoided by the person or company by reason of the contravention, subsection (4) does not apply but subsection (1) continues to apply. 1994, c. 11, s. 373.

Definitions: “loss avoided”, “profit made”

(6) In subsections (4) and (5),

“loss avoided” means the amount by which the amount received for the security sold in contravention of subsection 76 (1) exceeds the average trading price of the security in the twenty trading days following general disclosure of the material fact or the material change; (“perte évitée”)

“profit made” means,

(a) the amount by which the average trading price of the security in the twenty trading days following general disclosure of the material fact or the material change exceeds the amount paid for the security purchased in contravention of subsection 76 (1),

(b) in respect of a short sale, the amount by which the amount received for the security sold in contravention of subsection 76 (1) exceeds the average trading price of the security in the twenty trading days following general disclosure of the material fact or the material change, or

(c) the value of any consideration received for informing another person or company of a material fact or material change with respect to the reporting issuer in contravention of subsection 76 (2) or (3). (“profit réalisé”) 1994, c. 11, s. 373.

Consent of Commission

(7) No proceeding under this section shall be commenced except with the consent of the Commission. 1994, c. 11, s. 373.

Trial by provincial judge

(8) The Commission or an agent for the Commission may by notice to the clerk of the court having jurisdiction in respect of an offence under this Act require that a provincial judge preside over the proceeding. 1994, c. 11, s. 373.

Additional remedies

122.1 (1) If a person or company is convicted of an offence under this Act, the court may, in addition to any penalty, order the convicted person or company to make restitution or pay compensation in relation to the offence to an aggrieved person or company. 2006, c. 33, Sched. Z.5, s. 12.

Notice

(2) If a court makes an order for restitution or compensation, it shall cause a copy of the order or a notice of the content of the order to be given to the person or company to whom the restitution or compensation is ordered to be paid. 2006, c. 33, Sched. Z.5, s. 12.

Filing

(3) An order for restitution or compensation may be filed with a local registrar of the Superior Court of Justice and the responsibility for filing shall be on the person or company to whom the restitution or compensation is ordered to be paid. 2006, c. 33, Sched. Z.5, s. 12.

Enforcement

(4) An order for restitution or compensation filed under subsection (3) may be enforced as if it were an order of the court. 2006, c. 33, Sched. Z.5, s. 12.

Postjudgment interest

(5) Section 129 of the Courts of Justice Act applies in respect of an order for restitution or compensation filed under subsection (3) and, for that purpose, the date of filing shall be deemed to be the date of the order. 2006, c. 33, Sched. Z.5, s. 12.

Limitation

(6) A person or company is not entitled to participate in a proceeding in which an order may be made under this section solely on the basis that the person or company has a right of action against a defendant to the proceeding or that the person or company may be entitled to receive an amount under the order. 2006, c. 33, Sched. Z.5, s. 12.

Civil remedies protected

(7) A civil remedy for an act or omission is not affected by reason only that an order for restitution or compensation under this section

has been made in respect of that act or omission. 2006, c. 33, Sched. Z.5, s. 12.

The Ontario Securities Act grants authority to punish under s. 127:

Orders in the public interest

127. (1) The Commission may make one or more of the following orders if in its opinion it is in the public interest to make the order or orders:

1. An order that the registration or recognition granted to a person or company under Ontario securities law be suspended or restricted for such period as is specified in the order or be terminated, or that terms and conditions be imposed on the registration or recognition.

2. An order that trading in any securities by or of a person or company cease permanently or for such period as is specified in the order.

2.1 An order that acquisition of any securities by a particular person or company is prohibited, permanently or for the period specified in the order.

3. An order that any exemptions contained in Ontario securities law do not apply to a person or company permanently or for such period as is specified in the order.

4. An order that a market participant submit to a review of his, her or its practices and procedures and institute such changes as may be ordered by the Commission.

5. If the Commission is satisfied that Ontario securities law has not been complied with, an order that a release, report, preliminary prospectus, prospectus, return, financial statement, information circular, take-over bid circular, issuer bid circular, offering memorandum, proxy solicitation or any other document described in the order,

i. be provided by a market participant to a person or company,

ii. not be provided by a market participant to a person or company, or

iii. be amended by a market participant to the extent that amendment is practicable.

6. An order that a person or company be reprimanded.

7. An order that a person resign one or more positions that the person holds as a director or officer of an issuer.

8. An order that a person is prohibited from becoming or acting as a director or officer of any issuer.

8.1 An order that a person resign one or more positions that the persons holds as a director or officer of a registrant.

8.2 An order that a person is prohibited from becoming or acting as a director or officer of a registrant.

8.3 An order that a person resign one or more positions that the person holds as a director or officer of an investment fund manager.

8.4 An order that a person is prohibited from becoming or acting as a director or officer of an investment fund manager.

8.5 An order that a person or company is prohibited from becoming or acting as a registrant, as an investment fund manager or as a promoter.

9. If a person or company has not complied with Ontario securities law, an order requiring the person or company to pay an administrative penalty of not more than $1 million for each failure to comply.

10. If a person or company has not complied with Ontario securities law, an order requiring the person or company to disgorge to the Commission any amounts obtained as a result of the non-compliance. 1994, c. 11, s. 375; 1999, c. 9, s. 215; 2002, c. 22, s. 183 (1); 2005, c. 31, Sched. 20, s. 8.

Terms and conditions

(2) An order under this section may be subject to such terms and conditions as the Commission may impose. 1994, c. 11, s. 375.

Cease trading order

(3) The Commission may make an order under paragraph 2 of subsection (1) despite the delivery of a report to it under subsection 75 (3). 1994, c. 11, s. 375.

Exception

(3.1) A person or company is not entitled to participate in a proceeding in which an order may be made under paragraph 9 or 10 of subsection (1) solely on the basis that the person or company may be entitled to receive any amount paid under the order. 2004, c. 31, Sched. 34, s. 5.

Hearing requirement

(4) No order shall be made under this section without a hearing, subject to section 4 of the Statutory Powers Procedure Act. 1994, c. 11, s. 375.

Temporary orders

(5) Despite subsection (4), if in the opinion of the Commission the length of time required to conclude a hearing could be prejudicial to the public interest, the Commission may make a temporary order under paragraph 1, 2 or 3 of subsection (1) or subparagraph ii of paragraph 5 of subsection (1). 1994, c. 11, s. 375.

Period of temporary order

(6) The temporary order shall take effect immediately and shall expire on the fifteenth day after its making unless extended by the Commission. 1994, c. 11, s. 375.

Extension of temporary order

(7) The Commission may extend a temporary order until the hearing is concluded if a hearing is commenced within the fifteen-day period. 1994, c. 11, s. 375.

Same

(8) Despite subsection (7), the Commission may extend a temporary order under paragraph 2 of subsection (1) for such period as it considers necessary if satisfactory information is not provided to the Commission within the fifteen-day period. 1994, c. 11, s. 375.

Notice of temporary order

(9) The Commission shall give written notice of every temporary order made under subsection (5), together with a notice of hearing, to any person or company directly affected by the temporary order. 1994, c. 11, s. 375.

The OSC hears these matters at its own board. However, fines are issued by the Courts, not by administrative bodies. This is controversial as the Board drafts rules, investigates offences, prosecutes offences and judicially decides the matter. Studies have shown that people view a lack of apparent fairness in the way OSC pursues violations (due to lack of division of powers).

The OSC is however limited in its jurisdiction by the Statutory Powers and Procedures Act.

The OSC consists of a commission level, which includes 8-10 commissioners, two vice-chars, and a single chair, staff (hundreds, divided among different divisions), and enforcement. The enforcement division consists of litigators, former RCMP and police officers, forensic accountants, who prepare files, investigate, compel witnesses and issue statements of violations.

Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission) 2001 SCC

Held: The appeal should be dismissed.

Pursuant to s. 127(1) of the Securities Act, the OSC has the jurisdiction and a broad discretion to intervene in Ontario capital markets if it is in the public interest to do so. The permissive language of s. 127(1) expresses an intent to leave it to the OSC to determine whether and how to intervene in a particular case. In exercising its discretion, the OSC should consider the protection of investors and the efficiency of, and public confidence in, capital markets generally. In addition, s. 127(1) is a regulatory provision. The sanctions under the section are preventive in nature and prospective in orientation. Therefore, s. 127 cannot be used in response to Securities Act misconduct alleged to have caused harm or damages to private parties or individuals.

The standard of review applicable in this case is one of reasonableness. The OSC is a specialized tribunal with a wide discretion to intervene in the public interest and the protection of the public interest is a matter falling within the core of the OSC’s expertise. Therefore, although there is no privative clause shielding the decisions of the OSC from review by the courts, taking into consideration that body’s relative expertise in the regulation of the capital markets, the purpose of the Act as a whole and s. 127(1) in particular, and the nature of the problem before the OSC, those factors all militate in favour of a high degree of curial deference. However, as there is a statutory right of appeal from the decision of the OSC to the courts, when this factor is considered with all the other factors, an intermediate standard of review is indicated.

Condon: The courts have proven less willing to intervene, largely due to a lack of expertise. Iacobucci was the securities expert, and since his retirement, the SCC has been reluctant to get involved.

Irwin Law says: “The SCC upheld the OSC’s decision not to make an order pursuant to its ‘public interest’ jurisdiction under section 127 of the OSA…OSC decisions still should be accorded a ‘high degree of curial deference’ because of the OSC’s specialized expertise, the purpose of the statute, and the nature of the problem before the OSC.”

The STNDRD of RVW: “intermediate” lying between the extremes of correctness on the one hand and patently unreasonable on the other.

Re: Cartaway Resources Corp. 2004

Brokers had taken Cartway, a garbage removal company, and turned it into a mining co. They persuaded several of the brokerage clients to purchase shares. They did not update the purchasers that Cartaway had changed its business to mining. The B.C. securities regulator was outraged and levied an administrative fine, citing future deterrence as its motivation.

Q: Could the B.C. Reg. issue a fine for purposes of deterrence (is that not too similar to criminal law? HELD: The appeal should be allowed and the Commission’s order restored.

The balance of factors in the pragmatic and functional analysis pointed towards the reasonableness standard of review and away from the more exacting standard of correctness. STD of RVW: Was it rational for the Reg. to issue this fine?General deterrence is an appropriate factor to consider, albeit not the only one, in formulating a penalty in the public interest. Since general deterrence is both prospective and preventative in orientation, it falls squarely within the public interest jurisdiction of securities commissions to maintain investor confidence in the capital markets.No one factor should be considered in isolation because to do so would skew the textured and nuanced evaluation conducted by the Commission in crafting an order in the public interest. Here, the imposition of the maximum penalty was rationally connected to the respondents’ conduct globally.

Investment Dealers Association (IDA)

Takes the role of defining detailed roles and record keeping for broker’s investment requirements. However, it also acts as a lobby group for brokers, raising concerns as to how it can both regulate brokers and lobby for them.

Market Regulation Services (RS)

Wholly owned subsidiary of the TSX, RS regulates the trading process, including monitoring ongoing trades. Watches for such violations as front-running (a broker dealing w/ his brokerage’s accounts prior to his clients), taking advantage of the market, and empty trading (making non-existent trades to generate market excitement). Uses complex computer programs to watch for anomalies and deviations from trading patterns. Plans for RS to merge w/ IDA, as both monitor the same individual.

Mutual Fund-Dealers Organization

Ensure ethical conduct by mutual fund dealers, especially as mutual funds are targeted at non-sophisticated retail-end investors. The TSX imposes listing requirements as well; consequently, the TS ensures that listers follow listing requirements.

Security: Definitions

“security” includes,

(a) any document, instrument or writing commonly known as a security,

(b) any document constituting evidence of title to or interest in the capital, assets, property, profits, earnings or royalties of any person or company,

(c) any document constituting evidence of an interest in an association of legatees or heirs,

(d) any document constituting evidence of an option, subscription or other interest in or to a security,

(e) any bond, debenture, note or other evidence of indebtedness, share, stock, unit, unit certificate, participation certificate, certificate of share or interest, preorganization certificate or subscription other than a contract of insurance issued by an insurance company licensed under the Insurance Act and an evidence of deposit issued by a bank listed in Schedule I or II to the Bank Act (Canada), by a

credit union or league to which the Credit Unions and Caisses Populaires Act, 1994 applies or by a loan corporation or trust corporation registered under the Loan and Trust Corporations Act,

(f) any agreement under which the interest of the purchaser is valued for purposes of conversion or surrender by reference to the value of a proportionate interest in a specified portfolio of assets, except a contract issued by an insurance company licensed under the Insurance Act which provides for payment at maturity of an amount not less than three quarters of the premiums paid by the purchaser for a benefit payable at maturity,

(g) any agreement providing that money received will be repaid or treated as a subscription to shares, stock, units or interests at the option of the recipient or of any person or company,

(h) any certificate of share or interest in a trust, estate or association,

(i) any profit-sharing agreement or certificate,

(j) any certificate of interest in an oil, natural gas or mining lease, claim or royalty voting trust certificate,

(k) any oil or natural gas royalties or leases or fractional or other interest therein,

(l) any collateral trust certificate,

(m) any income or annuity contract not issued by an insurance company,

(n) any investment contract,

(o) any document constituting evidence of an interest in a scholarship or educational plan or trust, and

(p) any commodity futures contract or any commodity futures option that is not traded on a commodity futures exchange registered with or recognized by the Commission under the Commodity Futures Act or the form of which is not accepted by the Director under that Act,

whether any of the foregoing relate to an issuer or proposed issuer; (“valeur mobilière”)

We are most concerned with def. E. However, note that “commonly known” is commonly known by investors and market experts.

Irwin Law says: “The first thing to note about this definition is that it states that the term security “includes” the various enumerations. The definition is not exhaustive: things other than those appearing on the list may also be found to be securities. It is unlikely that any court or securities regulator would have to venture outside of the list, however, because the various terms are ‘catchalls.’ Designed to cast the net as wide as possible. In fact, the definition of security is so wide that it can be reasonably asserted that only the common sense of securities regulators and the courts places limits on what will be regulated as a security.”

Factors the court considers: (1) Investor Protection: If the court perceives that the purchaser of an interest is an investor in need of legislative protection, it is likely that the interest will be defined a security. If the investor is protected by another act or is situated to protect own interests, the court is less likely to see it as a security.

(2) Expectation of profit: Where one secures money from another one the promise of profit, expect a security, especially where the expected return is to exceed the initial value of the investment

(3) Risk factor: Need not be speculative, as even some risk is sufficient (though increased risk, increased likelihood of being considered a security).

(4) Purchaser’s degree of control: less control of an investor of the money invested, the increased likelihood of legislative protection.

(5) Independent value: if there is value in the subject matter independent of the success of the enterprise, may be characterized (such as selling an interest in a real estate transaction). Does not matter that an item may have value external (i.e. land can be sold on its own).

(6) Substance over form: court cares less about what something is touted as and cares more about what it is. Does not matter if something says it is not a security.

