INSIDE THIS ISSUE

NI 45-106 Would Consolidate and Harmonize Private Placement Prospectus and Registration Exemptions Across Canada

• consolidate and harmonize the prospectus and registration exemptions contained in various provincial statutes and national, multilateral and local instruments, and the disclosure and filing requirements associated with those exemptions, into a single national instrument;

• repeal or make consequential amendments to a number of national and multilateral instruments;

• modify the existing exemptions to make them more concise and consistent; and

• create new exemptions for relatively routine exemptive relief applications.

• "Founder" will be defined based on MI 45-103. The term "founder" will replace the concept of "promoter," which is currently contained in the securities legislation of most jurisdictions. A designation as a "founder" requires active involvement in the business of the issuer at the time of the trade and not simply the ownership of a certain percentage of an issuer’s securities.

• "Control" will have two different interpretations in the Instrument. The exemption for trades to employees, executive officers, directors and consultants will contain a broader concept of "control" than for the rest of the Instrument, in order to "accommodate trades of compensation securities in a wide variety of business structures."

• the "Accredited Investor" exemption contains additional categories to include an investment fund managed by a registered adviser and a person acting on behalf of a fully managed account if the person is registered as an adviser in Canada or, except in Ontario, in a foreign jurisdiction.

• a new "Private Issuer" exemption (welcome back!) will replace the closely-held issuer exemption in the existing OSC Rule 45-501 and the closed company exemption in Quebec.

• the "Minimum Amount Investment" returns and the prescribed minimum amount for all jurisdictions is set at $150,000, payable in cash at the time of the trade.

• the "Family, Friends and Business Associates" exemption will be available in all jurisdictions except Ontario. It applies to executive officers, directors and control persons of the issuer and certain of their close family, friends and business associates. Saskatchewan requires a signed risk acknowledgment from close friends and business associates.

• the "Family, Founder and Control Person" is an Ontario exemption for founders, affiliates of founders, control persons and certain family members of an executive officer, director or founder of the issuer.

• the "Affiliates" exemption, relating to trades by an issuer in a security of its own issue to an affiliate of the issuer purchasing as principal will be a new exemption for most jurisdictions, except in Ontario.

• the "Offering Memorandum" exemption will not be adopted by Ontario. There will be two versions of this exemption, one for British Columbia, New Brunswick, Nova Scotia and Newfoundland and Labrador, and another for Alberta, Manitoba, Northwest Territories, Nunavut, Prince Edward Island, Quebec and Saskatchewan. The primary difference between the two versions is that the latter requires purchasers to either be "eligible investors" as defined in the Instrument, or to purchase securities at an aggregate acquisition cost that is less than $10,000.

• the proposed return of the private issuer and $150,000 exemptions, albeit in slightly modified form, is welcome in Ontario, as these exemptions were frequently very useful and have been missed. The closely-held issuer exemption, which replaced the old private company exemption, was fraught with traps for the unwary, and the accredited investor exemption was on occasion just not broad enough.

• a new restriction, however, is proposed on the use of each of the accredited investor and $150,000 exemptions. An accredited investor includes a person, other than an individual or certain funds, with net assets of at least $5 million according to its most recent financials. Despite this, the proposed exemption would not be available to such a person if the person is "created primarily" to purchase securities in reliance on prospectus exemptions or is "used primarily" to purchase securities under "these" (the meaning of this word is unclear) exemptions. Similar limitations apply to all entities in the case of the proposed new $150,000 exemption. The reasons for these limitations are not entirely clear, especially in the case of the accredited investor exemption, and they could pose a number of (probably unintended) difficulties for entities that would otherwise be considered sophisticated and that might wish to participate in a substantial private placement.

• the new $150,000 exemption would also require payment in cash at the time of the purchase, creating a more restrictive situation than existed in the past, when obligations in that amount could be incurred instead.

• trades made in connection with an amalgamation, merger, reorganization, arrangement, dissolution or winding-up of an issuer.

• an asset acquisition with a fair value of not less than $150,000.

• an acquisition of mining, petroleum or natural gas properties or any interest in them.

• securities issued to settle bona fide debt of the reporting issuer owed to a creditor.

• an issuer’s acquisition or redemption of its own securities.

• trades pursuant to take-over bids and issuer bids.

• reinvestments allowing trades of securities of the issuer to existing security holders of the issuer under a plan, if the plan permits the security holder to direct that "dividends or distributions out of earnings, surplus, capital or other sources" payable in respect of the issuer’s securities be applied to the purchase of additional securities of the same class.

