Securities Regulation Condensed CAN Canadian Capital Markets ................................................................................................... 2 Purpose of capital markets .............................................................................................. 2 Types of Securities .......................................................................................................... 2 Fundamental Concepts ........................................................................................................ 2 What is a Security? ....................................................................................................... 2 What is a Trade? ........................................................................................................... 3 What is a Distribution? ................................................................................................ 3 What is a Distribution? (Dist. Of Securities Req’s Prospectus) ..................................... 3 Securities Regulators .......................................................................................................... 4 Constitutional Issues ....................................................................................................... 4 Powers of the BCSC/OSC .............................................................................................. 4 Sources of Securities Law ............................................................................................... 4 Public Policy ................................................................................................................... 4 Securities Dealers and Market Participants ........................................................................ 4 Registrants....................................................................................................................... 4 Conflicts of Interest & Networking Arrangements ......................................................... 4 Alternative Trading Systems........................................................................................... 4 Issuance of Securities and the Underwriter’s Role ............................................................. 4 Rights Offerings .............................................................................................................. 5 FOFI (two categories) ..................................................................................................... 5 MJDS .............................................................................................................................. 5 FOFI Req’mts ......................................................................................................... 5 o Update if changes occur .......................................................................................... 5 o Compare to actual results each time new fin. Statements issued ............................ 5 o Ensure auditor is involved in FOFI, and auditor’s report included ........................ 5 Types of Underwritings .................................................................................................. 5 The Prospectus Process ....................................................................................................... 5 Process and Content ........................................................................................................ 6 Preliminary Prospectus ................................................................................................... 7 Waiting Period ................................................................................................................ 7 Final Prospectus ......... Error! Bookmark not defined.Error! Bookmark not defined. Procedure – depending on whether prospectus filed or Not ........................................... 8 Role of Securities Lawyer ............................................................................................... 8 Civil Liability for Prospectus Misrepresentation Error! Bookmark not defined.Error! Bookmark not defined. The Short Form Prospectus/POP System ....................................................................... 8 Shelf-Offering Prospectus ............................................................................................... 8 The PREP System ........................................................................................................... 8 Private Placements .............................................................................................................. 9 Registration and Prospectus Exemptions ........................................................................ 9 Restricted Seasoning Periods (Resale Restriction & Holding Periods) .......................... 9 Exempt Distributions ...................................................................................................... 9 Offering Memorandum ................................................................................................... 9
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Continuous Disclosure ...................................................................................................... 10 Primary Purpose ............................................................................................................ 10 Competing Concerns ..................................................................................................... 10 Financial Statements ..................................................................................................... 10 Periodic Disclosure Requirements/AIF Requirements ................................................. 10 Timely Disclosure Requirements .................................................................................. 10 Civil liability for Continuous Disclosure Misrepresentations ...................................... 10 Selective Disclosure ...................................................................................................... 10 Disclosure Standards ..................................................................................................... 