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The Leveraged Capital Newsletter,
sponsored by Graham Financial Corporation
(http://www.GrahamFinancial.com),
is a free monthly newsletter that presents growth You are receiving this newsletter because you have requested that we send you our monthly editions. We do not believe in "spaming" anyone. Your time is valuable and if you have received this newsletter in error, please let us know. If you do not want to continue to receive Leveraged Capital please see our unsubscribe instructions at the bottom of this edition. To subscribe mail to:
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with the word "subscribe" in the subject field. What would happen if we chose not to participate in this recession? Who doesn't want to take advantage of the lowest interest rates in decades, company valuations that have finally come back to levels of sanity, and the fact that money is out there (and a lot of it!) waiting to be invested IF you have a solid business plan and you and your team can actually manage and grow your company? Given the depth of bad news that we have been subjected to and experiencing, this months newsletter was refreshing to put together given the scope and quality of the contributions. Good news for Ontario companies that want to raise less than $3million by issuing securities, great thoughts provoked about our leadership styles and a celebration of the best of Canada's entrepreneurial women. This month is definitely worth a close read. DPG. In this months issue:
============================================================== Investment
Hindsight: ============================================================== Welcome to the Leveraged Capital Newsletter. Our goal is to provide you with timely and informative articles about growth and strategy issues effecting entrepreneurs and small to medium sized companies. Each month Leveraged Capital will deal with issues affecting your business. You will be able to read topics ranging from finance, human resources, buying companies, selling your company, and technology. In coming months you will read profiles about other entrepreneurs and current decision makers. We will keep timely content levels high, advertising content low, and welcome your feedback. Are you interested in contributing articles?
Or, do you have an interesting and unique story to tell about your
company? We would like to interview you. ==============================================================
Cassels Brock & Blackwell LLP is a full service Toronto law firm with
affiliated offices in Montreal, Vancouver and Mexico City. Peter Dunne is the
co-head of the firm's Securities Law Practice Group with 24 lawyers servicing
clients in all aspects of the financial markets. Brian Koscak is a Senior
Associate with Securities Law Practice. Profiles and contact information
for Mr. Dunne and Mr. Koscak are found by clicking here. The rules governing the exempt market for the distribution of securities in Ontario are about to change.[1] The changes include the elimination of the most popular exemptions from the registration and prospectus requirements under the Securities Act (Ontario) (the “Act”), and the creation of several important new exemptions. Understanding which issues and which investors fit within the new exemptions is vital to accessing capital in Ontario’s new exempt market. The following will summarize some of the significant changes to the rules as well as identify key areas of significance that you should be aware of if you want to distribute securities in Ontario without a prospectus. Are
the New Private Placement Rules Really New? On
November 30, an old question is scheduled to get a new answer -- how do you
distribute securities in Ontario without a prospectus?
So
what's all this about a new system?
Since we are talking about private placements, what is a closely-held issuer?
That's pretty easy. It's certainly a lot easier than the old private issuer exemption, which introduced layer upon layer of case law tests for investor eligibility with the result that you could seldom be sure that the exemption was available -- to some extent, its like arguing about how many "best friends" you can have; and it is a lot more realistic than imposing an upper limit on the prospective investors you can approach (was that guy number 50 or only number 49?) How far can I go as a closely-held issuer?
Returning
to the private placement theme, who are these accredited investors who won't put
me offside the closely-held issuer status?
So
where are the problems under the new rules?
Final
analysis?
