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Securities • Issues & AdvocacyTEXT OF A LETTER SENT BY THE PDAC TO THE BRITISH COLUMBIA SECURITIES COMMISSION June 26, 2003 British Columbia Securities
Commission Attention: Ms. Brenda Benham Dear Sirs/Mesdames: Re: Securities Regulation That Works - The BC Model As you may be aware, the Prospectors and Developers Association of Canada (the “PDAC”) is a national organization whose membership consists of approximately 4,500 individuals and corporations who are engaged in mineral exploration and mining activities throughout the world. Established in 1932, the PDAC has been supportive of legislation and other regulatory initiatives which foster the responsible development of Canada’s mineral resources. Mining companies represent approximately 28% of all issuers listed on the Toronto Stock Exchange (“TSX”) and the TSX Venture Exchange (“TSX-V”). In 2002, 32% of the world’s equity capital raised for mining companies was for TSX and TSX-V issuers and 91% of the number of equity financings worldwide were for TSX and TSX-V listed issuers. Accordingly, the PDAC believes that changes that would benefit mining issuers would be of net benefit to the Canadian capital markets generally. During the last 12 months, the PDAC has had the opportunity to make submissions on securities regulatory reform to the September 2002 Mines Ministers’ Conference, to Mr. Harold MacKay (October 2002) and to the Canadian Securities Administrators regarding their Uniform Securities Legislation proposal (May 2003). In addition, the PDAC hosted a panel discussion among Messrs. David Brown, Robert Fabes, Doug Hyndman and Harold MacKay in March, 2003 on the issue of securities regulatory reform. The PDAC, as an organization whose members consist largely of junior resource companies, is supportive of any initiative that aims to simplify and harmonize Canada’s fragmented securities regulatory regime. While the current multi-jurisdictional system is inefficient in many areas for all issuers, it is particularly so for junior issuers for whom the costs of adhering to the increasingly complex securities regulatory regime is disproportionately large as compared to more senior issuers. In addition, junior issuers often find themselves accessing the private equity markets more frequently than senior issuers. Accordingly, the complexities of the various Canadian capital raising regimes pose significant problems for junior issuers. The PDAC’s Securities Committee is pleased to make the following submissions to the British Columbia Securities Commission (the “Commission”) regarding the “BC Model - Draft Legislation and Guides” (the “BC Model”). We congratulate the Commission on its efforts in conceiving of and developing the BC Model. The stated goals of the BC Model are laudable and would revolutionize and greatly simplify the British Columbia (“BC”) securities market. For convenience of reference, our comments below (other than those under the heading “General Comments” and “Interface Issues”) appear under the same headings used in the Draft Legislation. Capitalized terms used herein and not otherwise defined have the respective meanings ascribed to them in the BC Model. General Comments We are very encouraged by the proposed regime set out in the BC Model. It would result in a securities regulatory regime that (i) is simpler to understand and comply with, (ii) is less costly to adhere to, (iii) would permit junior issuers to raise the funds necessary to pursue their business plans in a timely and cost-effective manner (iv), would be expected to improve the timeliness and quality of an issuer’s ongoing continuous disclosure materials, and (v) would provide appropriate remedies for investors suffering a loss as a result of a material breach of the legislation. Our chief concern regarding the BC Model is that it will represent a significant departure from the approach being proposed by the other Canadian securities regulators. Although we acknowledge that the Commission has thought carefully about how the BC Model will “interface” with the comparable regulatory frameworks in the rest of Canada, we make certain comments regarding what we perceive as challenges to this interface. If these challenges are not resolved, issuers will be faced with two competing regulatory regimes with possibly contradictory requirements. For most, it would not make sense to follow the BC Model if they must also comply with the requirements of the other provinces. Accordingly, while we strongly favour the provisions of the BC Model, we also believe that uniformity of regulation is a more pressing consideration for most issuers. Overall we are very pleased with the proposals set out in the BC Model. In particular, we applaud the use of plain language in the legislation and the imposition of a plain language requirement for investor documents. We hope that this mandated approach will go a long way in de-mystifying the whole area of securities regulation thereby reducing issuers’ reliance on outside legal counsel. As well, simplified offering documents are more likely to be read and understood by investors. We also strongly support the concept of “continuous market access” which is a cornerstone of the BC Model. Removing the prospectus requirement for “public issuers” makes sense, provided that such issuers are required to continuously disclose all material information regarding their business and affairs on a timely basis and that this filed continuous disclosure record undergoes periodic selective review by the Commission. This concept, when combined with the requirement to file an annual information form (“AIF”) which discloses all material information regarding the issuer, will ensure that investors at all times have sufficient information concerning a public issuer on which to base an investment decision. While we are not convinced of the need to require a “due diligence provider” in connection with the filing of an initial AIF (the investor remedies should provide sufficient incentive for an issuer to ensure that the AIF is thorough and accurate), we are pleased that the Commission has recognized that the due diligence function may be appropriately performed by a non-registrant. This should encourage firms specializing in due diligence to compete with registrants for this role and thereby reduce the cost to issuers requiring a due