(7) Overlap in definition: remember that the OSA’s definition includes “any investment contract”. Thus wide, wide, wide definition.

(8) U.S. caselaw: U.S. cases are usefully cited.

(9) Explicit exclusions: the act specifically excludes contracts of insurance, as well as evidence of a deposit issued by a bank (these are essentially dealt w/ under the Ban Act.

Definitions:

Bond—debt security issued by a business where there is an obligation to pay the face value of the instrument and the interest (principle is returned).

Share—an equitable interest (with an open-ended return) that can be traded on the seasoned market. If designed as such, may involve voting rights , dividends, and/or rights to assets on dissolution.

Option—Right to buy or sell a specified item at a specified price at a specified time. Risky, often given to management to motivate and reward performance.

Securities and Exchange Commission v. W.J. Howey Co. et al. (1946)

H sold interests in plots of lands which grew orange groves. Purchasers could then buy a service contract from H to farm the land. Ps could not farm land themselves and in some cases were restricted from accessing it. Each lot could be individually quite small. Note that some people did actually hire other party than H.

Q: Was H selling securities? A: Yes, and the court defined a test.

Four elements to a security:(1) The paying out of money(2) Common enterprise(3) Expectation of profit (note: that profit is an open-ended concept; no set return)

(4) Profits are earned solely from the efforts of the promoter or the third party (profits which are expected are earned by the efforts of others)

As applied to Howey:(1) Investors paid out money(2) The common enterprise was the farming of the lots(3) All expected H to farm their lots and sell the oranges at a profit(4) Purchasers made no effort to farm the land; H did all

Irwin Law says: “the combination of the land sales contract, the deed giving title to land, and the service contract was a security”Says this is the test:“[A]n investment contract for the purposes of the Securities Act means a contract, transaction or scheme, whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or third party.”

State of Hawaii v. Hawaii Market Center, Inc., et al. (1971)

Ps could purchase m/ships in HMC, which would involve them getting different items (i.e. toasters), depending on m/ship package. By buying a m/ship, Ps could then generate profits by getting other people to become members. Profits were to be earned at set amounts.

Q: Did the fact that Ps were supposed to do part of the work in selling m/ships mean that HMC was not selling securities? A: No, these were securities.

Hawaii C.A. held that this was in fact an investment. The clients were motivated by an investment opportunity. The court partially rejected the Howey test, noting that it was too rigid and introduced a new four-part test (referred to as the RISK CAPITAL TEST).

(1) An offeree furnishes initial value to an offeror, and(2) A portion of this initial offering is subjected to the risks of the enterprise, and(3) The furnishing of the initial value is induced by the offeror’s promises or

representations which give rise to a reasonable understanding that a valuable benefit of some kind, over and above the initial value, will accrue to the offeree as a result of the operation of the enterprise, and

(4) The offeree does not receive the right to exercise practical and actual control over the managerial decisions of the enterprise.

Condon: Notice how concerned this method is with the separation between management and investment. This was a very results-oriented finding as HMC’s plan was so effectively designed to evade responsibility for securities.

Irwin Law says: “While consistent with…Howey, the Hawaii test makes it clear that not all of the “initial value” needs to be subjected to the risks of the enterprise. It also sidesteps the problem created by Howey’s requirement that the purchaser be led to expect profits “solely” from the efforts of a third party, by requiring only that the purchaser have no “practical and actual control” over management decisions.”

Pacific Coast Coin Exchange of Canada v. Ontario (Securities Commission) 1978 SCC

D sells options to buy bags of silver coins to investors. Investors have choice to either buy a legit bag for full price, or could simply make a down payment of only 35 percent. Purchasers in effect acquired an option to purchase silver whenever they wanted (and would have to pay the remainder if bought on margin) provided PCC had received 48 hour notice. Clear theory is that this an investment scheme with futures overtone. D holds out bags as good investment, “a good hedge against inflation.” Moreover, D emphasizes its expert knowledge of silver market, and when necessary to enter the futures market. Like Hawaii, there is a dependence on the expertise of the offeror to guarantee a profit for all concerned parties. DISTINCTION: whereas everyone involved in Howey was involved for a common reason, here they find that everyone is interested in making money (note that this is a much lesser example of commonality as some bought silver for the sake of owning silver). The court here waters down the test element significantly. The majority in this case adopts a HOLISTISTIC approach, concerning itself with the goal of the legislature (investor protection, which is obvious where sellers are doing margin transactions). The court holds that a strict test approach does not best protect investors.

Irwin Law says: “The PCC turned on whether the interests sold by PCCE constituted ‘investment contracts.” In finding that the interests were indeed investment contracts, the SCC purported to adopt the Howey test. However, applying the Howey test literally would likely have resulted in the finding that there was no security…To get around this difficulty, the SCC accepted a modification of the word “solely” stating: “We adopt a more realistic test, whether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.” The court further amends “common enterprise”:Common means between investors and promoters; not among investors themselves

Laskin’s Dissent

Laskin feels that this is not a security. Laskin notes that D assumes serious risk here (ensuring it has enough silver to meet its needs). Laskin says that the business of ensuring assets are managed appropriately is not enough to say that the money is at risk for the investors and that while there is a fixing of base price, that is the ongoing business capacity of D to stay in business. “I do not see any controlling factor in managerial effort,

to which the Court in Jenson alluded, when it is the market that determines profitability and not the promoter.”

Little difference between buying silver on the spot market and from PCC save solvency. This should not be sufficient to make this a security.

Irwin Law says: “if solvency risk is enough to render an interest a security, it is difficult to know when to stop finding that particular interests are securities.”

What did the court consider here in defining a security? Investment of money, common enterprise between investors and managers, risk element; profit potential; managers and not investors making effort to produce profits and minimize losses

Universal Settlements: the Viaticals Decision

Terminally ill patients would sell their life insurance policies to a company that would then partially pay out to the survivor, based on the notion it will realize a profit on the plan. The other party then continues to pay the premiums.

Q: Are viaticals a security?

Factors: There is a core contract; UniS is acting as a promoter (a recognized security role) by putting terminally ill in contact w/ investor pools; investors invest by paying for life insurance contract, risk that the party will not predecease the profitability point, managers do the research into the terminally ill;

The Court had to differentiate from Life Partners, which was not found to be a security. Key difference: in Life Partners, investors were brought on after the work was complete. Here, investors were on board and then the ill were sought. NOTE: buyers could have contact w/ the ill if they wished.

Found: Universal Settlements is a security for the above reasons.

Albino Decision

An Ontario natural resource company was compensating employees with incentive units (part of an award plan). Mr. Albino, an employee of Rio Algom was given an incentive plan whereby he would be paid the difference between the price at which the stock of RA was trading on its award, and the price at which it was trading when encashed. This was a phantom stock option (PSO) as Albino was never awarded the actual common share, just the difference in price from when he was granted the PSO and when he chose to cash it. He was charged w/ insider trading but it first had to be proved said PSO was a security, as per the act.

Q: Are PSOs recognized securities?

Held: Three judgments!!!

PM1: Not a security Not commonly recognized as such by the security experts PSOs are akin to employment contracts w/ interest in performance of the comp. Executive paid no money, was not allowed to trade, and no stock changed hands Also, only specific windows of time in which A could cash option (lim. liquidity)

PM2: Yes a security Applied dicta from Pacific Coast, and said law had to be read broadly and

purposively Relevant provision was the prohibition against insider trading, which A did PSOs are akin to derivative securities (which draw value from underlying

security) Encashing awards was a “constructive sale” Sanctions should be applied and objectives relating to insider trading would be

awarded

PM3: Refused to decide, but said OSC had jurisdiction. Refused to decide Found sufficient nexus between PSOs and capital markets for OSC to regulate Also, found A’s behaviour was “seriously prejudicial to public confidence in the

capital markets” A’s abuse of insider knowledge in encashing the awards was exactly what the law

was made to prevent

Irwin Law says: “the jurisdictional test for the issuance of a public interest order is not whether there is a security, but whether the transaction exhibits a significant connection to the capital markets of Ontario.”

While this does seem broad, Irwin Law cites Asbestos as proof the courts agree.

Trade and Distributions

A trade is:

“trade” or “trading” includes,

(a) any sale or disposition of a security for valuable consideration, whether the terms of payment be on margin, instalment or otherwise, but does not include a purchase of a security or, except as provided in clause (d), a transfer, pledge or encumbrance of securities for the purpose of giving collateral for a debt made in good faith,

(b) any participation as a trader in any transaction in a security through the facilities of any stock exchange or quotation and trade reporting system,

(c) any receipt by a registrant of an order to buy or sell a security,

(d) any transfer, pledge or encumbrancing of securities of an issuer from the holdings of any person or company or combination of persons or companies described in clause (c) of the definition of “distribution” for the purpose of giving collateral for a debt made in good faith, and

(e) any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the foregoing; (“opération”)

For the purposes of insider trading, trading includes purchasing and selling. For a “trade,” it is only selling, but for insider “trades” it can include the buyer.

Why worry about regulators/registrants/brokers?

They can easily manipulate customers and for the Securities Act to be triggered, it is necessary to label such actors as “trading in securities.” Most trades are conducted through brokers, with the exception of a discount brokerage.

Irwin Law notes five key points:

(1) Any sale or disposition for valuable considerationa. Gifts are excludedb. Valuable consideration can be widely defined

(2) Excludes (most) share pledgesa. Share pledges (generally as loan collateral) are excluded save in two

cases:i. The debt must have been incurred in ‘good faith’ (i.e. cannot use

this exception to avoid securities regulationii. A pledge is a ‘trade’ if the grantor is a control person

(3) Participation as a trader: receipt of an order by a registranta. Principle: Activities of professional traders can have a critical impact on

the functioning of the capital markets and must be regulated to protect investors

b. “any participation by a trader in any transaction in a security through the facilities of any stock exchange or quotation and trade reporting system” and “any receipt by registrant of an order to buy or sell a security”

(4) Acts in furtherance of a trade

a. “any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of’ any of the other activities constituting a trade’

b. The law is not simply reactive, it is preventative as well(5) Trades that are not distributions

a. A trade that is not a distribution can still be regulatedb. Traders must register w/ regulators either as dealers or as advisersc. This is to ensure minimum levels of integrity, competence and financial

soundness

Re World Stock Exchange (2000) Alberta Securities Commission

Q: Does a stock offering not based in Alberta trigger Albertan securities regulation? Held: It does unless…

Factors: An offeror / broker must include disclaimers that it is clearly not part of said province’s jurisdiction and that it is limiting its business to Z jurisdiction.

POINT: Even if you are trading in a way that does not amount to a distribution, regulators are zealous enforcers of their authority.

For the relevance of the OSC’s powers, see below:

3. (1) The Ontario Securities Commission is continued as a corporation without share capital under the name Ontario Securities Commission in English and Commission des valeurs mobilières de l’Ontario in French. 1997, c. 10, s. 37.

Composition

(2) The Commission is composed of at least nine and not more than 14 members. 1997, c. 10, s. 37.

Deficiency in number

(3) If there are fewer than nine but at least two members in office, the Commission shall be deemed to be properly constituted for a period not exceeding 90 days after the deficiency in the number of members first occurs. 1997, c. 10, s. 37.

Appointment

(4) The members shall be appointed by the Lieutenant Governor in Council for such term of office not exceeding five years as the Lieutenant Governor in Council determines. A member may be reappointed. 1997, c. 10, s. 37.

Chair and Vice-Chairs

(5) The Lieutenant Governor in Council shall, by order, designate a member of the Commission as Chair and may designate one or two members as Vice-Chairs. 1997, c. 10, s. 37.

Same

(6) The Chair and each Vice-Chair holds office for the term specified by the Lieutenant Governor in Council which shall not exceed his or her term as a member of the Commission. 1997, c. 10, s. 37.

Duties of Chair

(7) The Chair is the chief executive officer of the Commission and shall devote his or her full time to the work of the Commission. 1997, c. 10, s. 37.

Duties of members

(8) The members (other than the Chair) shall devote such time as may be necessary for the due performance of their duties as members. 1997, c. 10, s. 37.

Protection from liability

(9) A member is not liable for an act, an omission, an obligation or a liability of the Commission or its employees. A member is not liable for any act that in good faith is done or omitted in the performance or intended performance of his or her duties as a member of the Commission under this or any other Act. 1997, c. 10, s. 37.

Acting Chair

(10) If the office of Chair is vacant or if the Chair is absent or is unable to act for any reason, a Vice-Chair shall act as Chair. 1997, c. 10, s. 37.

Quorum

(11) Two members of the Commission constitute a quorum. 1997, c. 10, s. 37.

Crown agency

(12) The Commission is an agent of Her Majesty in right of Ontario, and its powers may be exercised only as an agent of Her Majesty. 1997, c. 10, s. 37.

Distribution: A distribution occurs when an issuer makes a public offering of a security that has not previously been traded. The first distribution by an issuer is an initial public offering (IPO); however, subsequent issues are still labeled distribution.

“distribution”, where used in relation to trading in securities, means,

(a) a trade in securities of an issuer that have not been previously issued,

(b) a trade by or on behalf of an issuer in previously issued securities of that issuer that have been redeemed or purchased by or donated to that issuer,

(c) a trade in previously issued securities of an issuer from the holdings of any control person,

(d) a trade by or on behalf of an underwriter in securities which were acquired by that underwriter, acting as underwriter, prior to the 15th day of September, 1979 if those securities continued on that date to be owned by or for that underwriter, so acting,

(e) a trade by or on behalf of an underwriter in securities which were acquired by that underwriter, acting as underwriter, within eighteen months after the 15th day of September, 1979, if the trade took place during that eighteen months, and

(f) any trade that is a distribution under the regulations,

and on and after the 15th day of March, 1981, includes a distribution as referred to in subsections 72 (4), (5), (6) and (7), and also includes any transaction or series of transactions involving a purchase and sale or a repurchase and resale in the course of or incidental to a distribution and “distribute”, “distributed” and “distributing” have a corresponding meaning; (“placement”, “placer”, “placé”)

“distribution company” means a person or company distributing securities under a distribution contract; (“compagnie de placement”)

“distribution contract” means a contract between a mutual fund or its trustees or other legal representative and a person or company under which that person or company is granted the right to purchase the shares or units of the mutual fund for distribution or to distribute the shares or units of the mutual fund on behalf of the mutual fund; (“contrat de placement”)

“distribution to the public”, where used in relation to trading in securities, means a distribution that is made for the purpose of distributing to the public securities issued by an issuer, whether such trades are made directly or indirectly to the public through an underwriter or otherwise; (“placement dans le public”)

Distribution is triggered in three situations: (1) trade by issuers, (2) trades by control persons, and (3) sales of restricted securities held by exempt purchasers.

Canada Business Corporations Act holds that were an issuer to purchase its shares, it extinguishes said shares. A corporation cannot, according to the CBCA, hold shares in itself.

