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HIGHLIGHTS

Implementation of National Instrument 45-106

On September 14, 2005, the Autorité des marchés financiers (AMF) and the other Canadian Securities Administrators implemented National Instrument 45-106 Prospectus and Registration Exemptions, with the objective of consolidating and harmonizing most of the prospectus and registration exemptions contained in various provincial and territorial statutes, regulations and rules and national, multilateral and local instruments into a single national instrument, with a limited number of local exemptions in each jurisdiction. In Quebec, National Instrument 45-106 has been implemented in the form of a regulation entitled Regulation respecting prospectus and registration exemptions, but will be referred to throughout this text as NI 45-106. NI 45-106 is drawn principally from Ontario Securities Commission Rule 45-501 Exempt Distributions (Rule 45-501) and Multilateral Instrument 45-103 - Capital Raising Exemptions (MI 45-103) which had been adopted by most of the other Canadian provinces and territories. Although MI 45-103 has now effectively been replaced by NI 45-106, certain parts of Rule 45-501 continue in force.

The adoption in Quebec of NI 45-106 results in sweeping changes to the rules governing private placements in Quebec. Substantially all of the provisions of the Securities Act (Quebec) (the "Act") dealing with prospectus and registration exemptions are repealed and replaced by the provisions of NI 45-106. The principal prospectus and registration exemptions are set out below.

REVIEW OF THE PRINCIPAL EXEMPTIONS AVAILABLE IN QUEBEC AS A RESULT OF THE COMING INTO FORCE OF NI 45-106

Accredited investors

The prospectus and dealer registration exemption for a trade with an "accredited investor" replaces the exemption for "sophisticated purchasers" that used to be available under the Act. The definition of accredited investor is much broader than the old definition of sophisticated purchaser and includes companies and other entities with more than $5 million in net assets and individuals with financial assets of at least $1 million or income exceeding prescribed amounts. The new exemption also replaces the numerous discretionary exemptions granted by the AMF since April 2004 based on certain criteria set out in MI 45-103. Every person who uses the prospectus exemption for a distribution to an accredited investor must file a report of exempt distribution in the form prescribed by NI 45-106 on or before the 10th day following the distribution and pay the required fee.

Private issuers

NI 45-106 introduces a prospectus and dealer registration exemption for "private issuers" which does away with the previous situation whereby "closed companies" were not subject to most provisions of the Act. The exemption for private issuers is much broader as, unlike the closed company exemption, it is available to any issuer, whether incorporated or otherwise constituted (e.g., limited partnerships). Investment funds, however, may not avail themselves of this exemption.

The exemption for private issuers will be available provided the issuer includes restrictions on the transfer of its securities in its constating documents or security holders' agreements.

The former requirement that there be no more than 50 shareholders remains as a factual basis for the exemption, but the restriction no longer has to be included in the issuer's constating documents. The issuer will be responsible for ensuring that its securities are beneficially owned, directly or indirectly, by not more than 50 persons, not including employees and former employees of the issuer or its affiliates.

These two conditions do not apply to non-convertible debt securities.

The requirement that the constituting documents of a "closed company" contain a restriction on the distribution of securities to the public has also been repealed. However, the private issuer exemption is limited to distributions to the persons named in NI-45-106 and if the issuer makes a distribution otherwise, even under another exemption pursuant to NI 45-106, the issuer will lose its private issuer status and will be prohibited from using the private issuer exemption thereafter.

Use of the private issuer exemption does not require the filing of a report of exempt distribution or the payment of any fee to the AMF.

The new exemption for private issuers provided in NI 45-106 is limited to the requirement to prepare a prospectus and to register as a dealer. Thus, certain obligations apply to private issuers from which closed companies were previously exempt. For example, the requirement discussed below to file disclosure documents for exempt distributions now applies to private issuers.

Family, friends and business associates

The prospectus and dealer registration exemption for trades with family, friends and business associates which is now available under NI 45-106 is new in Quebec. This exemption is available to any person and is therefore not restricted to the issuer; for example, it could be used in connection with a transfer of securities. However, it is important to note that it is limited to the persons specifically covered by the exemption under NI 45-106, namely, directors, executive officers or control persons of the issuer or an affiliate of the issuer, their family members, close personal friends and close business associates and the founder.

