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February 19, 2015

Introduction

The Canadian Securities Administrators (CSA or they) are adopting amendments to National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106) relating to the accredited investor and minimum amount investment prospectus exemptions (the Rule Amendments). NI 45-106 provides the critical prospectus exemptions for issuers to distribute securities by way of private placements. They are also modifying and replacing the Companion Policy 45-106CP Prospectus and Registration Exemptions with Companion Policy 45-106CP Prospectus Exemptions (the modified Companion Policy) which guides issuers on how to verify whether potential purchasers satisfy the conditions of particular prospectus exemptions.

The current timetable is for the above-referenced amendments (Rule Amendments) to come into force on May 5, 2015.

Substance and Purpose

The Rule Amendments and modified Companion Policy are intended to address concerns that:

  • some individual investors under the accredited investor prospectus exemption (the AI exemption) may not sufficiently understand the risks of investing or may not in fact qualify as accredited investors; and
  • the threshold of $150,000 in the minimum amount investment prospectus exemption (the MA exemption) is insufficient to establish sophistication or ability to withstand financial loss for individual investors and may encourage over-concentration in one investment for an investor who is an individual.

Background

The AI exemption and the MA exemption have historically been premised on the investor having one or more of:

  • a certain level of sophistication;
  • the ability to withstand financial loss;
  • the financial resources to obtain expert advice; and
  • the incentive to carefully evaluate the investment given its size.

The AI exemption and the MA exemption provide cost-effective objective measures for issuers to distribute securities to raise capital or for other purposes. However, the thresholds for individuals to qualify as accredited investors have not been changed or adjusted for inflation since they were originally set. The Securities and Exchange Commission originally set the thresholds for individuals to qualify as accredited investors in 1982; the CSA adopted similar thresholds in the early 2000s. The current threshold of $150,000 for the MA exemption was originally set in 1987.

Summary of Changes to the Amendments

The key changes being instituted by the CSA are as follows:

  • They have clarified that the categories of individual accredited investor who must sign the risk acknowledgement form are those individuals set out in paragraphs (j), (k) and (l) of the definition of “accredited investor”.
  • They have revised Form 45-106F9 Form for Individual Accredited Investors to make it easier for persons using the AI exemption to complete and for investors to understand.
  • They have removed the requirement for salespersons and finders to sign Form 45-106F9.
  • They have clarified and reorganized the guidance in the modified Companion Policy on practices for verifying whether purchasers meet the conditions of certain exemptions, including not only the AI exemption, but also the private issuer prospectus exemption, the family, friends and business associates prospectus exemption and, in some jurisdictions, the eligible investor definition under the offering memorandum prospectus exemption.
  • They have provided additional guidance in the modified Companion Policy on the meaning of close personal friend and close business associate.

Effective immediately, the TSX Venture Exchange (the “Exchange”) is implementing certain amendments to Policy 4.4 – Incentive Stock Options (“Policy 4.4”) which constitute new policies. A significant number of the amendments are for the purpose of clarifying and providing guidance on existing requirements and procedures and, correspondingly, do not constitute either the implementation of new nor the variation of existing policy requirements.

In connection with the amendments to Policy 4.4, the Exchange is also concurrently implementing corresponding minor amendments to Form 4G – Summary Form – Incentive Stock Options (“Form 4G”) and Policy 4.7 – Charitable Options in Connection with an IPO (“Policy 4.7”). Note that listed issuers (“Issuers”) are required to make use of the new Form 4G effective immediately.

Summary of Principal Amendments to Policy 4.4

Shareholder Approval Requirements

Shareholder approval is required for all substantive amendments to a stock option plan. The Exchange requires that any amendment to a stock option plan that is not a ≤ 10% Fixed Plan be subject to Shareholder approval as a condition to Exchange acceptance of the amendment, including amendments to any of the following provisions of a stock option plan:

(i)   persons eligible to be granted options under the plan;

(ii)   the maximum number or percentage, as the case may be, of shares that may be reserved under the plan for issuance
pursuant to the exercise of stock options;

(iii)   the limitations under the plan on the number of options that may be granted to any one person or any category of
persons (such as, for example, Insiders);

(iv)   the method for determining the exercise price of options;

(v)    the maximum term of options; and

(vi)   the expiry and termination provisions applicable to options.