============================================================ Spend your time marketing and promoting your business, not doing the daily tasks! This
software will automatically filter your email, run your newsletters, import your
leads or
============================================================== The Trouble with Humility. I once worked with a CEO who was a humble leader. I'll call him Alan. I say Alan was humble because in his heart he believed that he was no better than the employees in his company. Whether it was the receptionist, a janitor, or one of his direct reports, Alan spoke to everyone the same way. No condescension, no paternalism, no arrogance. Every employee received the same tone, the same attention, the same courtesy from Alan, and people respected and admired him in return. But don't get me wrong. Alan wasn't dynamic. In fact, he was somewhat plain; his critics would even say bland. Whenever he gave a speech, employees would lean over to me and say, "When are we going to get Alan some coaching with his public speaking?" We all labored with him as he paused, stammered and looked down at his notes. When Alan entered a room, most people didn't really notice him, and that was his preference. The way he carried himself, his general demeanor, gave no indication that he was a person of importance, not to mention the CEO. One day Alan stopped by the marketing department to speak to one of his vice presidents. He arrived at the VP's office at the same time as one of the company's newest employees, who reached out her hand and said, "Hi, I'm Mary. I'm the new advertising coordinator." Alan smiled. "Nice to meet you Mary. I'm Alan." Mary asked. "And what do you do Alan?" With a tone that sounded more like a marketing intern than a chief executive, Alan simply replied "Oh, I'm the CEO." In spite of his low-key attitude and lack of charisma, Alan built a company from scratch that reached almost a billion dollars in revenue. He received numerous awards for entrepreneurship and accomplishment in business. What's more, Alan's company was known for having higher employee and customer loyalty than any other in the industry. How did Alan accomplish all of this without a forceful personality? Part of Alan's success can be attributed to his intelligence. He had a way of sitting quietly during his staff meetings and saying almost nothing. While everyone else was advocating their points and positioning themselves to say something smart, Alan usually appeared to be turned out of the conversation. When everyone had finally exhausted their opinions, Alan would succinctly summarize their reasoning and recommend a course of action that his reports immediately recognized as the best possible solution. His lucidity was made all the more impressive by the subdued nature of his personality. In addition to his deceptive intellect, Alan had an unquestionably strong work ethic. He maintained a steady, persistent drive for results regardless of the challenges that confronted him. While Alan's intelligence and hard work certainly contributed to his success, they did not differentiate him from others. Most CEOs I've known are smart and work long hours, but that doesn't make them successful. What set Alan apart was his unmistakable humility, something that came to be valued by customers, partners, vendors, and employees alike. Anyone who knew Alan developed an affection for him and his company that easily transcended any shortcomings in his style. There is no question that Alan's authenticity provided the fuel for his organization's growth. But there was a limit to Alan's success. As his company grew, his drawbacks became more costly to the business. Most new employees didn't get the opportunity to know Alan personally, so they never developed the loyalty to him that others did. And when they heard Alan speak to large groups, their sense of disappointment could not be offset by his hidden humility. "This is the Alan we've been hearing about?" Confidence in his ability to lead the organization began to wane. As Alan's company grew and took on a higher profile in the market, his competitors began taking shots at him. Essentially, they were calling him out for a fight, but Alan had little interest in such public displays of competitiveness. In fact, he didn't like dealing with the press, and when he did make television appearances, his performance was less than impressive. When I tried to help Alan find opportunities to make symbolic gestures to build his esteem in the eyes of employees, he seemed puzzled. What I came to realize later was that deep down inside, Alan simply could not fathom why employees cared so much about his actions. After all, he was no better than they were. On the day that the board of directors bumped Alan upstairs to the chairman's office, he came by my office to break the news to me. I could not help but feel that deep amid his disappointment and sadness was a sense of relief. "I'm not the kind of person who likes to debate people on TV," he told me. "If that's what it takes, then maybe I'm not what they need." Although employees know he lacks charisma, Alan is still revered by them for his character, his authenticity, his accomplishments, and his modesty. But that's the trouble with humility; sometimes it makes it hard for a person to be a charismatic leader. The Charismatic Leader I once knew a chief executive of a very large organization who was a charismatic leader. We'll call her Zoe. I say she was charismatic because she realized that her actions were more important than those of the people she led. As a result, Zoe was always aware of herself, and acted in a way that inspired people. Whether she was giving a speech, sitting in on a meeting, or walking the halls among employees, Zoe made the most of every encounter. She knew how to show