Adjustment of stated capital account

39. (1) On a purchase, redemption or other acquisition by a corporation under section 34, 35, 36, 45 or 190 or paragraph 241(3)(f), of shares or fractions thereof issued by it, the corporation shall deduct from the stated capital account maintained for the class or series of shares of which the shares purchased, redeemed or otherwise acquired form a part an amount equal to the result obtained by multiplying the stated capital of the shares of that class or series by the number of shares of that class or series or fractions thereof purchased, redeemed or otherwise acquired, divided by the number of issued shares of that class or series immediately before the purchase, redemption or other acquisition.

Cancellation or restoration of shares

(6) Shares or fractions thereof of any class or series of shares issued by a corporation and purchased, redeemed or otherwise acquired by it shall be cancelled or, if the articles limit the number of authorized shares, may be restored to the status of authorized but unissued shares of the class.

Exception

(7) For the purposes of this section, a corporation holding shares in itself as permitted by subsections 31(1) and (2) is deemed not to have purchased, redeemed or otherwise acquired such shares.

Idem

(8) For the purposes of this section, a corporation holding shares in itself as permitted by paragraph 32(1)(a) is deemed not to have purchased, redeemed or otherwise acquired the shares at the time they were acquired, but

(a) any of those shares that are held by the corporation at the expiration of two years, and

(b) any shares into which any of those shares were converted by the corporation and held under paragraph 32(1)(b) that are held by the corporation at the expiration of two years after the shares from which they were converted were acquired

are deemed to have been acquired at the expiration of the two years.

Controlled Companies: A controlled company is one in which more than 50 percent of the shares are owned by one entity (an investor or a company) or where voting rights are such that one party has the right to elect the entire board.

DEFINITIONS: 1(3) A company shall be deemed to be controlled by another person or company or by two or more companies if,

Note: On a day to be named by proclamation of the Lieutenant Governor, subsection (3) is amended by the Statutes of Ontario, 2007, chapter 7, Schedule 38, subsection 1 (4) by adding at the beginning “Except for the purposes of Part XX”. See: 2007, c. 7, Sched. 38, ss. 1 (4), 15 (2).

(a) voting securities of the first-mentioned company carrying more than 50 per cent of the votes for the election of directors are held, otherwise than by way of security only, by or for the benefit of the other person or company or by or for the benefit of the other companies; and

(b) the votes carried by such securities are entitled, if exercised, to elect a majority of the board of directors of the first-mentioned company. R.S.O. 1990, c. S.5, s. 1 (3).

For a definition of a control person see below. The bright line test prima facie holds an investor with a 20 percent or greater share a control person by default. This presumption is rebuttable where a party can show that others have greater influence. That same test, however, can find a shareholder w/ less 20 percent a control person if said investor’s influence is such that it can affect material control.

Note that through (b), where an agreement exists, a combination of persons can be deemed controlling persons if their influence is such to trigger for all effects and purposes control person status. For the most part, reporting issuers start as issuers. In the past, a commonly exploited loophole allowed parties listed on other Canadian exchanges to transfer to the TSX. However, said loophole is now gone.

“control person” means,

(a) a person or company who holds a sufficient number of the voting rights attached to all outstanding voting securities of an issuer to affect materially the control of the issuer, and, if a person or company holds more than 20 per cent of the voting rights attached to all outstanding voting securities of an issuer, the person or company is deemed, in the absence of evidence to the contrary, to hold a sufficient number of the voting rights to affect materially the control of the issuer, or

(b) each person or company in a combination of persons or companies, acting in concert by virtue of an agreement, arrangement, commitment or understanding, which holds in total a sufficient number of the voting rights attached to all outstanding voting securities of an issuer to affect materially the control of the issuer, and, if a combination of persons or companies holds more than 20 per cent of the voting rights attached to all outstanding voting securities of an issuer, the combination of persons or companies is deemed, in the absence of evidence to the contrary, to hold a sufficient number of the voting rights to affect materially the control of the issuer; (“personne qui a le contrôle”)

Reporting issuer is any issuer who has at one point issued securities after March 1, 1967, has filed a prospectus, has filed a take-over bid, has had securities listed on an Ontario stock exchange, is offering securities and is recognized by the CBCA, is the continuance of another company that was previously listed, etc.

“reporting issuer” means an issuer,

(a) that has issued voting securities on or after the 1st day of May, 1967 in respect of which a prospectus was filed and a receipt therefor obtained under a predecessor of this Act or in respect of which a securities exchange take-over bid circular was filed under a predecessor of this Act,

(b) that has filed a prospectus and for which the Director has issued a receipt under this Act,

(b.1) that has filed a securities exchange take-over bid circular under this Act before December 14, 1999,

(c) any of whose securities have been at any time since the 15th day of September, 1979 listed and posted for trading on any stock exchange in Ontario recognized by the Commission, regardless of when such listing and posting for trading commenced,

(d) to which the Business Corporations Act applies and which, for the purposes of that Act, is offering its securities to the public,

(e) that is the company whose existence continues following the exchange of securities of a company by or for the account of such company with another company or the holders of the securities of that other company in connection with,

(i) a statutory amalgamation or arrangement, or

(ii) a statutory procedure under which one company takes title to the assets of the other company that in turn loses its existence by operation of law, or under which the existing companies merge into a new company,

where one of the amalgamating or merged companies or the continuing company has been a reporting issuer for at least twelve months, or

(f) that is designated as a reporting issuer in an order made under subsection 1 (11); (“émetteur assujetti”)

Preparing, filing and offering a prospectus

Short-form regime covered by NI 44-101

Why go public?

More flexible than working w/ banks Shareholders better able to retain control Private owners can diversify their wealth (without going public, the corporation is

dependant on their continued investment) Can capitalize future plans Ongoing visibility for public company (analysts follow the stock) Can acquire other corporations through stocks (which are not taxed until cashed)

versus cash (which is taxed immediately)

Use the trading market for the securities to offer the owner of an asset securities of one’s own company as opposed to cash for consideration on the transaction

Create a base for future capital needs Attractive for investors as their investments gain liquidity

Alternatives?

Banking debt (which must a. must be paid back and b. often involves acquiescing to banking decisions)

Private placement, i.e. seeking private equityo Priced less competitivelyo Buyer wants a price that reflects their increased interest (they can liquidate

their investment as readily)o Actual restrictions on when a party can private placement

What are the negatives?

Expensive: requires ongoing costs w/ accountants, securities lawyers, etc. Increased scrutiny

o Shareholders and competitors alike can monitor reportso Information maintained on SEDR (system for electronic disclosure and

retrieval) Certain groups of shareholders expect immediate returns and have little concern

for long-term strategy Taxes on equity Potential for loss of control Reduced flexibility

Security Process

There are four stages: pre-filing, waiting period, pre-closing and post-closing. In pre-filing, the issuer files a preliminary prospectus. During the waiting period, the issuer waits for approval from the regulator. The issuer can advertise the shares during this period. The OSC does not simply approve/disapprove; there is room for negotiation. Issuers can also distribute copies of the preliminary prospectus at so-called road shows (note: obligations flow from distributing these documents; issuers must keep a record of to whom they are issued). The issuer must also practice due-diligence and inspect the prospectus (do not want to trigger s. 130). Once the prospectus has been approved, the issuer enters the pre-closing stage and can print copies of final prospectus. The cooling-off period begins to run. Finally, at post-closing, money and securities change hands. The underwriter will advise the issuer when the distribution is complete.

Prospectus required

53. (1) No person or company shall trade in a security on his, her or its own account or on behalf of any other person or company if the trade would be a distribution of the security, unless a preliminary prospectus and a prospectus have been filed and receipts have been issued fofailry onerous requirements r them by the Director. 2006, c. 33, Sched. Z.5, s. 2.

Filing without distribution

(2) A preliminary prospectus and a prospectus may be filed in accordance with this Part to enable the issuer to become a reporting issuer, despite the fact that no distribution is contemplated. R.S.O. 1990, c. S.5, s. 53 (2).

Underwriting

The underwriter sells the issuer’s securities. Why employ an underwriter?

Extensive capital markets experience Ability to assess market demand for an issuer’s securities Knowledge regarding setting the terms of the offering Providing advice w/ respect to business management, and ownership structure

changes that may be necessary to make investment more attractive

An underwriter is defined as:

“underwriter” means a person or company who, as principal, agrees to purchase securities with a view to distribution or who, as agent, offers for sale or sells securities in connection with a distribution and includes a person or company who has a direct or indirect participation in any such distribution, but does not include,

(a) a person or company whose interest in the transaction is limited to receiving the usual and customary distributor’s or seller’s commission payable by an underwriter or issuer,

(b) a mutual fund that, under the laws of the jurisdiction to which it is subject, accepts its shares or units for surrender and resells them,

(c) a company that, under the laws of the jurisdiction to which it is subject, purchases its shares and resells them, or

(d) a bank listed in Schedule I, II or III to the Bank Act (Canada) with respect to securities described in paragraph 1 of subsection 35 (2) or to such banking transactions as are designated by the regulations; (“souscripteur à forfait”)

The underwriter has a precarious position. On the one hand, they are an interested financial party with a clear stake in the issue. On the other, they have a fiduciary duty as a “gatekeeper” and is expected to assume an “adversarial” role to ensure the issue is legitimate. The underwriter is expected to act as a third-party.

YBM Magnex International Inc. OSCBC 2003

YBM was initially a magnet company that shifted industries. In this instance, YBM stands for the principle that underwriters can be pursued as well. The court noted that “The phrase “to the best of our knowledge, information and belief” carries with it a requirement to obtain information before an underwriter can make that affirmation…An underwriter must go beyond the statements of the issuer’s directors, officers and counsel and must avoid automatic reliance.” However, this is to be balanced against their limited access.

Types of Underwriter / Issuer Relationships

Issuers and underwriters can have four relationships: direct issue, “best efforts” underwriting, firm commitment and bought deal.

Direct Issue: In a direct issue, there is no underwriter (such as occurred in Google’s IPO). This rarely occurs as underwriters are the parties experienced w/ capital markets and it is often their reputation which helps ensure the success of the offering.

“Best Efforts” Underwriting: The underwriter makes no agreement to purchase offering as a principle. This is governed by NI 41-101 part 8. The underwriter is only undertaking to make the best effort to sell the securities on the issuer’s behalf. The underwriter in effect is acting as an agent for the issuer. The risk of unsold securities is strictly that of the issuer. The underwriter has 90 days to distribute the security, at which point, the distribution ends. Underwriter only collects commission on securities sold.

Firm Commitment: The underwriter makes an agreement to purchase the securities and resell them. The undertaker likely is confident that the s/he can realize a profit on the sale of the securities to the capital market, the difference being the underwriter’s spread. An example of a firm commitment is the bought deal (see below). The issuer can also agree to sell the issue at the agreed price and instead charge an underwriting fee linked to the issue price.

NOTE: An underwriter can use “market out” clauses as a way to limit liability for sales here but must contract to do so. These occur generally in unstable markets and are often contingent on some unforeseen crisis (i.e. tsunami). Indemnity clauses will allow the underwriter to indemnify if there is a mistake in the prospectus. Not clear if the court will enforce these.

Bought Deal: A form of firm commitment in which the underwriter agrees to buy all shares. These are made before the preliminary prospectus is filed. These are more common in Canadian distributions than in the U.S. These generally occur where the underwriter has lined up an institutional investor who is interested in the issue. Retail investors complain because these are often attractive issues to which they have no access (rather than the normally speculative shares aimed at the retail investor).

COIs and Underwriting

Underwriting COIs are governed by NI 33-105.

The law recognizes three potential levels of COIs:

Low Level: The underwriter and issuer are not related but are connected (the test being would a reasonable investor be right to ask if the two are independent)

Medium Level: Issuer has a relation to the underwriter.

High Level: Bank is both issuing and underwriting the security

What kind of relationships are we discussing?

Imagine an issuer who has a loan w/ BMO. Said issuer wants to reduce loan and goes to Nesbitt Burns. NB is likely to have a COI w/ BMO.

The regulator has responded by requiring such relationships be made explicit and evident to investors. Also, where the underwriter is related, a portion of the underwriting work must go to an independent underwriter. Major underwriters complained that this was simply a hand-out of work to smaller underwriters, but the government did not care.

Preliminary Prospectus

Preliminary prospectus

54. (1) A preliminary prospectus shall substantially comply with the requirements of Ontario securities law respecting the form and content of a prospectus, except that the report or reports of the auditor or accountant required by the regulations need not be included. R.S.O. 1990, c. S.5, s. 54 (1); 1994, c. 11, s. 366.

Idem

(2) A preliminary prospectus may exclude information with respect to the price to the underwriter and offering price of any securities and other matters dependent upon or relating to such prices. R.S.O. 1990, c. S.5, s. 54 (2).

As per s. 54, a preliminary prospectus is not a draft.

Receipt for preliminary prospectus

55. The Director shall issue a receipt for a preliminary prospectus forthwith upon the filing thereof. R.S.O. 1990, c. S.5, s. 55.

Full, true and plain disclosure required

56. (1) A prospectus shall provide full, true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed and shall comply with the requirements of Ontario securities law. R.S.O. 1990, c. S.5, s. 56 (1); 1994, c. 11, s. 367.

Supplemental material

(2) The prospectus shall contain or be accompanied by such financial statements, reports or other documents as are required by this Act or the regulations. R.S.O. 1990, c. S.5, s. 56 (2).

Amendment to preliminary prospectus on material change

57. (1) Subject to subsection (2), where a material adverse change occurs after a receipt is obtained for a preliminary prospectus filed in accordance with subsection 53 (1) and before the receipt for the prospectus is obtained or, where a material change occurs after the receipt for the prospectus is obtained but prior to the completion of the distribution under such prospectus, an amendment to such preliminary prospectus or prospectus, as the case may be, shall be filed as soon as practicable and in any event within ten days after the change occurs. R.S.O. 1990, c. S.5, s. 57 (1).

Note: On a day to be named by proclamation of the Lieutenant Governor, subsection (1) is amended by the Statutes of Ontario, 2007, chapter 7, Schedule 38, subsection 3 (1) by striking out “Subject to subsection (2)” at the beginning. See: 2007, c. 7, Sched. 38, ss. 3 (1), 15 (2).

Idem

(2) Where an amendment to a prospectus is filed under subsection (1) for the purpose of distributing securities in addition to the securities previously disclosed in the prospectus or an amendment to the prospectus such additional distribution shall not be proceeded with for a period of ten days after the amendment is filed or, in the event the Commission informs the party filing in writing within ten days of the filing that it objects to the further distribution until such time as a receipt for the amended prospectus is obtained from the Director. R.S.O. 1990, c. S.5, s. 57 (2).