diligence provider. It also makes sense that the Commission only intends to require the services of a due diligence provider in connection with an initial AIF as opposed to in respect of subsequent filings and/or transactions. As an interface issue, the Commission has essentially maintained the availability to restricted issuers of the exemptions contained in Multilateral Instrument 45-103 - Capital Raising Exemptions (“MI 45-103”). MI 45-103 currently provides the most progressive regime for private placements in Canada and we are encouraged that the Commission has largely maintained this regime for restricted issuers in the BC Model. An important and progressive advancement under the BC Model is putting an end (at least in BC) to the closed system for public issuers. The current system of prospectus exemptions, resale restrictions, seasoning periods and deemed distributions is a major source of the complexity and confusion in today’s securities markets. A system such as the BC Model that will eliminate “hold periods” for public issuers will greatly enhance the capital raising abilities of all public issuers but will be particularly important for junior issuers. The resale restrictions that are contained in the BC Model (essentially for restricted issuers) are correctly based on the identity or status of the purchaser as opposed to an arbitrary time period imposed by the legislation. We particularly applaud the end to the material change report requirement endorsed by the BC Model. This requirement is one of the most meaningless filing obligations and results in needless duplication of an issuer’s disclosure. In most cases, the material change report merely repeats verbatim the disclosure contained in the press release. By requiring that each press release must contain all material information concerning the development being disclosed, there is no need for a separate material change report. We also view the consolidation of the reporting obligations of significant securityholders as a positive development. Replacing the often overlapping insider reports, early warning reports and control block advance distribution notices with a single reporting requirement will reduce the administrative burden on significant shareholders while ensuring that the relevant information is available to investors in a single source and on a timely basis. Selected Comments on the Legislation and Rules Part 1 Definitions and Interpretation We support the narrowing of the definition of “insider” to include only individuals and also including a functional test to the definition of “senior officer”. As discussed above, we approve of the exclusion of significant securityholders from the insider definition in favour of a single reporting obligation for significant securityholders. These changes will simplify the determination of those required to report their trading in the securities of an issuer and will limit disclosure of questionable relevance by parties who do not ordinarily have access to material undisclosed information concerning the issuer. We also support the new definition of “material information” which forms the basis of an issuer’s disclosure obligations and specifically removes the retroactive assessment of materiality and the reference to pending board decisions. The removal of this retroactive assessment is essential in light of the expanded investor remedies for misrepresentation. However, we believe that the new definition may result in an unintended expansion of the reporting obligations of public issuers. Under the current regime, a reporting issuer is only required to disclose material changes in its “business, operations or capital”. Changes in general market conditions or economic factors currently do not give rise to a reporting obligation. Under the new definition of material information, however, an issuer may be required to issue and file a press release regarding external factors such as changes in exchange or interest rates. In our view, this proposal represents an unnecessary expansion of an issuer’s reporting obligations. Minor Comments: “business combination” - We suggest that this term be expanded to include the acquisition of or combination with substantially all the assets of an issuer or other person. Although it is obvious, you may wish to include a definition of “commission”. “file” - This action would presumably be effected electronically, but in the event there are other methods available for filing we suggest you add to this definition “in the prescribed manner”. Section 1B4 - As the direct or indirect concept may also apply to matters beyond restrictions on any conduct, we suggest the following expansion of this provision:
Part 4 Offerings The distinction between public issuers and restricted issuers will have significant implications in the context of public and private offerings. The benefits of being a public issuer will be so substantial that it will create a tremendous incentive for issuers to become public issuers (no doubt this is the hope of the Commission). As indicated above, we strongly support the adoption in the BC Model of the concept of continuous market access and the simplification of the initial public offering (“IPO”) process through the use of an AIF as opposed to a prospectus. We also believe that the AIF proposed by the BC Model represents a significant simplification and streamlining of the existing required prospectus form. It is much cleaner and easier to follow. We also support requiring issuers to only deliver an AIF to those who request it. This will represent a cost saving to issuers. Section 4B1(1)(a) - An issuer becoming a public issuer may be doing so in the context of an offering and may wish to have some indication from the Commission as to how long the review process for the initial AIF may be expected to take. Of course it is difficult to estimate at this time the staffing requirements and the volume of documentation which may be submitted in connection with the initial AIF review process; but you may wish to give some consideration to providing for a proposed base timeline similar to the 10 business day period suggested in connection with national prospectus offerings with a principal jurisdiction. We also believe that the removal of the mandatory escrow regime is long overdue. The calculation of the number of shares subject to escrow in connection with an IPO or