empathy, disappointment, excitement and anger in a way that often moved people. She was self-deprecating much of the time, but celebrated the achievements of her organization with exuberance and flair. As a result, most employees loved to listen to Zoe's speeches and to be in meetings with her. In their minds, Zoe was a classic leader, and a good one. Zoe's accomplishments were considerable. She achieved for her organization a higher profile in the industry than it would have merited based on performance alone. Through her magnetism and charm, she was able to fend off skeptical analysts and critics and establish herself as a masterful spokesperson in the industry. Her personal profile soared. But there were exceptions to Zoe's ability to charm people, and they were important ones. The people who knew her best, her direct reports and others close to her, could not be mesmerized by Zoe the way most employees and outsiders were. Although they certainly appreciated her ebullient personality, they were often subtly disappointed by her actions, especially when she wasn't "on." These miscues were particularly disconcerting in contrast to her public persona. It was clear to those who knew her best that Zoe regarded herself as inherently more important than others she was chartered to lead. She arrived late to meetings purposefully, to make an entrance and avoid having to wait for anyone else. She used company resources to purchase expensive items for her office at a time when she was cutting costs in other parts of the organization. She made comments about employees that flew in the face of her public statements about respect for coworkers. And she was prone to fits of anger behind closed doors. With the aid of a potent truth serum, I'm sure she would have defended herself by saying, "Of course I'm more important than the people I lead. I'm smarter than most of them, I've taken more risks in my career, and no one else can do my job." All of which would have been true, to a certain extent. Gradually, Zoe's ability to lead diminished among her direct reports. Her influence was strongest among the masses, those employees with limited personal exposure to her. As a result, she looked for more and more opportunities to address those people. She knew that her charisma would win them over. She was right, until results began to slip. Almost immediately, it became harder and harder for Zoe to maintain her public persona. She found that her standing among the masses, although it had been extremely high, was paper-thin. As the organization struggled, general opinion of Zoe collapsed remarkably quickly, leaving her with a legacy of "all talk, no action." When asked to assess Zoe's qualities as a leader, those who knew her came to the conclusion that she lacked something essential in a good leader. As skilled as she was at the art of feigned self-deprecation, Zoe did not have a humble bone in her body. "And why should I be humble?" I'm sure she would have said under the influence of that truth serum. "People are watching every move I make - I must be important." But that's the trouble with charisma - it can make it difficult to be humble. The Tyranny of the Or In the book Built To Last, James Collins and Jerry Porras describe a phenomenon they call the "tyranny of the or." Essentially, it is the inability to hold two seemingly opposing ideas in mind simultaneously. For example, companies often mistakenly believe they must choose between opposing forces like long-term profit and short-term revenue growth, or concern for employees and concern for shareholders. Great companies, according to Collins and Porras, are able to adhere to both sides of a given issue, and therefore avoid the "tyranny of the or." Alan and Zoe personify the opposite ends of the leadership see-saw where humility and charisma sit, creating a potential for the "tyranny of the or." Remember, I have defined humility as the realization that a leader is inherently no better than the people he or she leads, and charisma as the realization that a leader's actions are more important than those of the people he or she leads. As leaders, we must strive to embrace humility and charisma. The problem is that, like a see-saw, when we try to raise our ability in one behavior, the other area tends to drop. Imagine Alan focusing on his "charismatic skills" as a leader. Better speeches. A comfortable television persona. The kind of charisma that turns heads in a room. Assuming that he could pull this off, Alan would almost certainly begin to see himself in a different light. He would receive more attention than he did before. Being human, that would tempt him to think of himself more favorably. And there is a good chance that his humility would suffer. If this sounds simplistic, we should consider the moments in our careers when we've been at our peak as a "public, charismatic leader." During these times it is sometimes difficult to maintain our sense of humility. All of us are susceptible to believing the praise and accolades that we receive, even when that praise comes from people who have a vested interest in winning our approval - unless we're lucky enough to go home to a spouse or children who can bring us back to earth. Sam Nunn, the former U.S. Senator from Georgia, recounted how his wife restored his humility when he returned from a 1994 diplomatic mission to Haiti where he helped avert a bloody conflict. You can just imagine how he must have felt after accomplishing something of that magnitude that benefited so many people. A temporary loss of humility certainly would have been understandable. But when he crawled into bed with his sleeping wife after the middle-of-the-night return flight from the Caribbean, she rolled over and in a barely coherent voice said, "Sam, will you clean the pool tomorrow? It's