Private Placements in Ontario

1
Private Placements in Ontario
Ontario Securities Commission

• Michael Brown
• Legal Counsel, Corporate Finance
• Canadian Listed Company Association November 7,
  2002

2
Why Private Placements?

• Ontario has a closed system
• general rules
• section 25 OSA trades must involve dealer
• section 53 OSA if trade is a distribution, must
  use a prospectus
• exemptions
• may not require a dealer
• no propsectus required, but next trade will be a
  distribution

3
Why Private Placements? (cont.)

• Most private placement exemptions in Rule 45-501
  Exempt Distributions
• Other exemptions to consider
• sections 35, 72 73 of the OSA
• Rule 45-503 Trades to Employees, Executives and
  Consultants
• MI 45-102 Resale of Securities

4
Rule 45-501 Exempt Distributions

• Commission Task Force (1994)
• Task Force Report (1996)
• Concept Paper (1999)
• Rule
• September 2000 (first comment period)
• April 2001 (second comment period)
• July 2001 (third comment period)
• September 2001 (final)
• Rule in effect November 30, 2001

5
Why a New Rule 45-501?

• Concerns with old regime
• start-up companies begin with private companies
• problems with private company exemption
• who/what is the public?

6
Why a New Rule (cont.)

• 150,000 exemption
• threshold too high for small business issuers -
  investors unwilling to spend 150,000
• perverse effect ? increased risk
• not a good proxy for sophistication

7
Rule 45-501 Two New Exemptions

• Closely-held issuer exemption (section 2.1)
• replaced the private company exemption
• Accredited investor exemption (section 2.3)
• replaced 150,000 exemption, exempt purchaser and
  seed capital exemption

8
Rule 45-501 Closely-held Issuer

• What is a closely-held issuer
• issuers other than mutual funds or non-redeemable
  investment funds
• shares subject to transfer restrictions
• maxium of 35 security holders, other than
• accredited investors
• directors, officers, exmployees or consultants
  who receive their securities as compensation

9
Rule 45-501 Closely-held Issuer Exemption
(cont.)

• A closely-held issuer can use exemption to raise
  up to 3 million if
• no selling or promotional expenses are paid
  except to a registered dealer
• no promoter of the issuer has used the exemption
  during the preceding year
• 3 million does not include money raised using
  other exemptions

10
Rule 45-501 Closely-held Issuer Exemption
(cont.)

• Available for trades between shareholders
• No offering memorandum required
• Form 45-501 F1
• if five or more beneficial security holders
• Fees

11
Rule 45-501 Accredited Investor Exemption

• Permits accredited investors to invest in
• any issuer
• without a prosepctus
• no minimum purchase price
• no limit on number of times it can be used

12
Rule 45-501 Who is an Accredited Investor?

• Types of insitutions
• Schedule I or II banks
• loan or trust corporation registered under Loan
  and Trust Corporations Act, Trust and Loan
  Companies Act, etc.
• insurance companies
• companies registered as dealers (other than
  limited market dealers)
• federal or provincial government, Canadian
  municipalities, crown corporations
• national, federal, state, provincial, territorial
  or municiapl government in foreign jurisidciton
• pernsion funds regulated by OSFI or provincial
  pension commission
• charities registered under the Income Tax Act

13
Rule 45-501 Who is an Accredited Investor?
(cont.)

• Other accredited investors
• Individuals alone or with a spouse own financial
  assets, net of related liabilities, over 1
  million
• financial assets
• related liabities
• individual whose net income before tax execeeded
  200,000 in each of 2 most recent years (or
  300,000 if including spouse)
• Company, limited partnership LLP, trust, estate
  (other than mutual fund on non-redeemable
  investment fund) that has net assets of at least
  5,000,000 as reflected on most recently prepared
  financial statements
• promoter of an issuer or affiliated entity of
  issuer
• spouse, parent, grandparent or chidl of officer,
  director or promoter
• control persons of an issuer

14
Rule 45-501 Accredited Investor Exemption

• No offering memorandum required
• Fees
• Advertising

15
Rule 45-501 Government Incentive Securities

• Government incentive securities flow-through
  securities
• Solicitations to no more than 75 prospective
  purchasers sales to no more than 50 purchasers
• Offering memorandum required
• Purchaser must be sophisticated with access to
  prospectus-like information
• No adversting and no promotional or selling
  expenses
• Promoter use of exemption limited to once a year

16
Other Rules of Interest

• Exemptions available under
• OSC Rule 45-503 Trades to Employees, Executives
  and Consultants
• new Multilateral Instrument 45-105 Trades to
  Employees, Senior Officers, Directors and
  Consultants

17
Resale of Securities

• MI 45-102 Resale of Securities - applies in all
  provinces and territories other than Quebec
• Conditions
• a reporting issuer in one of BC, Alberta,
  Saskatchewan, Manitoba, Ontario, Quebec or Nova
  Scotia
• more lenient resale restrictions if qualifying
  issuer

18
MI 45-102 Qualifying Issuer

• Reporting issuer in at least one of BC, Alberta,
  Saskatchewan, Manitoba, Ontario, Quebec or Nova
  Scotia
• Securities listed or quoted on a qualified market
• Current AIF
• SEDAR filer

19
MI 45-102 Restricted Periods

• If issuer is at the distribution date
• 4 month restricted period
• If issuer is not a qualifying issuer at the
  distribution date
• 12 month restricted period
• Legending

20
MI 45-102 Seasoning Periods

• Qualifying issuers
• 4 month sesoining period
• If issuer is not a qualifying issuer at the
  distribution date
• 12 month seasoning period
• Pre-IPO distributions
• employees
• others

21
MI 45-102 Control Block

• Changes from old regime
• restricted periods now 4 or 12 months depending
  upon whether the issueris a qualifying issuer
• tainting provisions removed