• additional investments in investment funds if the purchaser has initially purchased securities at a cost of not less than $150,000, paid in cash, or if the net asset value of those securities is at least $150,000 at the time of the trade.

• exemptions will be available for trades to employees, executive officers, directors and consultants, and are based on the current MI 45-105, with some modifications.

• isolated trades.

• trades to and among underwriters.

• trades of "debt securities" that are rated and issued or guaranteed by governments, "Canadian financial institutions" and "Schedule III banks."

• trades in non-convertible negotiable promissory notes or commercial paper maturing within one year of issue and with an "approved credit rating."

• trades in non-syndicated mortgages on real property by a registered or licensed person.

• trades in a security evidencing indebtedness "secured by or under" a security agreement for the acquisition of personal property if the security is not offered for sale to an individual.

• trades in an evidence of deposit issued by a "Schedule III bank" or an association governed by the Cooperative Credit Associations Act (Canada).

• conversion, exchange or exercise of securities automatically, at the option of the holder or at the option of the issuer.

• in Ontario only, certain registration exemptions for trades in Ontario by market intermediaries are removed, preserving Ontario’s current universal registration regime.

• under judicial procedures such as the probate of estates, receivership, bankruptcy, liquidation or judicial sale.

• by lawyers, accountants, engineers, teachers, notaries in Quebec and publishers and writers for newspapers, magazines or business journals under certain circumstances.

• there is an exemption from the requirement to be registered as an adviser for registered investment dealers who manage the investment portfolios of clients through discretionary authority, but otherwise must comply with the rules and policies for portfolio managers set out by the Investment Dealers Association of Canada. In Ontario, a registered investment dealer must also provide the OSC with the names of partners, directors, officers or employees designated and approved to make investment decisions.

• Minimum amount exemption - the prescribed minimum amount is $150,000, payable in cash at the time of trade.

• Private issuer exemption – will replace the closely-held issuer exemption currently set out in OSC Rule 45-501.

• Securities for debt exemption - currently available in British Columbia, but will be available pursuant to the Instrument in all provinces, with guidance on the appropriate circumstances of usage contained in the companion policy.

• Schedule III banks – based on the fact that Schedule III banks have been receiving relief from the registration and prospectus requirements by way of exemptive orders for several years.

• consequential changes will be made to NI 33-105 Underwriting Conflicts, NI 45-101 Rights Offerings, NI 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues.

• MI 45-102 Resale of Securities has been amended to include Quebec. With Quebec’s inclusion, 45-102 would become a national instrument. Other revisions include updating definitions, removing obsolete transitional provisions and revising appendices to incorporate the exemptions contained in the Instrument and transitional provisions for current exemptions.

• in Ontario, the resale provisions currently set out in both the existing Rule 45-501 and MI 45-102 have been consolidated into the amended MI 45-102. In the Instrument and the revised 45-501, the concept of "founder" has replaced the concept of "promoter" in many cases. However, the current Ontario resale regime for securities acquired under the existing Ontario promoter exemptions before the coming into force of the Instrument and the revised 45-501 will apparently be maintained, which adds a lot of extra complexity. Going forward, if a promoter or founder acquires a security under the exemptions in the Instrument and the revised 45-501, the first trade will be subject to either a restricted period or a seasoning period.

• in Ontario, amendments will be made to update OSC Rules 13-502 Fees, 31-503 Limited Market Dealers, 91-501 Strip Bonds and 91-502 Trades in Recognized Options according to the securities legislative references contained in the Instrument. Replacements will be made to OSC Rules 45-502 Dividend or Interest Reinvestment and Stock Dividend Plans and 81-501 Mutual Fund Reinvestment Plans by sections 2.2 and 2.18 of NI 45-106, respectively.

• requirements relating to the statutory right of action and right of rescission referred to in section 130.1 of the Securities Act (Ontario), for misrepresentations, would apply in the use of an offering memorandum in connection with a distribution made in reliance on the following exemptions: accredited investor, private issuer, family, founder and control person (Ontario), affiliates, additional investment in investment funds, and government incentive security.

• however, section 130.1 would not apply in respect of an offering memorandum delivered to a Canadian financial institution, a Schedule III bank, the Business Development Bank of Canada or a subsidiary of any of the foregoing as a prospective purchaser.