full of leaves." Humility restored. Unfortunately, some of us are never asked clean pools. One day they wake up and (perhaps) realize that they've lost the fundamental sense of humility we once had. On the other end of the see-saw, imagine Zoe, through a personal setback or brutally honest feedback, coming to see that she is no better than the guy who empties her trash at night. If she were truly able to internalize this concept, chances are she would develop a reluctance to be the demonstrative leader that she was before. Certainly, her ego-driven motivation would be reduced, which would have a significant impact on her behavior. The False Promise of Balance Balance is not the answer. Part of the problem with the "tyranny of the or" is that we sometimes try to balance the opposing forces by compromising both in some way. This is the stuff of mediocrity. If Alan were to trade even a little of his humility for some measure of charisma, he would risk destroying the humble core of his credibility as a leader. Unfortunately, rebuilding that core is a lot harder and takes more time than tearing it down. Similarly, if Zoe were to trade some of her charisma for a little humility, she might well risk her ability to lead. And her credibility would deteriorate more quickly than Alan's. A humble leader is given the benefit of the doubt far more often than a charismatic leader, whom constituents like to see humbled from time to time. The daunting challenge confronting Alan and Zoe, and all leaders to some extent, is a simple but difficult one. A humble leader must find a way to become more charismatic without sacrificing humility. A charismatic leader must find a way to develop a sense of humility without sacrificing the ability to move others. Theoretically, there is nothing preventing them from avoiding the "tyranny of the or" and developing greater humility and charisma simultaneously. However, it is extremely difficult to do in reality. What's a Leader to Do? The first step in taking on this challenge is to assess where on the leadership see-saw we fit. Even if we are able to confidently assess ourselves, it is important to get feedback from others. This not only provides evidence for our self-assessment, but can reinforce behavioral change. Charismatic leaders who survey their constituents or, better yet, sit with them and discuss the ups and downs of their leadership style will likely be humbled by the experience. But because they are being open and public about their pursuit of humility, they will be more likely to maintain their charismatic edge. In fact, the process of being humbled publicly can actually increase a leader's ability to be charismatic, because it provides an impetus for authenticity. Humble leaders who solicit feedback on their presentation skills of public persona will be seen as making a semi-public move toward greater charismatic leadership. While this will not ensure that such skills develop, it will give the leader confidence and permission to step outside of his or her comfort zone and take bold action. The single greatest impediment to raising both ends of the see-saw is the denial that both qualities are important. Humble leaders tend to discount the importance of charisma, labeling it phony or hokey. Charismatic leaders rarely discount the importance of humility publicly, but many of them privately believe that humility suggests weakness. A quote from Calvin Coolidge might help dispel that belief. "It is a great advantage to a president, and a major source of safety to the country, for him to know that he is not a great man." Certainly, there are humble, quietly effective leaders who remain little known simply because of their humility. And there are more than a few chief executives who exude charisma (and arrogance) and who achieve much. But the exceptional leaders - we know them when we see them - combine the best of both worlds. They share an ability to inspire loyalty and excitement. Whatever a leader's tendency, success requires that he or she find a way to genuinely appreciate the need for both sides of the leadership see-saw - and find a way to break it in the middle and raise both ends at once.
What kind of Leader Are You? This assessment requires you to honestly answer questions about your attitudes toward others. Certainly it will be easy to identify the "correct" answers. However, responding wishfully will not be helpful. Remember, too, that the most effective leaders are not just humble nor just charismatic; they are both. Humility and charisma each offer important benefits to leaders and their organizations. Benefits of Humility
Patrick Lencioni is the founder and president of The Table
Group. Pat has been speaking, consulting and writing about topics related to
leadership, organizational health, change and corporate culture since
establishing the company in 1997. Pat penned his first best-selling book, Pat can be reached at The Table Group in the San Francisco Bay
Area (510) 596-9292, ============================================================= The 2001 Rotman Canadian Woman Entrepreneur of the Year Awards (CWEYA) In their tenth year, the CWEYA honour the creativity and success of women
entrepreneurs The judges, who are themselves successful businesswomen from across Canada,
have selected Join the exciting tribute to these outstanding Canadian women entrepreneurs - register to attend the awards dinner and ceremony today. Individual tickets are $165 +GST, and corporate tables are $2000 + GST For more information, and to register, contact: 2001 Rotman CWEYA c/o The Powerpoint Group =============================================================
This
article is not intended to provide legal advice and is a general review of the
subject matter. Individual
situations will differ and should be discussed with a lawyer.