In certain cases, Saskatchewan requires the signature of a risk acknowledgement statement. Although no such obligation exists in Quebec, it would be prudent to follow the same practice, especially in the case of close personal friends or close business associates, thereby also confirming the "closeness" of the relationship with the persons concerned. The family, friends and business associates exemption will require a report of exempt distribution to be filed with the AMF on or before the 10th day following the distribution, together with the required fee.

Affiliates

NI 45-106 introduces a new prospectus and dealer registration exemption for trades by an issuer with an affiliate in the issuer's own securities. This exemption will be very useful for internal restructuring transactions and does not require the filing of a report of exempt distribution or the payment of any fee to the AMF.

Take-over bids and issuer bids

NI 45-106 provides a prospectus and dealer registration exemption for trades in securities in connection with a take-over bid or issuer bid. This exemption replaces the exemption previously contained in s. 63 of the Act and does not require the distribution to be made as part of a formal bid. Thus, a distribution of securities in connection with an exempt exchange bid (for example, in the case of the acquisition of a private issuer) is now automatically permitted like a formal bid and does not require the filing of a report of exempt distribution or the payment of a fee to the AMF.

Offering memoranda

The prospectus and dealer registration exemption for distributions where an offering memorandum is used expands upon the former exemptions pursuant to s. 47 (seed capital) and s. 48 (tax shelter securities) of the Act, except that the new exemption is automatic (and thus, does not require the review and prior consent of the AMF). In addition, the new exemption does not impose a maximum number of subscribers. In Quebec, the subscriber must either be an eligible investor within the meaning of NI 45-106 or subscribe for securities in an amount not exceeding $10,000. The issuer must also have the subscriber sign a risk acknowledgement.

The contents of the offering memorandum and the risk acknowledgement are prescribed by NI 45-106. NI 45-106 introduces a contractual right to cancel the agreement to purchase the security within 2 business days following the signing of the agreement. The offering memorandum must also contain certificates. It is worth noting that s. 40.1 of the Act has been modified to provide that the risk acknowledgement must be drawn up in French in Quebec. An issuer who uses the offering memorandum exemption must use one of the two required forms of offering memorandum provided in NI 45-106 depending on whether the issuer is a qualifying issuer within the meaning of NI 45-106.

An issuer who uses the offering memorandum exemption must file with the AMF a copy of the offering memorandum in French and the report of exempt distribution together with the required fee on or before the 10th day following the distribution.

Minimum amount investments and asset acquisitions

NI 45-106 provides separate exemptions for the distribution of securities in an amount of not less than $150,000 paid in cash and for the distribution of securities in connection with an asset acquisition with a fair value of not less than $150,000. These prospectus and registration exemptions replace the exemptions under ss. 51 and 155.1(2) of the Act respectively. Of note is that the former requirement that the distribution be effected without advertisement has been repealed. Both new exemptions require a report of exempt distribution to be filed and the required fee to be paid on or before the 10th day following the distribution.

Business combinations and reorganizations

NI 45-106 introduces a prospectus and dealer registration exemption with very broad effects on business combinations and reorganizations. In certain cases, this exemption requires that the transaction be described in a proxy circular or similar disclosure document to be delivered to each of the security holders whose approval is required to complete the transaction. This exemption replaces the prospectus exemption under s. 50 of the Act and the dealer registration exemption under s. 155.1(2) of the Act. Unlike the previous prospectus exemption, the new exemption does not require the filing of a notice or prior consent of the AMF. The exemption does not require a report of exempt distribution to be filed or any fee to be paid to the AMF. However, the obligations contained in Regulation Q-27 respecting protection of certain security holders in the course of certain transactions will continue to apply.

Additional investment in an investment fund

This new prospectus and dealer registration exemption replaces numerous discretionary exemptions granted by the AMF in the past. An investment fund which avails itself of this exemption must file a report of exempt distribution with the AMF not later than 30 days after its financial year-end and pay the required fee at the time of filing.