Note: On a day to be named by proclamation of the Lieutenant Governor, subsection (2) is repealed by the Statutes of Ontario, 2007, chapter 7, Schedule 38, subsection 3 (2) and the following substituted:

Same, additional securities

(2) If, after a receipt for a prospectus or for an amendment to a prospectus is issued but before the distribution under the prospectus or amendment is completed, securities in addition to those previously disclosed in the prospectus or amendment are to be distributed, the issuer making the distribution shall file an amendment to the prospectus disclosing the additional securities as soon as practicable and, in any event, within 10 days after the decision to increase the number of securities offered is made. 2007, c. 7, Sched. 38, s. 3 (2).

Receipt

(2.1) The Director shall issue a receipt for an amendment to a prospectus that must be filed under subsection (1) or (2) unless the Director refuses in accordance with subsection 61 (2) to issue the receipt. 2007, c. 7, Sched. 38, s. 3 (2).

Restriction

(2.2) Unless otherwise permitted by regulation, an issuer shall not proceed with a distribution or an additional distribution until a receipt is issued for an amendment to the prospectus that must be filed under subsection (1) or (2). 2007, c. 7, Sched. 38, s. 3 (2).

See: 2007, c. 7, Sched. 38, ss. 3 (2), 15 (2).

Notice of amendment

(3) An amendment to a preliminary prospectus referred to in subsection (1) shall, forthwith after it has been filed, be forwarded to each recipient of the preliminary prospectus according to the record maintained under section 67. R.S.O. 1990, c. S.5, s. 57 (3).

As per s. 57 there is a general requirement to amend preliminary prospectus when on the occurrence of “material adverse change”

Essentially, the preliminary prospectus does not include all of the detailed data that will be included in the final. The director is to issue the receipt for the preliminary pro forma (“shall issue a receipt”), which is not the case for final prospectuses. Note that any material change must be filed as soon as possible and not later than 10 days, if prior to distribution.

Irwin Law says: “The preliminary prospectus is a draft of the final prospectus that must be delivered in connection with a public offering of securities. It must ‘substantially comply’ with the rules governing final prospectuses. Once filed, the waiting period begins. During the waiting period, OSC staff who have reviewed the preliminary prospectus issue comment letters to the issuer. The issuer is obliged to respond in an effort to resolve any regulatory concerns so that when the issuer files the final prospectus (with any necessary amendments), it can obtain a receipt promptly.”

Waiting Period

During the waiting period, the regulator reviews the prospectus and the issuer awaits the issuance of a final receipt. The waiting period begins when the initial receipt for the preliminary receipt is issued. Under Ontario law, the waiting period is to last a minimum of 10 days. In practice, however, an issuer will receive a comment letter within 3-5 days. The prospectus is reviewed only in a single jurisdiction.

Note: the OSC openly admits to having adopted a risk-based approach to review so as to better allocate resources. Thus, only the riskier of prospectuses will be subject to extensive scrutiny. Such factors that would trigger such scrutiny include: issuer has no active business, minimal experience, fluctuating financial assets, abnormally small business issue, no clear plan for money sought, failure to contract an underwriter, etc.

Irwin Law says: “The waiting period shall be at least ten days…. The purpose appears to be so that the regulators have an adequate opportunity to vet the prospectus…[and] because it would permit prospective purchasers to ‘study the merits of the security issue’ and ‘permit underwriters to test the market.’”

NOTE: Short form can be approved in less than ten days.

Issuer’s Agency during Waiting Period

This is governed by OSA ss. 65, 66 and 67 (see below). During the waiting period, it is permissible to distribute advertisements and the preliminary prospectus; however, doing so triggers requirements under the Act.

65. (1) In this section,

“waiting period” means the interval, which shall be at least ten days, between the issuance by the Director of a receipt for a preliminary prospectus relating to the offering of a security and the issuance by the Director of a receipt for the prospectus. R.S.O. 1990, c. S.5, s. 65 (1).

Note: On a day to be named by proclamation of the Lieutenant Governor, the definition of “waiting period” is repealed by the Statutes of Ontario, 2007, chapter 7, Schedule 38, section 6 and the following substituted:

“waiting period” means the period prescribed by regulation or, if no period is prescribed, the period between the Director’s issuance of a receipt for a preliminary prospectus relating to the offering of a security and the Director’s issuance of a receipt for the prospectus.

See: 2007, c. 7, Sched. 38, ss. 6, 15 (2).

Distribution of material during waiting period

(2) Despite section 53, but subject to Part XIII, it is permissible during the waiting period,

(a) to distribute a notice, circular, advertisement or letter to or otherwise communicate with any person or company identifying the security proposed to be issued, stating the price thereof, if then determined, the name and address of a person or company from whom purchases of the security may be made and containing such further information as may be permitted or required by the regulations, if every such notice, circular, advertisement, letter or other communication states the name and address of a person or company from whom a preliminary prospectus may be obtained;

(b) to distribute a preliminary prospectus; and

(c) to solicit expressions of interest from a prospective purchaser if, prior to such solicitation or forthwith after the prospective purchaser indicates an interest in purchasing the security, a copy of the preliminary prospectus is forwarded to him, her or it. R.S.O. 1990, c. S.5, s. 65 (2).

Distribution of preliminary prospectus

66. Any dealer distributing a security to which section 65 applies shall, in addition to the requirements of clause 65 (2) (c), send a copy of the preliminary prospectus to each prospective purchaser who, without solicitation, indicates an interest in purchasing the security and requests a copy of such preliminary prospectus. R.S.O. 1990, c. S.5, s. 66.

Distribution list

67. Any dealer distributing a security to which section 65 applies shall maintain a record of the names and addresses of all persons and companies to whom the preliminary prospectus has been forwarded. R.S.O. 1990, c. S.5, s. 67.

Irwin Law says: “During the waiting period, it is unlawful to sell any of the securities. However, it is possible for the underwriters to distribute copies of the preliminary prospectus; to solicit “expressions of interest” from prospective purchasers, provided that the underwriter delivers a copy of the preliminary prospectus to the prospective purchasers either before the solicitation or after a prospective purchaser has expressed interest; and to distribute certain limited notices and advertisements, provided any such communication indicates how a copy of the preliminary prospectus may be obtained.”

Content of Prospectus

Key sections: OSA s. 56NI 41-101

Full, true and plain disclosure required

56. (1) A prospectus shall provide full, true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed and shall comply with the requirements of Ontario securities law. R.S.O. 1990, c. S.5, s. 56 (1); 1994, c. 11, s. 367.

Supplemental material

(2) The prospectus shall contain or be accompanied by such financial statements, reports or other documents as are required by this Act or the regulations. R.S.O. 1990, c. S.5, s. 56 (2).

S. 56 establishes the two key points to a prospectus: (1) it will include a full, true and plain disclosure of all material facts and (2) it will comply with Ontario securities law.

Financial Statements: These are governed by NI 41-101 part 4 and Form 41-101 F1 item 32. An issuer must include a minimum of numerical data. Section 32(2)(1) defines which specific financial statements: an income statement, a statement of retained earnings, a cash flow statement, and a balance sheet.

The income statement lists the revenue and losses of the business and can include non-cash items, such as appreciating expenses, capacity to write off depreciating value of an asset over time.

The cash flow statement is that with which the analysts and investors are most concerned. It shows what cash sources the business has and where that money is going.

The balance sheet is a two-sided document that lists assets on one side and liabilities on the other. The two figures are supposed to balance out. To ensure they do, shareholder equity is listed on the liability side.

The statement of retained earnings is the money the issuer has retained in the business’s coffers for future needs (such as future projects, dividends and reinvestment).

Issuers are supposed to include three years worth of financial statements, if possible.

As per s???, there is a requirement for external audit

Irwin Law says: “Both final and preliminary prospectuses must comply w/ regulatory requirements found in a number of sources.”

(1) The OSAa. The overriding duty of full, true and plain disclosure

i. Most requirements are in the OSC rulesii. The OSA contains guiding principle: “full, true and plain

disclosure of all material facts relating to the securities issued or proposed to be distributed”

iii. Thus: securities lawyers must make difficult judgment callsb. No half-truths

i. Misrep includes untrue statement of a material fact…ii. And omission to state a material fact

iii. Thus, statements that are literally true but misleading are unacceptable

c. Certificate requirementsi. Issuer’s must include signature by CEO, CFO, on behalf of the

BofD, and any promoter of the issuer that “the foregoing constitutes full, true and plain disclosure of all material facts relating to the securities offered”

ii. Underwriter must also supply a certificate that “to the best of our knowledge, information and belief, the foregoing…”

iii. All are potentially civilly liable for any misrepresentations(2) Requirements in the regulations, rules and forms

a. Must comply w/ requirements of Ontario securities law. Thus includes:i. OSA, OSA regulation, OSC rules and decisions of the OSC or the

directorii. All additional requirements are found in NI 41-101, rule 41-501,

41-501CP(3) Decision of the OSC or the director

a. OSC or its director has authority to demand additional information be disclosed in prospectus

(4) Policy statementsa. Not really an issue in Ontario, as the OSC has rule-making jurisdiction

(5) Amending the prospectusa. If a material adverse change occurs, the issuer must file an amendment to

the prospectus as early as possible and in any case within 10 daysb. Note: this is different than final prospectus which cares about any material

change

Prospectuses II

Cooling Off Period

S. 71 of the OSA entitles purchaser to make use of a cooling off period.

71. (1) A dealer not acting as agent of the purchaser who receives an order or subscription for a security offered in a distribution to which subsection 53 (1) or section 62 is applicable shall, unless the dealer has previously done so, send by prepaid mail or deliver to the purchaser the latest prospectus and any amendment to the prospectus filed either before entering into an agreement of purchase and sale resulting from the order or subscription or not later than midnight on the second day, exclusive of Saturdays, Sundays and holidays, after entering into such agreement. R.S.O. 1990, c. S.5, s. 71 (1).

Withdrawal from purchase

(2) An agreement of purchase and sale referred to in subsection (1) is not binding upon the purchaser, if the dealer from whom the purchaser purchases the security receives written or telegraphic notice evidencing the intention of the purchaser not to be bound by the agreement of purchase and sale not later than midnight on the second day, exclusive of Saturdays, Sundays and holidays, after receipt by the purchaser of the latest prospectus and any amendment to the prospectus. R.S.O. 1990, c. S.5, s. 71 (2).

Application of subs. (2)

(3) Subsection (2) does not apply if the purchaser is a registrant or if the purchaser sells or otherwise transfers beneficial ownership of the security referred to in subsection (2), otherwise than to secure indebtedness, before the expiration of the time referred to in subsection (2). R.S.O. 1990, c. S.5, s. 71 (3).

Time of receipt

(4) For the purpose of this section, where the latest prospectus and any amendment to the prospectus is sent by prepaid mail, the latest prospectus and any amendment to the prospectus shall be deemed conclusively to have been received in the ordinary course of mail by the person or company to whom it was addressed. R.S.O. 1990, c. S.5, s. 71 (4).

Receipt of prospectus by agent

(5) The receipt of the latest prospectus or any amendment to the prospectus by a dealer who is acting as agent of or who thereafter commences to act as agent of the purchaser with respect to the purchase of a security referred to in subsection (1) shall, for the purpose of this section, be receipt by the purchaser as of the date on which the agent received such latest prospectus and any amendment to the prospectus. R.S.O. 1990, c. S.5, s. 71 (5).

Receipt of notice by agent

(6) The receipt of the notice referred to in subsection (2) by a dealer who acted as agent of the vendor with respect to the sale of the security referred to in subsection (1) shall, for the purpose of this section, be receipt by the vendor as of the date on which the agent received such notice. R.S.O. 1990, c. S.5, s. 71 (6).

Dealer as agent

(7) For the purpose of this section, a dealer shall not be considered to be acting as agent of the purchaser unless the dealer is acting solely as agent of the purchaser with respect to the purchase and sale in question and has not received and has no agreement to receive compensation from or on behalf of the vendor with respect to the purchase and sale. R.S.O. 1990, c. S.5, s. 71 (7).

Onus of proof

(8) The onus of proving that the time for giving notice under subsection (2) has expired is upon the dealer from whom the purchaser has agreed to purchase the security. R.S.O. 1990, c. S.5, s. 71 (8).

The cooling off period functions as follows. Within two days of receipt of a prospectus and any additional amendments, a buyer can revoke his purchase. This exists to ensure that where there is a material change, the investor can move on. Note that the right listed in 71(2) is closely connected to the obligation in s. 57 (to file amendments for a m/c). NOTE that the cooling off period runs w/ the delivery of the final prospectus.

Irwin Law Says, “The OSA provides a “special two day cooling off” period for the purchasers of securities in a public offering. Under s. 72(2), such a purchaser has two

business days after receiving the prospectus or any prospectus amendment to withdraw from any purchase agreement by providing written notice. This withdrawal right is absolute and does not require the purchaser to prove—or even allege—any misrep or deficiency in the prospectus. Rationale…is twofold. First, …the right is intended to act as an antidote to high pressure sales techniques. Second, it helps ensure that purchasers have had at least the opportunity to review the detailed information in the prospectus before committing to purchase the securities offered.”

NOTE: Only those within the cooling off period enjoy the opportunity of the cooling off period restarting.

Example 1T receives prospectus on day 1. Day 2 agrees to buy. Day 5 T receives an amendment. Day 6 T wants out. FAIL. The cooling off period runes for two days after receipt of latest prospectus.

Example 2

T agrees to buy on day 1. Day 4 T receives final prospectus. Day 5 prospectus amendment filed. Day 8 Amendment delivered. Day 9 T wants out. PASS. The cooling-off period began on day 4 but restarted on day 5 and remained paused until day 8. Day 9 is within the two day time period.

Example 3

T receives prospectus on day 1. Day 4, T agrees to buy. Day 5 prospectus amendment filed. FAIL. Cooling off period ended on day 3, before T even agreed to purchase.

Enforcement

Penal Sanction: S. 122(1)(c) provides that anyone who has violated Ontario securities law is guilty of an offence and on conviction is liable to a fine of not more than $5 million or to imprisonment for a term of not more than five years less a day, or to both.

Orders in the Public Interest, including compliance w/ SA: s. 127 empowers the OSC to make orders in the public interest.

Failure to File Proper Documentation

Failure to file the proper prospectus documentation can trigger penal sanctions under s. 122, admin sanctions under s. 127 and civil sanctions under s. 128 (Superior Court of Justice applications). As a practical matter, the OSC rarely makes court applications as the OSC has greater expertise than the courts do.

Jones v. F.H. Deacon Hodgson Inc. (1986) SC HCJ

The court distinguished between an absolute failure to provide a prospectus (whether or not by virtue of incorrectly understanding an exemption) and the failure to provide a prospectus that had been filed to a specific purchaser, which as per the statute must be filed within three years. A failure to a prospectus w/ the regulator rendered the contracts of purchase and sale void, so there is no question of limitation period.

This case stands for the principle that a prospectus is so key to markets that where it is not filed, a claim will not be barred.