reverse take-over transaction was often a time-consuming and costly exercise usually only capable of being performed by an issuer’s legal counsel or auditors. In addition, there was no empirical evidence that this concept was successful in accomplishing its desired goals. We are pleased to see that the Commission has recognized that market participants (such as underwriters) will have a legitimate interest in ensuring that management and other significant shareholders do not use the liquidity brought by an IPO to sell significant quantities of their founders stock. This laissez-faire approach to escrow has worked for years in the United States and there is no reason to believe that it will not work in Canada. Subsequent offerings by public issuers under the BC Model will be able to be effected quickly and cheaply and issuers can determine whether or not, in the context of their market, to use an offering document in connection with such offerings. Presumably, this will mean that an exploration company raising funds in respect of a new non-material property would not even be required to file a technical report in respect of such offering (assuming that the actual expenditures made on such non-material property are not material in the context of the offering and the company). A definition of “offering document” might be helpful, however, as it is unclear whether a term sheet or subscription agreement would constitute an offering document for the purposes of the BC Model. It is accepted current practice that a term sheet or a subscription agreement is not considered to be an offering memorandum as neither purports to describe the business or affairs of an issuer. We see little use in filing a term sheet or subscription agreement which provides little, if any, information to the public that would not be included in the press release announcing the terms of the offering. Part 5 Continuous Disclosure As discussed above, we are more than pleased that the BC Model will do away with the requirement to file a material change report in lieu of an ongoing requirement to ensure that all material information concerning a public issuer is publicly disclosed and to issue and file a press release to supplement such issuer’s public record as and when required. We also support the addition of a ‘business judgment rule” with respect to the determination as to the adequacy of a public issuer’s continuous disclosure record. This provision is essential given the subjectivity of the materiality determination as well as the availability of civil liability for misrepresentations in a public issuer’s continuous disclosure record. We support the imposition of a requirement that all public issuers make an annual filing disclosing all securities issued from treasury by the issuer during its most recently completed financial year. This information is important for market participants and cannot always be collectively determined from an issuer’s various other filings. We view the provisions expressly permitting advertising as a very positive development. We see no legitimate reason to preclude an issuer from advertising in respect of the sale of its securities so long as the advertisement directs the prospective investor to the issuer’s continuous disclosure record and any offering document being utilized. Part 15 Investor Remedies We question the necessity of providing a civil liability remedy to investors for any material breach of the Act and/or rules rather than confining such remedies to breaches involving disclosure or non-disclosure. A civil remedy with such a wide scope will place too heavy a burden on public issuers and will likely subject them to actions by those “whistle-blowers” who are looking to cash in from any contravention of the Act or the rules. Although the proposed legislation requires a potential plaintiff to obtain the approval of the Supreme Court of British Columbia prior to commencing an action, in practice, the court may be unlikely to refuse leave to commence an action in all but the most frivolous cases, preferring to leave it to the trial judge to weigh the evidence in the particular case. We approve of the inclusion of a defence based on an issuer having established a “reasonable system to avoid contraventions” provided it followed a reasonable system for monitoring compliance with such system. This should encourage issuers to implement compliance systems appropriate for their size and type of industry. Provided such systems are implemented and regularly assessed, most issuers should be insulated from liability under the Act. We are also pleased by the inclusion of a specific provision dealing with the inadvertent release of information followed by prompt public disclosure. Of necessity there are often circumstances when an issuer is considering a course of action which may lead to a material change occurring in its business or affairs but which has not yet reached the level where disclosure is required or appropriate. The decision as to whether the information has crossed the materiality threshold is a subjective one and is not always capable of definitive determination. Where it becomes apparent that such information has inadvertently found its way into the marketplace, it is no longer appropriate for the issuer to take the position that it need not be released. The interest of all investors now favours full public disclosure. However, it would be unfair to conclude that (i) the mere fact that the information had been inadvertently released, or (ii) the fact that the issuer had not previously made public disclosure of such information, means that a violation of the Act has occurred. This safe harbour will encourage issuers to make prompt disclosure as soon as they learn that information that they thought was being safeguarded has found its way into the marketplace. Similarly, we support the inclusion of a safe harbour for forward-looking information that is identified as forward-looking and accompanied by a statement of the factors and assumptions relied upon in making the forward-looking statements. While we approve of imposing caps on a defendant’s liability, we question why the cap for an officer (who has primary responsibility for overseeing an issuer’s actions) is the greater of $25,000 and 50% of his or her compensation for the year, while the cap for an expert advisor is the greater of $1,000,000 and 100% of such