Employee, executive officer, director and consultant exemptions

This exemption has essentially been imported from Multilateral Instrument 45-105 - Trades to Employees, Senior Officers, Directors, and Consultants, which was in force in all jurisdictions except Quebec. In Quebec, the prospectus and dealer registration exemption for employees, executive officers, directors and consultants under NI 45-106 replaces the prospectus and dealer registration exemptions under ss. 52(5) and 155.1(2) of the Act. Unlike the old regime, the new exemption does not require the filing of a notice and an offering notice or prior consent of the AMF. It is also worth mentioning that this exemption is available to all issuers and that the provisions of Regulation Q-3 which applied to issuers whose securities were not listed on either the TSX or the TSX Venture Exchange have been repealed. The obligation to file annually a report on securities distributed in Quebec for this type of distribution was also repealed on September 14, 2005.

The new exemption contained in NI 45-106 does not require the filing of a report of exempt distribution or the payment of any fee to the AMF.

Moreover, as mentioned below, if a disclosure document is used for any distribution made pursuant to a prospectus exemption, it must be filed with the AMF without delay. So, for example, hard copies of plans or other documents given to employees, officers, directors or consultants will have to be filed in the issuer's record with the AMF.

Section 12 of the Act pertaining to distributions made from Quebec continues in force

Section 12 of the Act, which provides that every person intending to make, from Quebec, a distribution of securities to persons established outside Quebec is required to prepare a prospectus and obtain a receipt therefor from the AMF, continues in force. It should be noted that section 12 of the Act contains an exemption from the prospectus requirement if prescribed information is filed on SEDAR and if the consent of the AMF is obtained. A person may, however, rely on one of the statutory exemptions under NI 45-106 instead of filing information under s. 12 of the Act.

Registration exemptions

Dealers

The exemptions under NI 45-106 are twofold, in that they consist of prospectus exemptions and exemptions from the dealer registration requirement. Unlike the dealer registration exemptions in s. 155.1 of the Act, which were limited to distributions made through a registered dealer or by an issuer making such distributions as a secondary activity only, the registration exemptions contained in NI 45-106 are no longer so restricted in Quebec. One of the effects of this change is to broaden the activities that non-registered (e.g., foreign) dealers may undertake in Quebec.

Advisers

The coming into force of NI 45-106 has also had the effect of repealing the dealer or adviser registration exemption in s. 157 of the Act. This exemption applied to dealers or advisers who were doing business only with "sophisticated purchasers" as defined in the Act. Henceforth, persons doing business with certain limited categories of "accredited investors" (equivalent to the former definition of "sophisticated purchasers") are exempt from the adviser registration requirement.

Filing of documents

Certain prospectus exemptions contained in NI 45-106 require a report of exempt distribution to be filed and others do not. Where a report of exempt distribution is required, a fee is payable to the AMF. The new fee structure which came into force on September 14, 2005 requires payment of a fee of 0.025 % of the gross value of the securities distributed in Quebec, subject to a minimum of $250.

As previously indicated, the requirement to file certain documents remains in force and thus a hard copy of any disclosure document delivered to subscribers in connection with a distribution made under an exemption must be filed with the AMF even if such document is not required by NI 45-106.

Advertising

Advertising to solicit or find subscribers or purchasers is no longer prohibited in the context of private placements provided that local regulations are respected. Issuers must be careful, however, as such practices could give rise to a presumption that the relationship necessary to use certain exemptions under NI 45-106, such as the family, friends and associates exemption, does not exist. Every person using an exemption under NI 45-106 is responsible for ensuring that the conditions of the exemption are satisfied.

Definition of trade/Control block distributions

NI 45-106 contains a special definition of "trade" for Quebec. This definition includes a greater range of securities transactions than before and has the effect of importing into Quebec the meaning of "trade" used in neighbouring provinces.

Importantly, the definition of distribution in the Act has been expanded to include the concept of "control block distributions" which exists in the other jurisdictions. The effect is that a sale from a "control block" is now a distribution in Quebec subject to the prospectus and registration requirements of the Act unless an exemption is available.

The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault LLP or any member of the firm on the points of law discussed.

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