10 Insider Trading/Insider Reporting..................................................................................... 10 To whom does it apply? ................................................................................................ 10 What is Prohibited? ....................................................................................................... 10 What Defences are available? ....................................................................................... 10 OSC Policy 33-601 Guidelines for Insider Trading ..................................................... 10 Penalties ........................................................................................................................ 10 TSE Report on Corporate Disclosure (1997) ................................................................ 10 Take-Over Bids and Issuer Bids ....................................................................................... 10 Kimber Report .............................................................................................................. 10 Methods of Take-Overs ................................................................................................ 10 Reasons ......................................................................................................................... 10 Basic Rules.................................................................................................................... 10 Exemptions from Rules................................................................................................. 10 Share Lock-up agreements ............................................................................................ 10 Pre-Merger Agreements ................................................................................................ 10 Defensive Tactics .......................................................................................................... 10 Hostile Bids ................................................................................................................... 10 Going Private Transactions ........................................................................................... 10 Enforcement ...................................................................................................................... 10 Criminal Code ............................................................................................................... 10 Penal Offences .............................................................................................................. 10 Administrative Sanctions .............................................................................................. 10 Appeals ......................................................................................................................... 10 Investigations and Audits .............................................................................................. 10 Inter-jurisdictional......................................................................................................... 10 Charter Issues ................................................................................................................ 10 Stock Exchanges/SRO’s ............................................................................................... 10
Syllabus Topics: Canadian Capital Markets Purpose of capital markets Types of Securities Fundamental Concepts What is a Security? - commonly known as security (broad def’n) - stock, bond, option
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Cases: -
investment K – see cases below See Def’n in Sec. Act
expectation of profit risk factor (higher risk = more likely security) purchasers degree of control (no control = security) independent value (free of success of enterprise) leans to not security substance over form value given on representations of profit by offeror Investment K o Howey Test – invest money in scheme to expect profits solely from efforts of promoter (3rd party) o Hawaii Test Offeree gives initial value Portion of this is subj to risk Investment induced by representations of profit/benefit Offeree does not have control over mgt of enterprise
What is a Trade? (Trading securities you must be registered) - Disposition of a security for valuable consideration…. But not for the purpose of giving collateral for a debt (unless transferred due to default on debt) - Any act, ad, solicitation, conduct, negotiation in furtherance of a trade = a trade
What is a Distribution? What is a Distribution? (Dist. Of Securities Req’s Prospectus) - trade in a security not previously issued - trade in security by issuer (if previously bought back etc. by issuer) = reissue - sale by control person (20% holding) (but they will get exemption by giving notice to market) o “materially affect control” – could be as low as 5% holding!! - sales of restricted securities held by exempt purchasers o exempt purchasers – do not need protection of prospectus o can sell without being distribution by waiting out hold period OR selling to another exempt purchaser
EXAM: look at it from three primary perspectives: security/trade/distribution: 1. SECURITY: is there a security? how many and what type? 2. TRADE: does the transaction involve a trade? is it a sale of securities? If it involves a security in a trade then the rules apply. If sale to the public then triggers a prospectus requirement. 3. DISTRIBUTION: can’t trade unless your registered. Registration is always an issue 4. REGISTRATION: are they registered to trade and distribute? 5. EXEMPTION: is the transaction exempt from reg or prospectus requirements? 6. TAKEOVER: substantial amount of securities? trigger Takeover provisions?
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7. 8.
INSIDER TRADING: who is involved, are they related, special I.T. rules PUBLIC INTEREST CONCERNS: discretion of regulators. Canadian Tire