person’s fees for the year from the issuer. Interface Issues Overview While we are encouraged with the progressiveness and simplicity of the BC Model, we are concerned that its effectiveness will be greatly diminished until comparable provisions are enacted in the rest of Canada. If not, issuers will be faced with two competing regulatory regimes with possibly contradictory requirements. For most, it would not make sense to follow the BC Model if they must also comply with the requirements of the other provinces. Accordingly, although we strongly favour the provisions of the BC Model, we believe that uniformity of regulation is a more pressing consideration for most issuers. Public Issuer Status and Continuous Disclosure Under section 4B1(1)(b) an issuer may be come a public issuer if it is a reporting issuer in another Canadian jurisdiction and files a notice. Under section 4B1(2)(b) and rule 4B1, an issuer is a public issuer if it has at any time had its securities traded on TSX Venture Exchange, or any of its predecessors (“TSX-V”). By way of example, an Ontario reporting issuer could file the required notice stating that it intends to become a public issuer and determine the date on which such status will commence by its compliance with the relevant requirements of the Act and the rules, namely by having a complete and up-to-date continuous disclosure record. Such a company may already have a continuous disclosure record by way of its also having been a reporting issuer in British Columbia. Similarly, an Ontario reporting issuer which is on the TSX-V, or which trades over-the-counter in Ontario but had been quoted on the Canadian Dealing Network, would automatically become a public issuer subject to its immediately attorning to the British Columbia jurisdiction, if it has not already been a previous reporting issuer there, and specifically having a complete continuous disclosure record. We believe that an unintended compliance gap arises under rule 5A12. In each of the above examples, the Ontario reporting issuer would not be required to comply with the continuous disclosure rules 5A2 through 5A10 if it complies with the corresponding requirements under Ontario securities laws. Ontario Securities Commission rule 51-501 exempts a reporting issuer from filing an AIF if the issuer’s shareholders’ equity or revenues are $10,000,000 or less, and the aggregate market value of the issuer’s outstanding equity securities is less than $75,000,000. Accordingly, it would appear that small capitalized companies in Ontario and perhaps certain other Canadian jurisdictions could enjoy public issuer status under the Act without having an AIF on the continuous disclosure record until the requisite thresholds in their own jurisdiction are reached. In some cases, it may have been a considerable period of time since one of these smaller reporting issuers has filed a prospectus, resulting in a continuous disclosure record principally comprising financial statements, material change reports and management information circulars. We would expect that under the BC Proposal, a company that benefits from the continuous ability to distribute securities without resale restrictions as a public issuer should at all times maintain a current AIF in accordance with the Act, notwithstanding any available exemption from this requirement in another jurisdiction. Multi-Jurisdictional Resale Issues We believe that complications with regard to the resale of securities will arise when an issuer conducts a multi-jurisdictional offering by way of private placement in other jurisdictions and under its status as a public issuer in British Columbia. The placees in the other jurisdictions would have share certificates that are legended in accordance with MI 45-102, the legending being a pre-condition to the commencement of the relevant hold period. Under TSX-V rules the legending would need to be removed prior to the shares being sold in that market. Residents of British Columbia would not have legended certificates and would presumably be entitled to resell the purchased securities immediately. However, a sale over the TSX-V by a British Columbia resident may be to a person resident in another jurisdiction where the securities laws of that purchaser govern the sale to him or her, in this case being securities that have not been issued in accordance with the provisions of MI 45-102. This legending and resale issue for securities not issued in accordance with MI 45-102 would presumably also arise if the issue of securities was completed by a public issuer solely to residents of British Columbia. Our broader concern relating to this interface issue is twofold:
We believe that securities issued by a public issuer to BC residents under and subject to the BC Model could well enter other Canadian jurisdictions without having been subject to the MI 45-102 legending and hold period process. As we have indicated above, we would like to see the closed system disappear across the country. However, until that happens it would be unfortunate, and a major step backwards, if any other jurisdiction felt it necessary to enact protective firewall legislation to maintain the integrity of that province’s closed system for the time being. On the other hand, it would of course be helpful if other Canadian jurisdictions where to be proactive in putting appropriate interface legislation of their own in place to allow for better interaction with the BC Model once it is enacted. The PDAC and its membership view BC as a unique and primary market for natural resource offerings since the investing public in BC has a strong knowledge base and interest in this sector. It would be ironic that the most progressive and securities offering-friendly jurisdiction in our country would be avoided by issuers at least for a “wait and see” period subsequent to the BC Model coming into force as a new stand-alone regime. As our industry slowly recovers from an unusually long lower economic cycle, our members will need to equally access the equity markets of BC alongside those of the other provinces. * * * * * * * * * * We thank the Commission for its consideration of our comments. If the Commission or any of its members would like to discuss our comments further, please contact either Gregory Ho Yuen (416) 865-4534 or Kevin Rooney (416) 865-3415. |
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