If readers desire to contact the authors of this article, their personal
information is located at the end of this article. The rules governing the exempt market for the distribution of securities in Ontario are about to change.[1] The changes include the elimination of the most popular exemptions from the registration and prospectus requirements under the Securities Act (Ontario) (the “Act”), and the creation of several important new exemptions. Understanding which issues and which investors fit within the new exemptions is vital to accessing capital in Ontario’s new exempt market. Part
I: Background Many private placements in Ontario have relied on certain registration and prospectus exemptions under the Act, including but not limited to, the private company exemption, the seed capital exemption and the $150,000 (or “deemed sophisticated investor” exemption). These and other private placement exemptions have been generally criticized by industry as being inadequate or unsuitable for raising capital for small and medium size enterprises in Ontario. This was generally the theme of the Task Force of Small Business Financing as described in its October 1996 report (the “Report”) presented to the Ontario Securities Commission (the “OSC”). On May 7, 1999, the OSC published a concept paper entitled, “Revamping the Regulation of the Exempt Market” which was, in part, based on the Report (the “Concept Paper”). As a follow-up to the Concept Paper, the OSC published a proposed revision to Rule 45-501 on September 8, 2000. Rule 45-501 and its companion policy and accompanying forms were first introduced on October 16, 1998 as part of the OSC’s rule-making process. It is a restatement and refinement of the registration and prospectus exemption rules formerly found in various parts of the regulations under the Act and in certain OSC policy statements. In response to public comments made in respect of the Concept Paper, the OSC revised and republished Rule 45-501 on April 6, 2001, July 13, 2001 and, most recently, on September 14, 2001. In effect, the OSC has been reviewing this subject matter for almost six years and has revised Rule 45-501 four times. The result is wholesale change for the exempt market in Ontario. Revised Rule 45-501 entitled Exempt Distributions, comes into effect as of November 30, 2001, assuming approval by the Ontario Minister of Finance (“Rule 45-501”). Part
II: Elimination of Certain
Exemptions under the Act Rule 45-501, in effect, replaces, eliminates or qualifies the following exemptions from the Act: (a) the institutional and government purchaser exemption[2]; (b) the exempt purchaser exemption[3]; (c) the $150,000 (or “deemed sophisticated purchaser” exemption)[4]; (d) the net assets over $150,000 exemption[5]; (e) the seed capital exemption[6]; (f) the private company exemption[7]; (g) the bonds, debentures and other evidences of indebtedness exemption; and (h) the private mutual fund exemption[8]. In short, the most commonly relied upon exemptions are no longer available when the new Rule 45-501 comes into force. Part
III: Exemptions under Rule 45-501 The new exempt market under Rule 45-501 falls into the following exemptions from the registration and prospectus requirements of the Act: (a) a trade in a security of a closely-held issuer (the “Closely-Held Issuer Exemption”);1 (b) a trade in a variable insurance contract; (c) a trade to an accredited investor (the “Accredited Investor Exemption”); (d) a trade by a control person in a security acquired under a formal take-over bid; (e) a trade in connection with a securities exchange issuer bid; (f) a trade upon the exercise of conversion rights in a convertible security; (g) a trade upon an exercise of exchange rights in an exchangeable security; (h) a trade on an amalgamation, arrangement or specified statutory procedure; (i) a trade in a security under the Execution Act (Ontario); (j) a trade in debt of the Conseil Scolaire de L’ile de Montreal; (k) a trade in a security of a mutual fund or non-redeemable investment fund; (l) a trade by a promoter or issuer in a government incentive security; and (m) a trade in a security previously distributed in the exemption under (l) above (collectively, the “Exemptions”). Most of these Exemptions are based on prior exemptions under the Act and are not addressed separately by this memorandum. However, two exemptions are entirely new – the Closely-Held Issuer Exemption and the Accredited Investor Exemption. These are discussed below. Part
IV: The Closely-Held Issuer
Exemption (i)
Transfer Restrictions and 35 Investor Limit Generally, a company is “a closely-held issuer” if its outstanding securities (except for debt securities) are: (a) subject to transfer restrictions contained in its constating documents (eg., articles of incorporation) or one or more other agreements among the issuer and its shareholders (eg., shareholders agreement); and (b) beneficially owned directly or indirectly by not more than 35 persons or companies (the “35 Investor Limit”). The 35 Investor Limit does not include accredited investors (discussed below in Part V) or current or former directors, officers and employees of the issuer or an affiliated entity of the issuer or current or former consultants. Additionally, two or more persons who are joint registered holders of securities of the issuer or a corporation, partnership, trust or other entity shall be considered as one owner of the issuer’s securities. This means that companies may solicit securities to an unlimited number of unaccredited investors, regardless of whether such investors are family, friends or strangers of the issuer or its promoters. This is a significant change from the private issuer exemption under former Rule 45-501, which limits such solicitations to, among others, family and friends and those having common bonds of interest and association with the issuer and its promoters. These are the benchmarks of the old common law tests for who is the “public”. The Closely-Held Issuer Exemption replaces the uncertainty and subjectivity of the private company exemption with a new test of ready application. This should greatly facilitate financing efforts of issuers who fit this profile. (ii)