Securities Regulators Constitutional Issues Powers of the BCSC/OSC Sources of Securities Law SROs, Exchanges, s. 23-33 Public Policy Securities Dealers and Market Participants Registrants BCP 31-601 Registration Requirements Broker Liability – fiduciary duty of broker to client unless discount broker - applies to suitability of investments to the client (risk level) Conflicts of Interest & Networking Arrangements Underwriting Conflicts – registrant underwrites securities of issuer that is somehow related to the registrant (or is the registrant) - related issuer – either is influential security holder of the other, or each related to the same 3rd party if related requires another independent underwriter participate in the transaction p. 108 essentials.. - connected issuer – o requires disclosure of the connection Dealer Conflicts – registrant provides advice on purchase or sale of securities of itself, a related party, a connected issuer, and where registrant enters cross selling or other arrangements with a financial intermediary Alternative Trading Systems 3 regulatory options for ATS to choose from: 1. Function as exchange: Must do this if the perform any one of 4 exchange functions a. Provide listing req’mts b. Guarantee two-sided mkt c. Set req’mts for conduct of subscribers d. Discipline subscribers 2. Become an exchange member 3. Be registered as a Dealer and become a member of an SRO ATS – can only trade the following securities: - already listed on Cdn exchange - corp debt - gov’t debt - listed on exchg recognized by the International Organization of Sec. Commissions Issuance of Securities and the Underwriter’s Role 4
Securities Issuances: 2 Categories 1. Public Offerings 2. Private Placements (exempt offerings) 3. Items not in those categories discussed Here: Rights Off, FOFI, MJDS Alternative Dist. Methods (direct purchase plans, sales to SHs holding small blocks), Mutual funds Rights Offerings distribution by issuer to it’s own security holders of rights to acquire more securities of issuer (rights not exercised offered pro rata to others – NO favourtism) 45-101 o rights offering exempt from prospectus req’mt if no more than 25% increase in outstanding securities must still dist/file Rights offering circular Resale restrictions on buyers o standby commitment e.g. to sell unsold shares to investment bank – must be disclosed, and Shares offered to existing holders first can not be used to dilute ownership o can also make rights offering with a prospectus (must apply to both rights, and securities themselves acquired by the rights) FOFI (two categories) Forecasts – less speculative – based on most probably set of economic conditions (can not make these until have operated for 24 mths – then must use forecast if using FOFI) Projections – more speculative – based on hypothesis – plausible actions and economic conditions (in first 24 mths) FOFI Req’mts o Update if changes occur o Compare to actual results each time new fin. Statements issued o Ensure auditor is involved in FOFI, and auditor’s report included
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MJDS - allows disclosure document requirements in Cdn/US to be used across the border - 3 basic requirements o For Investment grade debt or preferred shares - (not in default for 12 mths) – not convertible, or if convertible then min $75M float in equities o Rights Issue – 36 mth min reporting history – listed on NYSE, AMEX, NASDAQ for min 12 mths o Other cases – min $75M public float Types of Underwritings The Prospectus Process Types of Prospectus Offerings: - Long form - Short form (POP prompt offering prospectus)
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- Shelf Prospectus - Post Receipt Pricing Prospectus Primary offering – dist by issuer (this chapter) Secondary offering – sale of previously issued securities by a control person Types of Underwritings: - best efforts – underwriter is sales agent, commission only on what sold - firm commitment – buy entire issue at time of final prospectus and must sell at prospectus price (no more) – get a % commission on the deal (must keep unsold securities) - bought deal – same as firm commitment but bought 2 days before prelim prospectus – only occurs for short form offerings - standby underwriting (commitment to buy unsold ones by issuer – see prev. chapt – 5) Process and Content - limitation on testing the waters – very limited due to def’n of trade (act in furtherance of..) o stops inside trading – share price drops on news of new issue o limited testing can be done AFTER prelim prospectus filed o BUT in bought deal – sign deal, then two day window to solicit expressions of interest before prelim prospectus filed - Content Requires: o Full true and plain disclosure – of all material facts o No misrepresentations/half truths/misleading/omissions – o Signature of CEO, CFO, two directors, & any promoter, underwriter – potential for civil liability for misreps o Content req’mts in 41-501 o Changes (that occur until dist. Is done – e.g. no more selling to public) for Prelim - if adverse – must file amendment asap/max 10 days final – any change – asap/max 10days Review of Prospectus o MRRS Mutual Reliance Review System – between provinces Obligation to deliver prospectus – within 2 days of sale s. 71(1) - failure to deliver s. 133 (limited by s. 138) – right to dmgs, or recission Withdrawl rights – cooling off period s. 71(2) – two business days from receiving prospectus – just need to provide written notice of withdrawl Statutory Civil Liability for Prospectus Misrepresentations: s. 130 - in addition to CL actions of fraudulent misrep, or negligent misrep o which require an Intent to defraud, and actual reliance on info - Who is liable: o Issuer (for primary offering) o Selling security holder (in secondary offering) o Underwriters who sign certificate attached to prospectus