Exceptions to Long Form Prospectuses

Short form prospectus Shelf prospectus PREP prospectus MJDS Capital Pool Companies Mutual Fund Prospectus

All of the above do not require a standard form prospectus

Short form prospectuso NI 44-101o 2.2: Basic Qualification Criteria:

(a) issuer files electronically under NI 13-101; reporting issuer in at least one CDN jurisdiction; has filed in all active jur. Periodic and timely disclosure documents, has annual financial statements and AIF, the issuer’s equity securities are listed and posted on a short form eligible exchange

In the alt. for approved rating non-convertible securities, all of the above and the securities have received an approval rating provincially,

In the alt. for issuers of guaranteed non-convertible debt securities, preferred shares, and cash settled derivatives

o Available to larger issuers: must be a reporting issuer in Canada, must be on CDAR; where not a reporting issuer, one must have filed all documents, be up to date w/ fin. Info and forms; continuing disclosure

o The short form prospectus includes: cover page, summary desp. Of business, con. capitalization, use of proceeds, plan of distr., earnings coverage ratios, desc. Of securities being distr., selling security holder, mineral prop., sig. acquisitions, doc. incorp. By reference, add. Disclosure for issues of guaranteed securities, exemptions for certain issues of guar. Sec., r/s between issuer or selling security holder and underwriter, interst of experts, promoters, risk factors, other material facts, exemptions from the instrument or this form, stat. rights of w/drawal and rescission, and certificates

o Note item 11: documents that are automatically incorporated: current AIF, current annual fin. State., interim fin. Stat., news release and public communications if more recent than above, material change report (except where confidential), business acquisition report, info circular, any other disclosure document w/ the issuer has filed pursuant to an undertaking to a regulator, any other disclosure doc. of the type listed above which the issuer has filed pursuant to an exemption from any requirement since the beg. Of the fin. Year in respect of which the current AIF is field

o NOTE: any mistake in docs. Incorporated is treated like a violation of the short form, which thus triggers continuous disclosure requirements

o THEORY: On the one hand, NI 44-101 wants to ease the prospectus requirements on regular and larger issuers who have other securities on the market and therefore already have ongoing reporting requirements.

On the other, nothing in the short form is intended to provide relief from liability. Any untrue statement will trigger liability. Note that the instructions put requirements for clear language and no boiler plate provisions.

MOREOVER, 44-101 is more interested in issuers explaining the security being offered than it is in requiring the company to explain its’ long term plans / prospects

Shelf prospectuso “a disclosure document that is prepared, filed and put on the metaphorical

shelf (for up to 25 months) until the issuer decides that it wishes to take some or all of the qualified securities ‘off the shelf’ and distribute them.”

o At time of sale, issuer prepares doc. w/ info excluded from earlier doc., which is then incorporated by ref

o Note that issuer must satisfy req. at time of filing shelf prospectus and again at time securities are sold

o Further note that a shelf prospectus can be filed relating to any number and type of securities

o NI 44-102o Only those issuers who qualify for short form issuing can qualify for a

shelf prospectus (44-101CP(1.6)); advises that issuers look first to 44-101 and then to 44-102

o To be included: statement at top of cov. Pg. indentifying s/f prospectus as base shelf pros., 2 a statement to that effect, 3 all shelf info omitted from the bas.shf. pros. Will be contained in suppl that will be del to purchasers, 4 each supplement w/ incorp by ref, 5. A statement of aggregate dollar amount, 6 disclosure of type of security that may be distr., 7 if an undertaking then a statement to that effect, 8 prosp. Certificates, and 9 list all exemptions from the provisions granted to issuer

o Permitted omissions: variable terms of the securities (if not known at that date), 2 the dollar amount of teanche of securities that may be distributed (ifnotknown), 3 variable terms of the distribution (if nk), 4 name and certificate of underwriter (if nk), 5 if one or more underwriter has agreed to purchase securities at a specified price, 6 if underwriting is on a best efforts basis, 7 any other info that pertains only to a specific distribution of securities under the base shelf prospectus, if nk, and 8 any other info req. under 44-101 or other securities reg and cannot be ascertained at time of filing

PREP prospectuso 44-103o This is similar to a shelf prospectus. An issuer files in two stages: a base

document that omits certain deal-specific info is filed and cleared w/ the OSC; second, at the time of sale, a second, shorter supplement w/ is not pre-cleared w/ regulators is used.

o Note that PREP is available to all issuers, that it faces a shorter shelf time (90 days from receipt) and that a PREP cannot be used to offer multiple types of securities

o PHILOSOPHY: Capital markets are time sensitive and often companies have a very small window in which they can operate; PREPs and Shelfs allow issuers to be ready in advance and rush to market

MJDSo Multi-jurisdictional disclosure systems are governed by NI 71-101o US issuers who wish to issue in Canadian mrktso Mutual recognition (if US says fine, CAN says fine)o Eligibility: rep. issuer in CAN for 1 year, public float of $75mo US issuers essentially allowed to distribute in Canada using US docso This allows CAN issuers to target US mrkt without review by the SECo CAN issuers must have a CAN prospectus + relevant US form (gen. F-10)o Fin. Statements must be in GAAP formato Must also face continuous disclosure req. CAN disclosure + Form 40F

Capital Pool Companieso OSC Policy 41-601o Issuer files a CPC prospectus and is permitted to obtain a CDNX listing

for a co. without any assets and that does not carry on any business o Once financing complete, CPC has 18 months within which to use money

to complete a “qualifying transaction” and become eligible for tier ½ listing status on the TSX Venture

o NOTE: Very open to abuse, so TSX Venture listing requirements are used to watch for abuse

Mutual Fund Prospectuso Governed by Rule 41-502o Units are in continuous distributiono One can walk in and purchase them at any time directly from the mutual

fundo Manager must be aware of ongoing liability for misrepresentationo These are targeted to the retail end of marketo Expect future enforcement around this end

Reasons for an Enforcement Regime

Parties concerned w/ securities have generally conceived of two ways in which to ensure compliance: empower regulators to look into and ensure compliance or empower shareholders to seek remedies where abuses occur.

Arguments in favour of government regulation: Regulators have the larger market’s interest in mind, not just their own bank book Study by Rafael La Porta shows that countries that rely on private market forces were

less efficient than markets that rely on regulation (however, study also shows that investor-friendly law and remedies are necessary)

Arguments in favour of shareholder remedies: Shareholders are the hurt parties. As such, it is in their interest to seek a remedy; their

motivation is stronger and they are less likely to make a deal Government resources are finite Individual investors are often fully capable, competent investors (i.e. hedge funds,

pension funds) Pitiful record of enforcement by OSC Statistics suggest rampant insider trading yet little action by OSC La Porta’s argument (see above) found that s/holder remedies and regulation works

by setting a general standard (to prevent parties starting from scratch w/ a different K each time

Remedies

Common Law: Negligent Misrepresentation

While this tort remedy is available, it adds a burden in that each investor must prove individual reliance to qualify for the remedy, which is not the case with the statutory regime.

Civil Liability under S. 130

130. (1) Where a prospectus, together with any amendment to the prospectus, contains a misrepresentation, a purchaser who purchases a security offered by the prospectus during the period of distribution or during distribution to the public has, without regard to whether the purchaser relied on the misrepresentation, a right of action for damages against,

(a) the issuer or a selling security holder on whose behalf the distribution is made;

(b) each underwriter of the securities who is required to sign the certificate required by section 59;

(c) every director of the issuer at the time the prospectus or the amendment to the prospectus was filed;

(d) every person or company whose consent has been filed pursuant to a requirement of the regulations but only with respect to reports, opinions or statements that have been made by them; and

(e) every person or company who signed the prospectus or the amendment to the prospectus other than the persons or companies included in clauses (a) to (d),

or, where the purchaser purchased the security from a person or company referred to in clause (a) or (b) or from another underwriter of the securities, the purchaser may elect to exercise a right of rescission against such person, company or underwriter, in which case the

purchaser shall have no right of action for damages against such person, company or underwriter. R.S.O. 1990, c. S.5, s. 130 (1); 2004, c. 31, Sched. 34, s. 6.

Defence

(2) No person or company is liable under subsection (1) if he, she or it proves that the purchaser purchased the securities with knowledge of the misrepresentation. R.S.O. 1990, c. S.5, s. 130 (2).

Idem

(3) No person or company, other than the issuer or selling security holder, is liable under subsection (1) if he, she or it proves,

(a) that the prospectus or the amendment to the prospectus was filed without his, her or its knowledge or consent, and that, on becoming aware of its filing, he, she or it forthwith gave reasonable general notice that it was so filed;

(b) that, after the issue of a receipt for the prospectus and before the purchase of the securities by the purchaser, on becoming aware of any misrepresentation in the prospectus or an amendment to the prospectus he, she or it withdrew the consent thereto and gave reasonable general notice of such withdrawal and the reason therefor;

(c) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on the authority of an expert or purporting to be a copy of or an extract from a report, opinion or statement of an expert, he, she or it had no reasonable grounds to believe and did not believe that there had been a misrepresentation or that such part of the prospectus or the amendment to the prospectus did not fairly represent the report, opinion or statement of the expert or was not a fair copy of or extract from the report, opinion or statement of the expert;

(d) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an expert or purporting to be a copy of or an extract from his, her or its own report, opinion or statement as an expert but that contains a misrepresentation attributable to failure to represent fairly his, her or its report, opinion or statement as an expert,

(i) the person or company had, after reasonable investigation, reasonable grounds to believe and did believe that such part of the prospectus or the amendment to the prospectus fairly represented his, her or its report, opinion or statement, or

(ii) on becoming aware that such part of the prospectus or the amendment to the prospectus did not fairly represent his, her or its report, opinion or statement as an expert, he, she or it forthwith advised the Commission and gave reasonable general notice that such use had been made and that he, she or it would not be responsible for that part of the prospectus or the amendment to the prospectus; or

(e) that, with respect to a false statement purporting to be a statement made by an official person or contained in what purports to be a copy of or extract from a public official document, it was a correct and fair representation of the statement or copy of or extract from the document, and he, she or it had reasonable grounds to believe and did believe that the statement was true. R.S.O. 1990, c. S.5, s. 130 (3).

Idem

(4) No person or company, other than the issuer or selling security holder, is liable under subsection (1) with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an expert or purporting to be a copy of or an extract from his, her or its own report, opinion or statement as an expert unless he, she or it,

(a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation; or

(b) believed there had been a misrepresentation. R.S.O. 1990, c. S.5, s. 130 (4).

Idem

(5) No person or company, other than the issuer or selling security holder, is liable under subsection (1) with respect to any part of the prospectus or the amendment to the prospectus not purporting to be made on the authority of an expert and not purporting to be a copy of or an extract from a report, opinion or statement of an expert unless he, she or it,

(a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation; or

(b) believed there had been a misrepresentation. R.S.O. 1990, c. S.5, s. 130 (5).

Limitation re underwriters

(6) No underwriter is liable for more than the total public offering price represented by the portion of the distribution underwritten by the underwriter. R.S.O. 1990, c. S.5, s. 130 (6).

Limitation in action for damages

(7) In an action for damages pursuant to subsection (1), the defendant is not liable for all or any portion of such damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon. R.S.O. 1990, c. S.5, s. 130 (7).

Joint and several liability

(8) All or any one or more of the persons or companies specified in subsection (1) are jointly and severally liable, and every person or company who becomes liable to make any payment under this section may recover a contribution from any person or company who, if sued separately, would have been liable to make the same payment provided that the court may deny the right to recover such contribution where, in all the circumstances of the case, it is satisfied that to permit recovery of such contribution would not be just and equitable. R.S.O. 1990, c. S.5, s. 130 (8).

Limitation re amount recoverable

(9) In no case shall the amount recoverable under this section exceed the price at which the securities were offered to the public. R.S.O. 1990, c. S.5, s. 130 (9).

No derogation of rights

(10) The right of action for rescission or damages conferred by this section is in addition to and without derogation from any other right the purchaser may have at law. R.S.O. 1990, c. S.5, s. 130 (10).

Liability for misrepresentation in offering memorandum

130.1 (1) Where an offering memorandum contains a misrepresentation, a purchaser who purchases a security offered by the offering memorandum during the period of distribution has, without regard to whether the purchaser relied on the misrepresentation, the following rights:

1. The purchaser has a right of action for damages against the issuer and a selling security holder on whose behalf the distribution is made.

2. If the purchaser purchased the security from a person or company referred to in paragraph 1, the purchaser may elect to exercise a right of rescission against the person or company. If the purchaser exercises this right, the purchaser ceases to have a right of action for damages against the person or company. 2004, c. 31, Sched. 34, s. 7.

Defence

(2) No person or company is liable under subsection (1) if he, she or it proves that the purchaser purchased the securities with knowledge of the misrepresentation. 1999, c. 9, s. 218.

Limitation in action for damages

(3) In an action for damages pursuant to subsection (1), the defendant is not liable for all or any portion of the damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon. 1999, c. 9, s. 218.

Joint and several liability

(4) Subject to subsection (5), all or any one or more of the persons or companies specified in subsection (1) are jointly and severally liable, and every person or company who becomes liable to make any payment under this section may recover a contribution from any person or company who, if sued separately, would have been liable to make the same payment, unless the court rules that, in all the circumstances of the case, to permit recovery of the contribution would not be just and equitable. 1999, c. 9, s. 218.

Same

(5) Despite subsection (4), an issuer shall not be liable where it is not receiving any proceeds from the distribution of the securities being distributed and the misrepresentation was not based on information provided by the issuer, unless the misrepresentation,

(a) was based on information that was previously publicly disclosed by the issuer;

(b) was a misrepresentation at the time of its previous public disclosure; and

(c) was not subsequently publicly corrected or superseded by the issuer prior to the completion of the distribution of the securities being distributed. 1999, c. 9, s. 218.

Limitation re amount recoverable

(6) In no case shall the amount recoverable under this section exceed the price at which the securities were offered. 1999, c. 9, s. 218.

No derogation of rights

(7) The right of action for rescission or damages conferred by this section is in addition to and without derogation from any other right the purchaser may have at law. 1999, c. 9, s. 218.

Application

(8) This section applies only with respect to an offering memorandum which has been furnished to a prospective purchaser in connection with a distribution of a security under an exemption from section 53 of the Act that is specified in the regulations for the purposes of this section. 2001, c. 23. s. 216.

Go back to 9/2/5 for more info

Liable Parties Under OSA s. 130(1) Issuer / selling shareholder(2) Each underwriter signing prospectus(3) Every director at time of prospectus filing(4) Every expert, in relation to reports / opinion / statements they have given(5) Every other signing party of the prospectus

Proving Misrepresentation in the Prospsectus Test

(1) Purchase of securities offered under the prospectus(2) Purchase made during period of distribution(3) A misrepresentation was made in the prospectus

a. Definition of the misrepresentationb. Deemed reliance

Amending a Preliminary Prospectus for a Material Change

57. (1) Subject to subsection (2), where a material adverse change occurs after a receipt is obtained for a preliminary prospectus filed in accordance with subsection 53 (1) and before the receipt for the prospectus is obtained or, where a material change occurs after the receipt for the prospectus is obtained but prior to the completion of the distribution under such prospectus, an amendment to such preliminary prospectus or prospectus, as the case may be, shall be filed as soon as practicable and in any event within ten days after the change occurs. R.S.O. 1990, c. S.5, s. 57 (1).