Aggregate Proceeds Not Exceeding $3 Million Closely-held issuers and other issuers engaged in common enterprise with the issuer can only raise aggregate proceeds up to $3 million pursuant to trades made in reliance on the Closely-Held Issuer Exemption (the “$3 Million Aggregate Proceeds Limit”). To that extent, it is a “once in a lifetime” exemption, much like the former seed capital exemption. Unlike the seed capital exemption, however, there is no time limit on raising the required capital. It can be raised incrementally over time until the $3,000,000 limit is reached. The OSC is of the view that proceeds received by the issuer from trades made in reliance upon other exemptions, including exemptions available prior to the date when the Closely-Held Issuer Exemption came into force, are not relevant for purposes of calculating the $3 Million Aggregate Proceeds Limit.[9] For example, 45-501CP states that proceeds realized by an issuer from trades to accredited investors are not counted toward the $3 Million Aggregate Proceeds Limit. However, issuers must be careful to file a report on Form 45-501F1 with respect to trades to accredited investors where such filing is required, otherwise proceeds of that trade will be counted towards the $3 Million Aggregate Proceeds Limit. (iii)
Annual Limit on Promoters The Closely-Held Issuer Exemption only permits a promoter to rely on this exemption once in a 12-month period. In other words, a person cannot act as a promoter in respect of a trade in reliance on this exemption if he or she has done so within 12 months preceding the trade. This feature parallels the promoter restrictions under the former seed capital exemption. (iv)
No Selling or Promotional Expenses – Exception for Dealer Expenses The Closely-Held Issuer Exemption does not permit any selling or promotional expenses to be paid or incurred in connection with a trade thereunder other than for services performed by a dealer registered under the Act. This means that only registered brokers, investment dealers and securities dealers may be paid a commission for raising money under the Closely-Held Issuer Exemption. Additionally, Rule 45-501 explicitly permits limited market dealers to receive selling or promotional compensation in connection with a trade under this exemption. Therefore, even though solicitations may be made to an unlimited number of unaccredited investors, it is unlikely that an issuer would undertake a widely publicized offering, since such activity would likely incur promotional expenses. In effect, this is a practical limitation on an issuer’s ability to raise money from investors beyond those known to it or to its promoters. Interestingly, it may create an impetus to engage a dealer where broader solicitation is required. See below under Part IV(ix) for limitations on dealer investment. The
OSC is of the view that the expenses incurred in connection with the preparation
and delivery of an offering memorandum (see Part IV(v) below) do not
constitute selling or promotional expenses.[10]
Therefore, such expenses are permitted. (v)
Offering Memorandum Other than trades involving government incentive securities, there is no requirement to prepare an offering memorandum (“OM”) under Ontario securities law, although business practice may suggest otherwise. The OM rules under Rule 45-501 are now clearer in application. A voluntary OM must include a statutory right of action as referred to in Section 130.1 of the Act. Section 130.1 of the Act deals with statutory liability for a misrepresentation in a voluntary OM. This is consistent with the existing OM rules and is the basis upon which discipline can or should be brought to the disclosure. Ontario has no prescribed form or other requirements involving voluntary OMs, other than the statutory right of action described above. However, 45-501CP states that a voluntary OM must comply in all other respects with Ontario securities law. Therefore, by incorporating a statutory right of action, issuers and a selling security holder on whose behalf the distribution is made, may be liable for any misrepresentation. The Act defines a “misrepresentation” as an untrue statement of a material fact or 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. As mentioned, this does not change the status quo under former Rule 45-501. Issuers, promoters, lawyers and auditors should still bear the definition of misrepresentation in mind in determining what information to disclose in or omit from a voluntary OM. This decision depends on the facts relating to a particular issuer and its business. However, as a general rule, the degree to which an issuer seeks to avoid the possibility of being liable for any misrepresentation, the more likely that a voluntary OM will be prospectus-like. Once a voluntary OM is drafted, a copy of it must be delivered to the OSC within 10 days of the date of the trade. 45-501CP states that the OSC does not generally review or comment upon voluntary OMs. However, if the OSC becomes aware that a voluntary OM fails to disclose material information relating to securities, staff of the OSC may intervene to take remedial action. (vi)
Exempt Trade Report and Fee No exempt trade report or fee is required to rely on the Closely-Held Issuer Exemption to file voluntary OMs with the OSC in connection therewith. Generally, voluntary OMs will not be placed on the public file. (vii)
Mandatory Dissemination of Disclosure Form 45-501F3 This
is new. The Closely-Held Issuer
Exemption requires that the seller provide the purchaser with a prescribed
information statement substantially similar to Form 45-501F3 at least 4 days
prior to the date of the trade. This
is essentially a statement of investment risk.