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o Directors of issuer at time of offering (signature not required) o Persons who gave consent to reports in prospectus (but only wrt specific reports/opinions made by them e.g. lawyers, accountants, engineers o CEO, CFO, Promoter – anyone who signed the prospectus Extent of Liability o Max of offer price of securities s. 130(9) o If D proves dmgs exceed depreciation in securities due to misrep, not liable for the excess s. 130(7) o For underwriter – max is portion of offering price underwritten by that underwriter s. 130(6) Defences for Issuer & Selling Security Holder from s. 130 o Only – if D purchased security with knowledge of misrep o NO due diligence helps Defences to others under s. 130 o Non- expertise portion of Prospectus D did not have knowledge of or consent to filing of the prospectus s. 130(3)(a) D upon learning of misrep withdrew consent s. 130(3)(b) Statement in prospectus found to be false was believed by D to be true and D had no reas. grounds for believing it false s. 130(3)(e) D did not believe there was misrep, and conducted reas. investigation as to provide reas ground for a belief that no misrep s. 130(5) (DUE DILIGENCE) Reas std – required of a prudent person in the circumstances of the particular case s. 132 o Expertise portion of prospectus For Expert If info inaccurately represented accurate report - and expert believed based on reas. grounds after reas. investigation that info in prospectus fairly represented original info, or that on learning of error gave notice to OSC and generally s. 130(3)(d) If info itself is in error – due diligence defence s. 130(4) Non-Expert Did not believe and no reas grounds to believe there was misrep s. 130(3)(c) – no required investigation S. 130 Recission right – only available against Underwriter (not issuer) if bought from underwriter
Preliminary Prospectus - almost all info req’d in final prospectus BUT can omit o price o auditor’s report Waiting Period - waiting period – between prelim and final prospectus – min of 10 days
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10 days to: o examine prospectus o permit prospective purchasers to study merits of the issue o permit underwriters to test the mkt - Exceptions to 10 day min – POP, Shelf, MJDS - During waiting period: o No selling o Dist. Copies of prelim o Solicit expressions of interest Role of Securities Lawyer Alternate forms of Prospectus: The Short Form Prospectus/POP System - Req’mts (must meet one of) o 12mths reporting, AIF, $75M mkt value of outstanding securities o AIF, $300M mkt value of outstanding securities o Issuer of investment grade non-convertible securities – 12mths reporting, AIF, non-convertible securities received investment grade rating o 3 more see p. 167 Essentials - Purpose of these Req’mts o Key info already avail to public o For larger issuers – analyst follow closely – more info - AIF – must be current – file annually - Shorter Review Period – Shelf-Offering Prospectus - pre-prepare a prospectus and get receipt – put it on the shelf and later issue securities - at actual sale – brief shelf supplement – with specific info to securities - supplement – no prior review by regulators - Must be eligible for POP to use Shelf - Good for 25 mths – for any number and type of securities – should disclose total expected amt in initial shelf prospectus The PREP System Post Receipt Pricing Prospectus (PREP) - available to all issuers (not just POP) - expires after 90 days - only one type of security offering allowed CPCs Capital Pool Companies - alternative to IPO (it is an RTO) - CPC files prospectus – obtains CDNX listing for Co. with no assets or business - CPC has 18 mths to complete a “qualifying transaction” within which to use the money raised for a Regular tier 1 or tier 2 listing status on CDNX (this still apply on tsx venture?) Procedure – depending on whether prospectus filed or Not Prospectus: s. 61 – Distribution of Securities req’s – Preliminary Prospectus, and Prospectus
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s. 74 – Exemptions:
Private Placements Registration and Prospectus Exemptions Registration exemptions: - in almost every prospectus exemption there is also registration exemption - 3 main points: o trade triggers registration requirement (even if no distribution) o do not assume that prospectus exemptions = registration exemptions o Source of exemptions – s. 34, 35, 45-501, 502, 503 & s. 74 Prospectus Exemptions – discussed throughout the rest of this chapter: - Primary offerings: o 3 categories of exempt purchasers family and friends sophisticated investors OR if securities are super safe e.g. issued by gov’t of Cdn - Secondary offerings o Sales by exempt purchasers must be regulated o 2 ways out to another exempt purchaser meeting the Hold period - sales by Control persons (also req’ prospectus) o deemed control person if 20% holding o could be control with less holding o Exemptions Sale to exempt purchaser Or if issuer is reporting issuer If control person is eligible institutional investor (62-101) – provided they do not control the issuer, or have board representation, has no knowledge of material facts, sale in ordinary course of business, secs. Not otherwise subj. to hold period Subj. to seasoning and restricted periods - mirror those for exempt purchasers – and must give advance notice of sale, and no knowledge of material info 45-101 Restricted Seasoning Periods (Resale Restriction & Holding Periods) See – super can p. 30-31 Exempt Distributions s. 74 See p. 25-26 in full CAN Offering Memorandum
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Continuous Disclosure Primary Purpose Competing Concerns Financial Statements Periodic Disclosure Requirements/AIF Requirements Timely Disclosure Requirements Civil liability for Continuous Disclosure Misrepresentations Selective Disclosure Disclosure Standards Insider Trading/Insider Reporting To whom does it apply? What is Prohibited? What Defences are available? OSC Policy 33-601 Guidelines for Insider Trading Penalties TSE Report on Corporate Disclosure (1997) Take-Over Bids and Issuer Bids Kimber Report Methods of Take-Overs Reasons Basic Rules Exemptions from Rules Share Lock-up agreements Pre-Merger Agreements Defensive Tactics Hostile Bids Going Private Transactions Enforcement Criminal Code Penal Offences Administrative Sanctions Appeals Investigations and Audits Inter-jurisdictional Charter Issues Stock Exchanges/SRO’s
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