Note: On a day to be named by proclamation of the Lieutenant Governor, subsection (1) is amended by the Statutes of Ontario, 2007, chapter 7, Schedule 38, subsection 3 (1) by striking out “Subject to subsection (2)” at the beginning. See: 2007, c. 7, Sched. 38, ss. 3 (1), 15 (2).

Idem

(2) Where an amendment to a prospectus is filed under subsection (1) for the purpose of distributing securities in addition to the securities previously disclosed in the prospectus or an amendment to the prospectus such additional distribution shall not be proceeded with for a period of ten days after the amendment is filed or, in the event the Commission informs the party filing in writing within ten days of the filing that it objects to the further distribution until such time as a receipt for the amended prospectus is obtained from the Director. R.S.O. 1990, c. S.5, s. 57 (2).

Note: On a day to be named by proclamation of the Lieutenant Governor, subsection (2) is repealed by the Statutes of Ontario, 2007, chapter 7, Schedule 38, subsection 3 (2) and the following substituted:

Same, additional securities

(2) If, after a receipt for a prospectus or for an amendment to a prospectus is issued but before the distribution under the prospectus or amendment is completed, securities in addition to those previously disclosed in the prospectus or amendment are to be distributed, the issuer making the distribution shall file an amendment to the prospectus disclosing the additional securities as soon as practicable and, in any event, within 10 days after the decision to increase the number of securities offered is made. 2007, c. 7, Sched. 38, s. 3 (2).

Receipt

(2.1) The Director shall issue a receipt for an amendment to a prospectus that must be filed under subsection (1) or (2) unless the Director refuses in accordance with subsection 61 (2) to issue the receipt. 2007, c. 7, Sched. 38, s. 3 (2).

Restriction

(2.2) Unless otherwise permitted by regulation, an issuer shall not proceed with a distribution or an additional distribution until a receipt is issued for an amendment to the prospectus that must be filed under subsection (1) or (2). 2007, c. 7, Sched. 38, s. 3 (2).

See: 2007, c. 7, Sched. 38, ss. 3 (2), 15 (2).

Notice of amendment

(3) An amendment to a preliminary prospectus referred to in subsection (1) shall, forthwith after it has been filed, be forwarded to each recipient of the preliminary prospectus according to the record maintained under section 67. R.S.O. 1990, c. S.5, s. 57 (3).

Versus: Section 130:Liability for misrepresentation in prospectus

130. (1) Where a prospectus, together with any amendment to the prospectus, contains a misrepresentation, a purchaser who purchases a security offered by the prospectus during the period of distribution or during distribution to the public has, without regard to whether the purchaser relied on the misrepresentation, a right of action for damages against,

(a) the issuer or a selling security holder on whose behalf the distribution is made;

(b) each underwriter of the securities who is required to sign the certificate required by section 59;

(c) every director of the issuer at the time the prospectus or the amendment to the prospectus was filed;

(d) every person or company whose consent to disclosure of information in the prospectus has been filed pursuant to a requirement of the regulations but only with respect to reports, opinions or statements that have been made by them; and

(e) every person or company who signed the prospectus or the amendment to the prospectus other than the persons or companies included in clauses (a) to (d),

or, where the purchaser purchased the security from a person or company referred to in clause (a) or (b) or from another underwriter of the securities, the purchaser may elect to exercise a right of rescission against such person, company or underwriter, in which case the purchaser shall have no right of action for damages against such person, company or underwriter. R.S.O. 1990, c. S.5, s. 130 (1); 2004, c. 31, Sched. 34, s. 6; 2006, c. 33, Sched. Z.5, s. 13.

Defence

(2) No person or company is liable under subsection (1) if he, she or it proves that the purchaser purchased the securities with knowledge of the misrepresentation. R.S.O. 1990, c. S.5, s. 130 (2).

Idem

(3) No person or company, other than the issuer or selling security holder, is liable under subsection (1) if he, she or it proves,

(a) that the prospectus or the amendment to the prospectus was filed without his, her or its knowledge or consent, and that, on becoming aware of its filing, he, she or it forthwith gave reasonable general notice that it was so filed;

(b) that, after the issue of a receipt for the prospectus and before the purchase of the securities by the purchaser, on becoming aware of any misrepresentation in the prospectus or an amendment to the prospectus he, she or it withdrew the consent thereto and gave reasonable general notice of such withdrawal and the reason therefor;

(c) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on the authority of an expert or purporting to be a copy of or an extract from a report, opinion or statement of an expert, he, she or it had no reasonable grounds to believe and did not believe that there had been a misrepresentation or that such part of the prospectus or the amendment to the prospectus did not fairly represent the report, opinion or statement of the expert or was not a fair copy of or extract from the report, opinion or statement of the expert;

(d) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an expert or purporting to be a copy of or an extract from his, her or its own report, opinion or statement as an expert but that contains a misrepresentation attributable to failure to represent fairly his, her or its report, opinion or statement as an expert,

(i) the person or company had, after reasonable investigation, reasonable grounds to believe and did believe that such part of the prospectus or the amendment to the prospectus fairly represented his, her or its report, opinion or statement, or

(ii) on becoming aware that such part of the prospectus or the amendment to the prospectus did not fairly represent his, her or its report, opinion or statement as an expert, he, she or it forthwith advised the Commission and gave reasonable general notice that such use had been made and that he, she or it would not be responsible for that part of the prospectus or the amendment to the prospectus; or

(e) that, with respect to a false statement purporting to be a statement made by an official person or contained in what purports to be a copy of or extract from a public official document, it was a correct and fair representation of the statement or copy of or extract from the document, and he, she or it had reasonable grounds to believe and did believe that the statement was true. R.S.O. 1990, c. S.5, s. 130 (3).

Idem

(4) No person or company, other than the issuer or selling security holder, is liable under subsection (1) with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an expert or purporting to be a copy of or an extract from his, her or its own report, opinion or statement as an expert unless he, she or it,

(a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation; or

(b) believed there had been a misrepresentation. R.S.O. 1990, c. S.5, s. 130 (4).

Idem

(5) No person or company, other than the issuer or selling security holder, is liable under subsection (1) with respect to any part of the prospectus or the amendment to the prospectus not purporting to be made on the authority of an expert and not purporting to be a copy of or an extract from a report, opinion or statement of an expert unless he, she or it,

(a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation; or

(b) believed there had been a misrepresentation. R.S.O. 1990, c. S.5, s. 130 (5).

Limitation re underwriters

(6) No underwriter is liable for more than the total public offering price represented by the portion of the distribution underwritten by the underwriter. R.S.O. 1990, c. S.5, s. 130 (6).

Limitation in action for damages

(7) In an action for damages pursuant to subsection (1), the defendant is not liable for all or any portion of such damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon. R.S.O. 1990, c. S.5, s. 130 (7).

Joint and several liability

(8) All or any one or more of the persons or companies specified in subsection (1) are jointly and severally liable, and every person or company who becomes liable to make any payment under this section may recover a contribution from any person or company who, if sued separately, would have been liable to make the same payment provided that the court may deny the right to recover such contribution where, in all the circumstances of the case, it is satisfied that to permit recovery of such contribution would not be just and equitable. R.S.O. 1990, c. S.5, s. 130 (8).

Limitation re amount recoverable

(9) In no case shall the amount recoverable under this section exceed the price at which the securities were offered to the public. R.S.O. 1990, c. S.5, s. 130 (9).

No derogation of rights

(10) The right of action for rescission or damages conferred by this section is in addition to and without derogation from any other right the purchaser may have at law. R.S.O. 1990, c. S.5, s. 130 (10).

Liability for misrepresentation in offering memorandum

130.1 (1) Where an offering memorandum contains a misrepresentation, a purchaser who purchases a security offered by the offering memorandum during the period of distribution has, without regard to whether the purchaser relied on the misrepresentation, the following rights:

1. The purchaser has a right of action for damages against the issuer and a selling security holder on whose behalf the distribution is made.

2. If the purchaser purchased the security from a person or company referred to in paragraph 1, the purchaser may elect to exercise a right of rescission against the person or company. If the purchaser exercises this right, the purchaser ceases to have a right of action for damages against the person or company. 2004, c. 31, Sched. 34, s. 7.

Defence

(2) No person or company is liable under subsection (1) if he, she or it proves that the purchaser purchased the securities with knowledge of the misrepresentation. 1999, c. 9, s. 218.

Limitation in action for damages

(3) In an action for damages pursuant to subsection (1), the defendant is not liable for all or any portion of the damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon. 1999, c. 9, s. 218.

Joint and several liability

(4) Subject to subsection (5), all or any one or more of the persons or companies specified in subsection (1) are jointly and severally liable, and every person or company who becomes liable to make any payment under this section may recover a contribution from any person or company who, if sued separately, would have been liable to make the same payment, unless the court rules that, in all the circumstances of the case, to permit recovery of the contribution would not be just and equitable. 1999, c. 9, s. 218.

Same

(5) Despite subsection (4), an issuer shall not be liable where it is not receiving any proceeds from the distribution of the securities being distributed and the misrepresentation was not based on information provided by the issuer, unless the misrepresentation,

(a) was based on information that was previously publicly disclosed by the issuer;

(b) was a misrepresentation at the time of its previous public disclosure; and

(c) was not subsequently publicly corrected or superseded by the issuer prior to the completion of the distribution of the securities being distributed. 1999, c. 9, s. 218.

Limitation re amount recoverable

(6) In no case shall the amount recoverable under this section exceed the price at which the securities were offered. 1999, c. 9, s. 218.

No derogation of rights

(7) The right of action for rescission or damages conferred by this section is in addition to and without derogation from any other right the purchaser may have at law. 1999, c. 9, s. 218.

Application

(8) This section applies only with respect to an offering memorandum which has been furnished to a prospective purchaser in connection with a distribution of a security under an exemption from section 53 of the Act that is specified in the regulations for the purposes of this section. 2001, c. 23. s. 216.

Misrepresentation

“misrepresentation” means,

(a) an untrue statement of material fact, or

(b) an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made; (“présentation inexacte des faits”)

“mutual fund” means an issuer whose primary purpose is to invest money provided by its security holders and whose securities entitle the holder to receive on demand, or within a specified period after demand, an amount computed by reference to the value of a proportionate interest in the whole or in part of the net assets, including a separate fund or trust account, of the issuer; (“fonds mutuel”)

“mutual fund in Ontario” means a mutual fund that is a reporting issuer or that is organized under the laws of Ontario, but does not include a private mutual fund; (“fonds mutuel de l’Ontario”)

TEST: Proving an Issuer Has Failed to Report a Material Fact / Change

(1) Was this information about the emerging result a material change / fact? (2) Does the issuer have a continuing obligation to ensure that all material facts are

disclosed until time of purchase?

Remedies and Limitations

S. 130 holds that shareholders are essentially limited to the cost of the security (s. 130(7)) or to rescission (against the underwriter, not the issuer save in a best efforts situation) in the award they seek. Is this true?

Three limitations exist on the plaintiff’s right to recover. The amount sought cannot exceed the price of the securities (opportunity cost is not recoverable). Where a defendant can prove that the damages exceeded the depreciation, the defendant is only responsible for the depreciation. Lastly, underwriters are only responsible for the portion they underwrote.

Available Defences to the Issuer

The purchaser can claim that the purchaser knew about the misrepresentation in making the purchase (s. 130(2)) or that the depreciation was not caused by the misrepresentation (s. 130(7)). Note that the onus lies on the issuer to prove either claim.

Available Defences for directors, officers and underwriters

The liable party has a defence if he can show that he did not know about the prospectus or that he did not consent to its filing (130(3)(a)); the defendant upon learning of the misrepresentation withdrew any consent previously given (130(3)(b)); any official statement in the prospectus fairly reflected the official statement that the defendant believed to be true and had no reasonable grounds to doubt; and the defendant did not in fact believe that there had been a misrepresentation and conducted a ‘reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation (aka the due diligence defence s.130(5)).

Available Defences for Experts

First, is the expert advice made by the expert in question? If not, then no liability. If yes, then the expert has two defences. First, if the information in the prospectus does not reflect his advice (130(3)(d), then he is not liable provided he prove that he reasonably believed the information in the prospectus was correct. To do this, he will likely have to have made a reasonable effort to check the prospectus after the fact and if incorrect took steps to have it corrected (i.e. informed the issuer and the OSC). Second, if he can prove due diligence (130(4)), he is fine.

Due Diligence: S.130(4),(5)Must actually believe that there was no misrepresentation. This belief is reasonable and is based on reasonable investigation. The onus falls on the would be non-liable defendant. S. 132 defines reasonable as: “the standard of reasonableness shall be that required of a prudent person in the circumstances of the particular case.”

Kerr v. Danier

May 6: receipt obtained for final prospectus. Final prospectus included a Q4 forecast for 1998. May 16-19, D received info re: first ½ of Q4 that results will be down due to unseasonably warm weather. May 20 distribution closed. June 4, Danier revises forecast and material change report; share price drops. June 27, Q4 has ended and Danier has substantially achieved Q4 forecast.

Q: Was Danier in violation of its reporting duties? A: No. The weather was a material fact, not a material change.

Note that weather is external to the issuer’s control. However, weather does play a key component in the company’s business, so therefore it constituted a material fact. For it to be a material change, it would have to qualify as a change in business, operations or capital.

This case stands for the principle that the legislature intended material change to include changes in business, operations and capital.

Continuous Disclosure

Policy Rationale

A continuous disclosure regimes assists in ensuring that the securities are efficiently and correctly valued on the market. It further reduces fraud possibilities, assist w/ achieving corporate governance goals, equality of opportunities for all investors, and increases market confidence.

ECMH: Efficient Capital market Hypothesis—at any given time the price should reflect the state of the knowledge in the company.

Arguments against continuous disclosure

Issuers face serious costs keeping information up-to-date, as do regulators. Reporting emphasizes short-term results at the expense of long-term success/prospects. If continuous disclosure creates confidence, that may be a bad thing as insider trading is rampant. Sensitive information can lead to crippling results for companies that if said info was withheld, said companies might stand better chances at survival. Lastly, continuous disclosure creates information overload. Rules in this area are fossilized and fail to meet modern needs.