If the issuer has five or fewer shareholders following the trade, Form
45-501F3 is not required. This
disclosure document is aimed at increasing investor awareness regarding the
nature and risk of investing in a small company and suggests investors take
certain steps prior to making any investment (e.g., suggestions describing how
to analyze an investment). (viii) Resale Restrictions A description of the detailed resale provisions is beyond the scope of this memorandum. For present purposes, we merely note that the first trade in a security distributed under the Closely-Held Issuer Exemption is subject to Section 2.6 of Multilateral Instrument 45-102 Resale of Securities (“MI 45-102”). One should also note that MI 45-102 has been revised and is anticipated to come into force on November 30, 2001 – the same time as Revised Rule 45-501.[11] (ix) Limitations on Dealer Involvement As noted under Part IV(iv) above, the Closely-Held Issuer Exemption permits an issuer to pay or incur selling or promotional expenses for services performed by a dealer registered under the Act in connection with a trade thereunder. Notwithstanding this provision, it is not the case that all dealers can trade securities under the Closely-Held Issuer Exemption and be reimbursed for such selling or promotional expenses. Section 5.1 of Rule 45-501 states that this exemption is not available for a trade in a security unless the dealer is registered in a category that permits it to act as a dealer for the trade described in the exempting provision. This means, for example, that mutual fund dealers would not be eligible to trade or be compensated for selling securities of a closely-held issuer sold under the Closely-Held Issuer Exemption. However, there is still a role for certain other dealers in connection with the Closely-Held Issuer Exemption. Dealers registered under the Act in the categories of broker, investment dealer, securities dealer and limited market dealer are eligible to participate in and be compensated for distributions under this exemption. It is noted that the category of “securities dealer” is effectively closing as such dealers are required to migrate to the category of investment dealer on, or prior to, their renewal date.[12] Also, we understand from staff at the OSC that the category of “limited market dealer” is the subject of ongoing consideration and can be expected to change significantly in the future. Part
V: The Accredited Investor
Exemption Section 2.3 of Revised Rule 45-501 states that the registration and prospectus requirements under the Act do not apply to a trade in a security if the purchaser is an “accredited investor” and purchases as principal. This means that issuers can raise any amount of money at any time from any person or company that meets certain criteria. The concept of “accredited investor” is borrowed from U.S. law. Whereas the $150,000 threshold was an arbitrary indicator of deemed investment sophistication, the accredited investor approach actually creates a laundry list of persons or entities that satisfy the notion of sophistication for specific reasons. For example, if certain professionals (eg., doctors, lawyers or accountants) satisfy certain high net financial assets or net income tests (see “High Net Financial Assets or Net Income Individuals” at Part V(ii) below), they can invest any amount of money under the Accredited Investor Exemption. Therefore, issuers or prescribed registered dealers acting on their behalf are no longer restricted to finding investors that satisfy the $150,000 threshold as previously required under Section 72(1)(d) of the Act. But who are accredited investors and what are the criteria? (i)
Definition of Accredited Investor Revised Rule 45-501 provides a long list of accredited investors that includes, among others, banks, trust and loan corporations, insurance companies and pension funds. Three notable accredited investors include family members, registrants and high net financial assets or high net income individuals. (ii)
High Net Financial Assets or High Net Income Individuals After considerable debate, Revised Rule 45-501 has eliminated Section 72(1)(d) of the Act, effectively eliminating $150,000 investments as the benchmark of deemed sophistication. It has replaced this standard with new tests which involve satisfying either a “net financial assets test” or a “net income test”. The “net financial assets test” deems a person to be an accredited investor if, an individual alone or together with a spouse, beneficially owns financial assets having an aggregate realizable value that, before taxes, but net of any related liabilities, exceeds $1 million (the “Net Financial Assets Accredited Investor Test”). The “net income test” deems an individual whose net income before taxes exceeded $200,000 in each of the two most recent years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of those years to be an accredited investor. Additionally, in either case, the investor must have a reasonable expectation of exceeding the same net income level in the current year (the “Net Income Accredited Investor Test”). (iii)