Amendments to a stock option plan (including a ≤ 10% Fixed Plan) that would result in any of the standard option limits of the Policy being exceeded will require “Disinterested Shareholder Approval”. Disinterested Shareholder Approval means approval by a majority of the votes cast by all Shareholders at an Issuer’s Shareholders’ meeting excluding votes attaching to shares beneficially owned by (i) Insiders to whom options may be granted under the stock option plan, and (ii) Associates of such persons.

Granting of Options under an Amended Plan

The Exchange will generally permit a new or amended plan to be implemented prior to the requisite Shareholder approval having been obtained. In addition, the Exchange will generally permit the Issuer to grant options under the new or amended stock option plan that it would not otherwise be permitted to grant under its existing stock option plan prior to the requisite Shareholder approval for the new or amended stock option plan having been obtained provided that the Issuer also obtains specific Shareholder approval for such grants and otherwise complies with the applicable policy requirements in respect of both the stock option plan and the option grants.

Shareholder approval for any option grants must be separate and apart from Shareholder approval for a new or amended stock option plan.

Shareholder approval for the implementation or amendment of a stock option plan or the grant or amendment of stock options, as required under this Policy, can be given at a meeting of the Shareholders after the implementation or amendment of the plan or the grant or amendment of options, provided that:

(i)   in the case of a new or amended plan, no options granted under the new or amended plan are exercised; and

(ii)   in the case of the grant or amendment of options, the options are not exercised, before the Shareholder meeting and
that all relevant information concerning the approvals sought has been fully disclosed to the Shareholders prior to the
meeting. Any such Shareholder approval must be obtained no later than the earlier of the Issuer’s next annual meeting
of its Shareholders and 12 months from the implementation or amendment of the plan or the grant or amendment of
the option.

Disclosure of Amendments to Plans in the Information Circular

The Information Circular of the Issuer to be provided to the Shareholders in respect of a meeting of the Shareholders at which the approval of a stock option plan amendment of a stock option will be sought must disclose the particulars of the plan or the option grant or amendment in sufficient detail to permit the Shareholders to form a reasoned judgement concerning the acceptability of the plan or the option grant or amendment, as the case may be. In the case of a stock option plan, the disclosure should include:

(i)  a description of the persons eligible to be granted options under the plan;

(ii)   the maximum number or percentage, as the case may be, of shares that may be reserved under the plan for issuance
pursuant to the exercise of stock options;

(iii)   the limitations under the plan on the number of options that may be granted to any one person or any category of
persons (such as, for example, Insiders);

(iv)   the method for determining the exercise price of options;

(v)   the maximum term of options; and

(vi)   the expiry and termination provisions applicable to options.

Where disinterested Shareholder approval for the stock option plan or stock option grant or amendment, as the case may be, is required, those Persons that are ineligible to vote and the number of voting shares held by such Persons should be disclosed in the Information Circular.

Blackout Periods and Extensions of Options

A stock option plan may contain a provision allowing for the automatic extension to the expiry date of a stock option governed by the plan if such expiry date falls within a period (a “Blackout Period”) during which an Issuer prohibits Optionees from exercising their stock options. The following requirements are applicable to any such automatic extension provision:

(i)  The Blackout Period must be formally imposed by the Issuer pursuant to its internal trading policies as a result of the
bona fide existence of undisclosed “Material Information”. For greater certainty, in the absence of the Issuer
             formally imposing a Blackout Period, the expiry date of any options will not be automatically extended in any
circumstances;

(ii)    The Blackout Period must expire upon the general disclosure of the undisclosed Material Information. The expiry date
of the affected stock options can be extended to no later than ten (10) business days after the expiry of the Blackout
Period.

Grant of Options to Eligible Charitable Organizations

Exchange Policy 4.7 only permit the grant of options to charitable organizations prior to or in connection with an Issuer’s initial public offering. Policy 4.4 now permits Issuer’s to grant options to charitable organizations subsequent to listing.