Information Issuers Are Obliged to Disclose

Periodic Disclosure of- Financial statements (annual and interim)

o Annual Annually and within 140 days following end of fin. Year (OSA 78) To consist of balance sheet, income statement, statement of

retained earnings and cash flow statement (OSC Rule 52-501 s 2.1) Said docs must be reviewed by audit committee (52-501 2.1),

approved by BoD and signed by two directors (OSA Reg 1015) Statements must comply w/ gen. accepted accounting principles

and include report of auditor (OSA s. 78(1),(2))o Interim

To be filed within 60 days of quarter’s end (OSA s. 77, 78)

- MD&A- AIF (annual information form)

o (51-102 s.4) distinguishes between venture and non-venture issuerso Major issuers must be listed on AIM, within 90 days as 51-102 s. 4.2o Venture issuers have 120 dayso

- Proxy CircularsTimely Disclosure (OSA s. 75)

- Material Change Reports

Ongoing Disclosure for Financial Statements (NI 51-102 Continuous Disclosure Obligations)

Must Provide Financial Statements (4)

Must file annual statements including (a) income statement, a statement of retained earnings and a cash flow statement for (i) most recently completed fin. Year and (ii) immediate. Prec. Year, if any; (b) a balance sheet as at the end of each period and (c) notes to fin. State. (4.1)

(4.1(2)) all docs. Must be audited (4.2) Rep. Iss. Must file in 90 days; ven. Iss. Must fil w/ 120 days (4.3(2)) must file interim financial statements, including: (a) balance

sheet at end of interim period and preceding year; (b) income statement, a statement of retained earnings and cash flow statement—all for the year to date interim period w/ comparative data from previous time and (d) notes to said forms

If no auditor, must disclose (4.3(3)) RI in 45 days and venture issuers in 60 days (4.4(a),(b)) Fin. Statements under 4.1 and 4.3 must be approve by BoD before

filing RI and VI must sent request forms to reg. and ben. Owners if said

parties wish to request materials, and to provide free of cost (4.6(3)) Forward Looking Information (4A)

Not to disclose FLI without reasonable basis for the belief (4A.2) Must, when doing so, make it clear that it is forward looking, cautions

that results may vary, states material facts or assumptions that lead to conclusion and describe policy for updating forward-looking info (4A.3)

FOFI and Financial Outlooks (4B)o FOFI: “Forward-looking information about prospective results of operations,

financial position or cash flows, based on assumption about future economic conditions and courses of action, and presented in the format of a historical balance sheet, income statement or cash flow statement”

o Fin. Out.: “forward-looking info about prospective results of operation, financial position or cash flows that is based on assumption about future economic conditions and courses of action and that is not presented in the format of a historical balance sheet, income statement or cash flow statement.”

Oral statements and statutory obligations are excepted (4B.1(2)) RIs not to disclose FOFI or FO without reasonable assumptions (4B.2) FOFIs&FOs are to be limited to periods that can reasonably be

estimated and use accounting policies the RI expects to use to prepare its historical financial statement (4B.2(2)

FOFIs&FOs must include the date mgmt approved the FOFI/FO and explains the purpose of the FOFI/FO and warns that it may be inappropriate for other purposes (4B.3)

MD&A (Management’s Discussion & Analysis) (5)o “A Completed Form 51-102F1 MD&A” or if SEC issuer, that plus additional

info MD&A are to accompany annual and interim fin. State. (5.1.1) except

for years RI was not a RI (5.1(1.1)) Expected to file at the date financial statements are filed, excepting

that, when financial statements are due (5.1(2)) Venture issuers who lack significant revenue from operations in the

last two years must include a breakdown of material components of development, research, deferred development, general and admin, and any other material costs (5.3)

Must include the designation and number or principle amount of outstanding shares (and their classification) (5.4)

AIF (Annual Information Form) (6)o “A completed AIF Form (51-102F2); if US then 10K or 20F”

Applies only to RIs (6.1) and must be filed within 90 days (6.2) Material Change Report (7)

o “Material change means (a) a change in the business, operations or capital of the reporting issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the reporting issuer; or

o “(b) a decision to implement a change referred to in paragraph (a) made by the board of directors or other persons acting in a similar capacity or by senior management of the reporting issuer who believe that confirmation of the decision by the board of directors or any other persons acting in a similar capacity is probable”

Where a material change occurs, the RI must immediately issue and file a news release authorized by executive officer disclosing the nature and substance of the change (7.1(1)(a)) and “as soon as is practicable and in any event within 10 days” file a material change report (7.1(1)(b))

There is an exemption where the disclosure would in a reasonable opinion be detrimental (7.1(2)(a)) or where the material change awas decided on by senior mgmt who believe that confirmation by the BoD is probable and management has no belief that insider selling is occurring (7.1(2)(b))

Business Acquisition Report (8)o Must report a significant acquisition within 75 days (8.2) or if said acquired

business’ fin year ended 45 days or less before acquisition, then said acquisition must be reported within 90 days if RI or 120 days if VI (8.2(2))

o As per 8.3, for RI, significant acquisitions must meet any of the following: Asset Test (share of consolidated assets exceeds 20 percent)

Investment Test (investments or advances to the business exceed 20 percent of the consolidated assets)

Income Test (share of the income from the continuing operations exceeds 20 percent)

o As per 8.3, for VI, any of the above tests except read 40 percent for Asset Test or Investment Test

Proxy Solicitation and Information Circular (9)o Proxy: “a completed and executed form of proxy by which a securityholder

has appointed a person or company as the securityholder’s nominee to attend and act for the securityholder and on the securityholder’s behalf at a meeting of securityholders”

(9.1) When mgmt of RI gives notice of a meeting to its registered shareholders, mgmt must also at the same time or prior give a proxy

Disclosure Obligations on Other Parties

As per OSA 107, insiders must report insider status to the OSC. As per OSA 101, parties that acquires control or direction over 10 percent or more of the outstanding shares must forthwith issue a news release and within two business days file a report containing the info contained in the press release (the so-called early warning system). The rationale behind this is that if a takeover bid is in play, shareholders want to know.

Other Relevant MIs and NIs

NI 52-108 – auditor oversightNI 52-109 – Certification of annual and interim filingsMI 52-110 – audit committeesNI 58-101/NP 58-201 – Disclosure of Corporate Governance Practices

These amendments exist to improve regulation standards and align Canadian efforts with American reform under the Oxley Act. Note that BC and Quebec have resisted, feeling that these additional requirements were unnecessary.

NI 52-108

The Canadian Public Accountability Board exists to oversee the credentials of auditors and ensures standards (i.e. accredited accountant, etc.) are followed. It ensures that auditors do not also perform other activities for the issuer that are more profitable than the auditing work and thus raise COI issues.

NI 52-109

NI 52-109 governs the certification of disclosure in annual and interim filings. It includes a boiler-plate form for officers to sign. Key point is part 12, which defines liability for

false certification: “an officer providing a false certification potentially could be subject to quasi-criminal, administrative or civil proceedings under securities law”.

MI 52-110

MI 52-110 defines the characteristics of non-venture issuer audit committees. S. 1.4 defines independence “if he or she [audit committee member] has no direct or indirect material relationship with the issuer.” Such a relationship occurs where it could “be reasonably expected to interfere w/ the exercise of a member’s independent judgment.”

Part 2 defines audit committee’s responsibility, which includes having a written charter, overseeing the work of an independent auditor, reviewing the financial statements, ensuring adequate procedures are in place for reviewing fin info and establishing procedures for receiving and responding to complaints re: accounting practices (which includes allowing confidential, anonymous complaints by employees).

Part 3 defines the composition of an audit committee: all members must be directors, independent, and must be financially literate. Also, part 3 provides that an audit committee must consist of three members. However, VI are exempt from Part 3 via Part 6.

Note that many criticize the requirements for independence as overly burdensome.

NI 58-101 / NP 58-201

NI 58-101 establishes a disclose and explain approach to corporate governance practices and requires that said information be included in a management circular. This circular must be distributed w/ proxies for the purposes of selecting board members (form 58-101F1).

Said national instrument has a corresponding form that goes out to investors. NI 58-101 does not define specific corporate governance practices; rather it requires issuers to disclose their practices.

Issuers must disclose the nature of their boards, including matters such as independence of members, number of independent members, explanation of why maj are not independent. Must also define what steps are taken to ensure independent judgment and ethical business conduct. It also must define how compensation decisions are made.

NP 58-201 does try to define what issuers ought to do, but as it is a policy, it remains non-binding. NI 58-101, which is binding, concerns itself w/ the management circular.

Timely Disclosure

Sources of Law for Timely Disclosure

OSA s. 75 (nature and substance of the change) Definition of material change NI 51-102, Part 7 NP 51-201

In essence, issuers must report any material change, which is generally considered to be a change that would reasonably be expected to have a significant effect on the value of the issuer’s securities. As per s. 75 of the OSA, such news must be reported as soon as practicable and in any event within 10 days.

Consider the OSA definition of material change: (i) a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any securities of the issuer, or (ii) a decision to implement a change referred to in subclause (i) made by the board of directors or other persons acting in a similar capacity or by senior management of the issuer who believe that confirmation of the decision by the board of directors or such other persons acting in a similar capacity is probable

This definition has been fleshed out in caselaw.

Pezim v. BC (Superintendent of Brokers) (1994) SCC

SOB instituted proceedings against Pezim in connection w/ events occurring in ’89, alleging that P had violated timely disclosure provisions and insider trading prohibitions. Pezim was head of Prime, which was head of Calpine. C tests for gold in its mines and awards stock options to its executives. C was awarding stock options to executives just prior to releasing news as to gold findings. Also, C had planned to place 4m units w/ an underwriter who had already arranged to sell 1m to a UK underwriter who subsequently w/drew.

Issue 1: Had C properly disclosed its testing results? A: The SCC applies reasonableness as the standard of review. SCC affirmed that information from a drilling program is tantamount to a material change as it touches on the business operations, assets and ownership. The SCC says that mineral property directly touches on assets of the company and that any change in these assets is disclosable.

Issue 2: Had C improperly placed its shares privately?A: The SCC held that a change in the ownership of the C most certainly must be disclosed. Retail investors are going to want to know about the ownership of the company.

Issue 3: Did C have to disclose the problems w/ the underwriter? A: The SCC held that there was a requirement to disclose these problems. Where a contract dispute is significant, issuers have a requirement to report even where the contract has not yet been formally repudiated.

YBM Magnex International Inc. (2003) OSCB

Due to inconsistencies w/ the finances (money was bleeding into a separate entity without explanation), auditor insisted that YBM explain. YBM refused to do so, so auditor threatened to w/drew services. YBM’s counsel said no need to disclose at this point.

On April 19, D&T makes clear that it is w/drawing its auditing services. At roughly same time, YBM issues a positive, rosy press release, listing none of its difficulties w/ D&T.

Two Issues: Is an audit suspension disclosable in and of itself? Or, is the potential that such a suspension will result in issuer being unable to meet filing requirements the key factor to materiality?

The OSC held that what triggers the materiality (and thus requirement to disclose) is that YBM would be unable to meet its financial obligations.

Note that the OSC declares materiality to be a mixed test of fact and law. In effect, some factors are material in and of themselves while others are contextually material.

Contrast this case w/ Kerr v. Danier, which raises the bar for materiality. Consider the following however. Kerr v. Danier is an SCC decision; YBM is an OSC decision. Also, Kerr v. Danier is a shareholder suit whereas YBM is an OSC application. It might be argued that the law is more willing to consider materiality where regulation is the concern and less willing to allow it to lead to shareholder damages.

The Continuing Relevance of the Probability Magnitude Test for Determining Materiality

YBM had a high probability of being unable to meet its filing obligations if D&T w/drew, which it did. Further, the magnitude of such a failure is huge—effectively destroys public trust in issuer.

A bright-line test? NP 51-201’s List of Material Changes

Section 4.3 defines a list of events or information which “may be material.” Note that “this list is not exhaustive and is not a substitute for companies exercising their own judgments in making materiality determinations.”

Changes in corporate structure: share ownership; major reorganizations; mergers; takeover bids

Changes in capital structure: public/private sale of securities; planned repurchases of securities; planned splits of common shares; share consolidations; change in dividend payment policies; possible proxy fights; material modification to shareholder rightsChanges in financial results: significant increase/decrease in near-term earnings prospects; unexpected changes in financial results; shifts in financial circumstances (cash flow, major asset write offs, etc.); change in value or composition of assets; material change in accounting policyChanges in business and operations: developments that affect resources, tech, products or market; significant change in capital investment or corporate objectives; major labour / supplier disputes; significant new contracts, products or losses thereof; significant discoveries by resource companies; changes to the BofD or executive officers; developments in legal proceedings; waivers of corporate ethic or conduct rules for key employees; any notice that prior audits are unreliable; delisting of securitiesAcquisitions and dispositions: significant acquisitions or dispositions of assets, property or joint venture interests; takeoversChanges in credit arrangement: borrowing or lending significant amounts of money; mortgaging assets; defaults on debt obligations; changes in rating agency decisions; significant new credit arrangements

S. 75: Timeline for Public Disclosure

File a press release w/ regulators and issue to the public and file a material change report w/ the regulators as soon as practicable and in any event within 10 days.

Consider how the caselaw develops this. Pezim makes clear that timing is relevant in relation to other actions (i.e. issuing securities and disclosing information after that was known prior). YBM makes clear that something that may not have been disclosable can later become disclosable if a faction pattern emerges making it clear that said info is relevant.

Again, apply the prob/mag test. If at some point the prob increases then the previous uncertain info may become disclosable.

NI 51-102 – Continuous Disclosure Obligations

Confidential Disclosure

Confidential disclosure is a uniquely Canadian invention. In essence, it allows issuers to disclose a material change but not to the public if it believes that general disclosure will unfairly prejudice it in the market. This allows issuers to meet their disclosure obligations but not protect their companies.

S. 75(3) makes this possible: “Where (a) in the opinion of the reporting issuer, and if that opinion is arrived at in a reasonable manner, the disclosure required by subsections (1) and (2) would be unduly detrimental to the interests of the reporting issuer; or (b) the material change consists of a decision to implement a change made by senior

management of the issuer who believe that confirmation of the decision by the board of directors is probable and senior management of the issuer has no reason to believe that persons with knowledge of the material change have made use of that knowledge in purchasing or selling securities of the issuer, the reporting issuer may, in lieu of compliance with subsection (1), forthwith file with the commission the report required under subsection (2) marked so as to indicate that it is confidential, together with written reasons for non-disclosure.

Note however that this relief is temporary. S. 75(4) gives the issuer 10 days to advice the OSC in writing where it believes that this confidentiality ought to be extended and if insiders are trading (75(5)) says disclose forthwith.

Note that this is not a routine matter for issuers and should be considered an exceptional form of relief.

AiT Technologies

Feb 17, 2002, AiT receives a call from 3M re: t/o, unsolicited. March 26-28, first due diligence visit by 3M. April 11-12, meeting re: valuation of company. April 25, AiT board meeting and e-mail to CIBC. April 26, LOI signed. May 7-9 second due diligence visit. May 9, 2002 call from RS re: unusual trading activity. May 14, 3M delivers a draft merger agreement. and approves takeover subject to due diligence. May 22, AiT approves final merger agreement. May 23, final agreement executed and press release issued.