How does an Issuer Verify that an Investor Satisfies the Net Financial
Assets Accredited Investor Test and the Net Income Accredited Investor Test? It is the seller’s responsibility to ensure that trades in a security satisfy the Accredited Investor Exemption. The OSC expects that the seller will exercise reasonable diligence for purposes of determining whether the exemption is available in any particular circumstance. Does this mean that accredited investors have to provide their financial statements to sellers? The simple answer is no. 45-501CP states that the OSC would ordinarily be satisfied that a seller has exercised reasonable diligence where the seller has obtained statutory declarations or written certifications from purchasers regarding their net financial assets and/or net income. This can be relied upon by the seller for purposes of the Accredited Investor Exemption. However, a seller cannot rely on such declarations or certifications if the seller has knowledge that any facts set out therein are incorrect. This means that sellers should include representations and warranties in their subscription agreements involving the Net Financial Assets Accredited Investor Test and Net Income Accredited Investor Test in order to rely on the Accredited Investor Exemption and, in addition, request declarations and certificates related thereto. (iv)
Family Members are Included The definition of accredited investor includes, among others, spouse, parent, grandparent or child of an officer, director or promoter of an issuer – hence the family member exemption. (v)
Certain Registrants are Included The definition of accredited investor also includes, among others, a person or company registered under the Act or securities legislation in another jurisdiction as an adviser or dealer, other than a limited market dealer (the “Registrant Exemption”). Moreover, the definition of accredited investor also includes an individual who has been granted registration under the Act or securities legislation in another jurisdiction as a representative of a person or company under the Registrant Exemption, whether or not such individual’s registration is still in effect. Arguably, an investor who has satisfied the proficiency requirements to become a registered representative should be an accredited investor. These individuals have the requisite experience to determine when to seek advice. (vi)
Offering Memorandum See comments above at Part IV(vi). (vii)
Resale Restrictions See comments above at Part IV(viii). (viii)
Exempt Trade Reports and Fee Generally, Section 7.5 of Revised Rule 45-501 requires a seller to file a prescribed exempt trade report in prescribed form within 10 days of the trade. There are certain exceptions involving a promoter or prescribed family members of an officer, director or promoter of an issuer. The prescribed form to be used by sellers for sales from treasury is form 45-501F1. The prescribed form to be used in respect of sellers on re-sale (i.e. a trade made in reliance on subsection 2.5(2) or (3) of MI 45-102) is Form 45-501F2. The filing fee for a report filed in Form 45-501F1 is based on a formula, but requires a minimum of $100, while the fee for a report filed in form 45-501F2 is a flat fee of $100. (ix)
Limitations on Dealer Involvement See comments above at Part IV(viii). Peter A. Dunne, LL.B., LL.M., is a partner in the law firm of Cassels Brock & Blackwell LLP in Toronto, Ontario. Peter is Co-Head of the Securities Law Practice Group and leads the firm’s securities regulatory practice. Peter’s practice includes corporate finance and securities regulatory matters, including registration under securities legislation. His practice also includes mutual funds, venture capital funds, limited partnerships and other investment vehicles, public and private financings, stock exchange listings, as well as mergers and acquisitions. Peter is a graduate of the University of Toronto and Osgoode Hall Law School and has an LL.M. from the London School of Economics. He was called to the Ontario Bar in 1988. He can be contacted at 416-869-5342 or at pdunne@casselsbrock.com. Brian P. Koscak, B.A. (Hon.), M.A., A.I.I.C., J.D., LL.B., is a lawyer in the law firm of Cassels Brock & Blackwell LLP in Toronto, Ontario and practices primarily in the areas of securities, corporate and financial institutions law, including regulatory law affecting financial intermediaries. Brian is currently enrolled and working towards his part-time LL.M. – Securities at Osgoode Hall Law School. Brian obtained his LL.B. and J.D. degrees in 1997 at the University of Windsor Faculty of Law and the University of Detroit Mercy School of Law as part of a joint program. Brian obtained his B.A. (Honours) with an emphasis in public administration in 1987 and a M.A. specializing in judicial administration in 1988 at Brock University. He can be contacted at 416-860-2955 or at bkoscak@casselsbrock.com. |