Q: At what point were AiT’s dealings w/ 3M disclosable?

Panel holds that the deciding to disclose a LOI (letter of intent) is a fact specific matter and is to be decided in each case (in other words, do not simply see as a case that is to be followed w/ all LOIs). Here, this need not be disclosed as (a) the LOI was non-binding, (b) 3M assumed no legal liability, (c) price was not firm, and (d) most of the conditions were beyond AiT’s control.

Note that initial meetings showed much distance between the two companies on price ($30m offer v. $75m asking) and strategy (only low level executive from 3M ever contacted AiT; long delays between contact). Note as well that initially this was to be a takeover and then became an amalgamation.

Q: At what point has AiT “implemented” a change in corporate plan?

Held that the fact situation here does not reflect AiT being a realistic position to implement the merger.

Rumours

NP 51-201 s. 2.3 and 6.13 are relevant here. S. 2.3 holds: “If the confidential material change, or rumours about it, have leaked or appear to be impacting the share price, a company should take immediate steps to ensure that a full public announcement is made.”

6.13 recommends that issuers “Adopt a ‘no comment’ policy with respect to market rumours and make sure that the policy is applied consistently.” It further warns that inconsistent application could appear to be tipping and notes that exchanges may require issuers to make a clarifying statement where trades are seemingly influenced by rumours.

Selective Disclosure

Again, NP 51-201 is relevant, particularly Parts III (ss 3.3(5),(7); 3.7), V (ss. 5.2, 5.3), VI. The SEC (and likely the OSC by extension) has become concerned w/ issuers communicating directly to investors but not to the market in general, which can potentially trigger tipping.

3.3(5) says that the general course of business exception for disclosing selectively does not apply to analysts, institutional investors or other market professionals.

3.3(7) says that where an investor is “brought over the wall” to act as an advisor, said investor is in a special relationship and is subject to prohibitions against tipping and insider trading. Such an individual is estopped from informing others of disclosed material.

3.7 holds that where a pattern of “unintentional selective disclosures” exists, it will be harder to show that a particular selective disclosure was truly unintentional.

5.2 says that a company takes on a high degree of risk of violating securities legislation where in selectively confirms that analysts are on target, too low or too high in relation to estimates.

5.3 says that even where a confidentiality agreement exists, an issuer has violated securities law when informing such an analyst of non-publicly disclosed information.

6 advises companies that it is best practice to avoid selective disclosure. To ensure no violations, issuers should establish a corporate disclosure policy, which is reviewed by the board and the audit committee. Authorized spokespersons should be designated and policies drafted re: analyst conference calls, quiet periods, insider trading monitoring and electronic communications.

Public Enforcement of Continuous Disclosure Obligations

S. 122 and 122(3) quasi-criminal proceedingsDue diligence defenceS. 127 enforcement order

OSC CD compliance reviewsCSA Staff Notice 57-301 / OSC Policy 57-603

Continuous Disclosure: Civil Liability

Private Enforcement

Investors have the option of suing issuers who do not follow comply w/ disclosure obligations. Other than negligent or fraudulent misrepresentation, there were no remedies available to investors. However, this requires showing reliance on a document or statement and must demonstrate duty of care.

23.1 was created in recognition of the hurdles presented by the common law remedy. Part of this was motivated by (a) the reality that 90 percent of trades are in the secondary market and (b) a need to be in line w/ US securities law.

Cause of Action Requires Leave of Court

S. 138.8 requires that no action under s.138(3) can be commenced without leave of the court, which must be satisfied that the action is (a) brought in good faith and (b) there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff.

Limitation Period

138.14 holds that no cause of action can be filed under s. 138(3) later than the earlier of three years following the release of the doc, the public statement, the date of which disclosure was required and six months after the issuance of a news release disclosing that leave has been granted to commence an action.

Prospectus Misrepresentation

s. 130(1) Liability for misrepresentation in prospectus—where a misrepresentation is made in the prospectus and purchaser purchases during the period of distribution or during the distribution to the public, without regard for reliance, said purchaser has a right of action against (a) the issuer or selling security beholder on whose behalf the distribution is made, (b) each underwriter who is required to sign the certificate, (c) every director of the issuer at time of misrepresentation, (de) every person whose consent to disclosure form has been filed (but only w/ respect to info to which they are responsible, (e) every person or company who signed the prospectus.

In the alternative, s. 130 empowers purchasers who purchased directly from (a) or (b) to a right of rescission (but this election eliminates right to damages)

Misrepresentation in Offering Memorandum

130.1(1) Where there is a misrepresentation in an offering memorandum, the purchaser (during period of distribution) has rights to (1) action for damages against issuer and a selling security holder on whose behalf the distribution was made and (2) rescission against the parties mentioned in (130.(1)(1)).

Liability for Misrepresentation in Circular

!31(1) Where a takeover bid circular sent to the security holders or a notice of change to said circular contains a misrepresentation, a security holder may elect to exercise a right of action for rescission or damages against the offeror or a right of action for damages against (A) every director then active, (b) experts who signed off, (c) every person who signed a certificate (other than those in (a)).

Liability where material fact or change undisclosed

134(1) Those in a special relationship w/ an RI, w/ knowledge of an undisclosed material change or fact who buy or sell securities is liable to compensate the seller or purchaser of the security for damages unless (a) can prove that s/he reasonably thought info had been generally disclosed or (b) the material fact or change ought reasonably to have been known to the seller or purchaser.

NOTE: 134(2) contemplates a cause of action for tipping against the responsible party

Civil Liability for Secondary Market Disclosure

“Influential Person” as per 138.1 means “in respect of a responsible issuer, (a) a control person, (b) a promoter, (c) an insider who is not a director / officer, or (d) an investment fund manager, if the responsible issuer is an investment fund.”

“Responsible Issuer” [hereafter RI] is (a) a reporting issuer or (b) any other issuer w/ a “real and substantial connection to Ontario”, any securities of which are publicly traded.

Documents Released by RI

138.3 Documents released by responsible issuer—where a RI or a party w/ “actual, implied or apparent authority” releases a doc w/ a misrep, a person who acquires or disposes of said RI’s security “during the time the when the doc was released” and before the mistake was corrected has a right of action against (a) issuer, (b) each director of the resp issuer at time of period, (c) each officer who authorized, permitted or acquiesced in the release of the doc, (d) each influential person and each director and officer of an influential person who knowingly influenced (i) the responsible issuer or its rep into releasing the docs, (e) each expert where the misrep (i) is contained in his report/statement/opinion, (ii) the doc includes, summarizes or quotes from the report statement or opinion of the expert, (iii) the expert consented in writing to the use of the report, etc. in the document

Public Oral Statements by RI 138.3(2) statements made by a person w/ “actual, implied apparent” authority that relate to the “business or affairs” of the RI and that contain a misrep, parties who

acquire/dispose of securities during the time between statement and its correction has without reliance a cause of action against (a) the RI, (b) the person who made the public statement, (c) each director/officer who authorized the public oral statement, (d) each influential person who knowingly influenced (i) the maker of said statement to make said statement, (ii) the director/officer to authorize, permit or acquiese in the making of the public oral statement, and (e) each expert where (i) the misrep is also contained in the expert’s report/statement/opinion, (ii) the person making the statement acknowledges the expert’s r/s/o and (iii) if the statement was made by other than the expert, said expert consented in writing to the use of his r/s/o.

Influential Persons (IP)

128.3(3) Misrepresentations in documents released by or statements made by an influential person or a person of a company w/ actual, implied or apparent authority to act/speak on behalf of the influential person can be the a cause of action by a party who acquires/disposes of securities in the period between the misrep and its correction without reliance against (a) the RI, if RI authorized, permitted or acquiesced in the release of the doc/statement, (b) the speaker, (c) each director/officer of the RI who authorized, permitted or acquiesced, (d) the influential person, (e) each director/officer of the IP, and (f) each expert (i) misrep in r/s/o, (ii) the doc/statement refers to the expert’s r/s/o and (iii) the expert consented in writing to the use of the r/s/o in the doc/oral statement.

Failure to Make Timely Disclosure

128.3(4) Where a RI fails to make a timely disclosure, a person who acquires/disposes of a security from the time the material change was required to be disclosed until the subsequent disclosure, a purchaser, without reference to reliance, has a right of action for damages against (a) the RI, (b) each director or officer who authorized, permitted or acquiesced in the failure to make timely disclosure, and (c) each influential person (and its directors/officers) who knowingly influenced the RI in the failure to make timely disclosure

Burden of Proof

(1) Where a misrepresentation is made in a non-core document or a public oral statement, the responsible party is not liable unless the plaintiff can prove that the defendant (a) knew about the misrepresentation, (b) deliberately avoided acquiring knowledge that the doc or statement contained the misrepresentation, or (c) was through action or failure to act guilty of gross misconduct in connection in regard to the doc/statement.

138.4(2) Note that in regard to an expert, the plaintiff does not have to prove the above.

138.4(3) Timely disclose—Not liable unless the plaintiff can prove the defendant (a) knew that the change occurred and that said change was a material change, (b) deliberately avoided knowing or (c) was guilty of gross misconduct.

138.4(4) Note that an RI, an officer of an RI, an investment fund manager, or an officer of an investment fund manager, the defendant must disprove these allegations (no burden of proof on plaintiff).

Main Defences Are Plaintiff Knowledge and Reasonable Investigation

The guilty defendant must either prove that: (a) the plaintiff knew about the misrepresentation or about the material change (138.4(5)), (b) It conducted a reasonable investigation (w/ requires reasonable investigation and no reasonable grounds for believing otherwise) (138.4(6)).

Some Other Defences

Confidential Disclosure – Where a timely disclosure is the cause of action and the defendant can prove that (a) a material change was disclosed by the RI on a confidential basis; (b) the RI had a reasonable basis for disclosing confidentially; (c) the info was made public promptly w/ the basis for confidentially disappeared, (d) there was no public statement/doc that due to the confidential info was a misrep; and (e) where the info was disclosed incorrectly, the RI promptly disclosed the material change, there will be no liability (138.4(8)).

Forward-Looking Information (FLI) – A defendant has a defence for FOFIs containing a misrepresentation if he can prove (1) the doc contained (i) reasonable cautionary language indentifying the FLI as FLI and indentifying material factors that could cause actual results to differ materially and (ii) a statement of the material factors / assumptions that were applied in reaching the FLI conclusions and (2) the person had a reasonable basis for coming to these FLI conclusions (138.4(9)).

In regards to oral FLI, the speaker must (a) make a cautionary statement that the oral statement includes FLI, (b) state that the (i) the actual results might differ and (ii) certain material factors/assumptions were used in coming to the FLI and (c) state that additional info about (i) the material factors that could cause a variance and (ii) the material factors that were relied upon are contained in a readily-available document and identify said doc (138.4(9.1)).

Note that section 9 does not apply to FLI that is included in a financial statement required by the Act released in connection w/ an initial public offering (138.4(10)).

The Expert Defence (for RIs) – No liability under 138(3) where a person/company can prove the doc/oral statement that includes, summarizes or quotes from an expert r/s/o in respect of which the person/company obtained the written consent of the expert to use and that this consent was not w/drawn prior to the release of the doc or statement if the

person/company can prove (a) the person/company did not know and had no reasonable grounds to believe that there had been a misrep and (b) the doc/statement did not distort the expert’s r/s/o (138.4(11))

The Expert Defence (for Experts) – An expert must prove that s/he had withdrawn the written consent in writing before the doc was released or statement made (138.4(12)).

Private Documents Defence – A person/company is not liable if the document other than documents which are required to be released if s/he/it can prove that (a) did not know doc was going to be released and (b) had no reasonable grounds to believe it would be released (138.4(13)).

Derivative Information Defence – A person/company is not liable if s/he/it can prove that (a) the misrep was also contained in doc filed by someone other than the RI w/ the OSC or similar securities commission in Canada and was corrected before the doc/statement in question was made; (b) that the doc/statement contained a reference to that doc that was the source of the misrep and (c) when the doc/statement was made said party did not know and had no reasonable grounds to believe there was a misrep.

The Corrective Action Defence – A person/company other than the RI is not liable if the misrep or failure to make timely disclosure was made without the knowledge or consent of the person or company and if after becoming aware of the misrep before it was corrected (a) the person or company promptly notified the BoD of the RI and (b) if no correction was made within TWO business days after notification, the person or company promptly and in writing notified the OSC of the misrep or failure to make timely disclosure (138.4(15)).

Damages

138.5-7 deals w/ damages and their calculation.

For Parties Who Acquired a Security:138.5(1) After the release of a doc or the making of an oral statement containing a misrepresentation or the failure to make a timely disclosure will result in damages to be assessed as follows

1. Securities disposed of up to the 10th day following the public correction of the misrepresentation, damages are to equal the difference between the average price paid for those securities (and commissions) and the price received upon the disposition of those securities (without deducting any commissions paid in respect to dispositions) w/ consideration to hedging or other risk limitation transactions2. Securities disposed of after the 10th day after the correction damages are to equal the lesser of…(i) an amount equal to the difference between the average price paid and the price received upon disposition, w/ consideration for risk limitation AND(ii) an amount equal to the number of securities that the person disposed of, multiplied by the dif between the average price paid and (a) the issue’s trading price on the principle market for the 10 trading days following the correction (if publicly traded) and (b) if no published market, the amount the court considers just. 3. In respect of securities not disposed of, damages to equal the number of securities acquired, multiplied by the dif between the average price per security paid (incl commission) and (i) if publicly traded on a published market, the trading price of the security for the 10 days following the public correction OR (ii) in no published mrkt, price the court deems just.

For Parties Who Disposed of a Security:138.5(2) 1. Any security sold on or before the 10th day after the public correction of the misrep, damages to equal the dif between the average received upon disposition of those securities (deducting commission paid) and the price paid for those securities (without including commissions) w/ consideration for risk limitation. 2. W/ respect to securities acquired 10 days after the public correction, assessed damages to equal the lesser of…(i) amount equal to the dif between average price received upon disposition (deducting commission) and the price paid (not deducting) calculated w/ consideration for risk reduction activities AND(ii) An amount equal to the number of securities that the person disposed of, multiplied by the dif between the average price per security received (deducting) upon the disposition of these securities (not deducting) AND

(a) If the issuer is trading on a published market, the trading price on the principle market for the 10 trading days following the public correction OR

(b) If no published market, the amount the court considers just3. In respect of securities not acquired???

NOTE that damages not to include any sum that the defendant can prove are attributable to a change in the mrkt price of securities that is unrelated to the misrepresentation or the failure to make a timely disclosure.

GET SOMEONE TO EXPLAIN THE LIMITS OF DAMAGES IN SECURITIES S. 138.7(1)

Note that where

d

Test: Q1: Does this transaction involve the concept of a security? Q2: If so, what is a security? Q3: If so, then the act is somewhat triggered. Is there a trade in this security?Q4: Does this trading in this security amount to a distribution?