Securities Regulation Summary General Introduction Definition: The point of securities law is to govern the capital raising process.

It is the body of law that governs how a business can raise money. It governs how a stock is traded, and provides for the ongoing disclosure requirements. ecurities !aw has two concerns: "a# $rotecting investors "b# %nsuring efficiency &and possibly a third concern'confidence in markets Three (pproaches to ecurity !aw 1. Neoclassical Law and Economics Individuals should be left alone to bargain. If someone accepts to buy ) security at * price that is because they want+ they are best situated to know that that is a good bargain, not a third party. ,oluntary e-changes are the best way to ensure proper distribution as everyone pursues his or her self.interest. /eoclassical economists are skeptical as to the ability of government to control regulatory e-changes efficiently. 0here there is a goal, it should be efficiency. %fficiency is defined as where at least one party, if not both are better off by the e-change. 0here a party is worse off, inefficiency has resulted. ome role for government where the market does not work best "i.e. in disclosing information#. 2. Behavioural Finance 1uestions the view that people are rational actors. 2elieves legal rules should respond it irrational behaviour. %-amples include that people will often prefer the status quo, even if the quo is not efficient, that people will get rid of good investments too early, will keep bad investments too long and deal with all bad problems at once. 3. Socio-legal Position 3ocuses on the regulators. 0onders about who the winners and losers are when the rules are made. cholars try to calculate who wins and who loses when issuers are required to issue 455 page prospectuses. ources of ecurity !aw tatute 6ntario ecurities (ct /ational Instruments . Issued by the ), these are not binding but most provinces choose to follow them . 7equire ratification from the provincial government

!ocal 7ules . 8an be issued by the regulator without comment from the provincial government $olicies . /ot binding . 6ften issued in con9unction w: /Is to act as a guideline or e-planation (dmin !aw /ote: 7ules are sub9ect to a notice and comment procedure

;istory ecurities law has moved away form its caveat emptor roots. In the early <5th century, 8anada introduced =blue sky> legislation, meaning to focus on the sellers and on fraud issues. !ater, regulators reali?ed that they needed to do more front.end and back.end. In the mid @5s and mid A5s as a result of the Bimber committee, security regulation moves from front end concern with initial offering information but with ongoing release disclosure requirements. Today, securities regulation is marked by vigorous front. and back.end securities regulation. 6ur 3ederal ystem $rovinces have clamed authority for securities regulation under s. C<, while the federal government makes claims under . C4 3eds as trade and commerce $rovinces as property and civil rights ;istory shows the provinces asserting their authorities

Dayland and Dercury 6ils !imited v. !ymburn and 3rawley "4CE<# The defendant argued that it would be difficult for federally incorporated companies to operate under various provincial regimes and that such authority was ultra vires. The Priv !ouncil con"irms that regulating securities is within the #rovincial government$s #owers. I70I/ !(0 says: =&the $8 held that properly crafted provincial securities laws could indeed apply to federal companies. pecifically, such laws are valid as long as they do not require federal companies to register provincially before they sell securities.> 7 v. mith "4CA5# The defendant was charged w: issuing a false prospectus. The defendant argued that the provincial sanctions were too similar to criminal charges and were therefore ultra vires. The 88 ruled that this was complementary, not contradictory. The 8riminal 8ode had no provisions for what a prospectus should contain, whereas the provincial code did. The

S!! a""irms the #rovince$s authorit to regulate securities and to sanction violations under s. %2. I70I/ !(0 says: =In mith, the court determined that there was =no repugnancy> between what is now section @55 of the 8riminal 8ode and the legislative predecessor to what is now section 4<< of the 6 (&.the 6 ( and the 8riminal 8ode provisions could continue to co.e-ist because the provincial provision was not one =the pith and substance of what is to prohibit an act with penal consequences.> The main purpose of the provincial enactment was instead =to ensure the registration of persons and companies before they are permitted to trade in securities themselves.> 7. v. 0. DcBen?ie ecurities !imited 4CAA 6ntario broker solicits sales in Danitoba via mail. Danitoban teacher purchases, complains and ultimately buys more. $urchaser took action against said broker for not registering in Danitoba. The defendant argued that Danitoba would be overstepping its authority by regulating an 6ntario broker, which maintained no Danitoba office. The !ourt o" &##eal rules that ' soliciting and selling securities to (anito'ans) the de"endant was su'*ect to (anito'an securit regulation. Evidence that the court is going to 'roadl de"ine wor+ing within a #rovince. N,TE- & 'ro+er) not an issuer. Dultiple (ccess !td. v. Dc8utcheon "4CF<# .uled that "ederal and #rovincial regime need not 'e e/clusive . (s long as compliance with one does not put one at odds with the other, there is no conflict or authority. Duplication in laws is defined as acceptable. Thus, regulators have a variety of remedial options available. Irwin !aw quotes: =$arliament has not yet enacted any comprehensive scheme of securities legislation. To date the 8anadian e-perience has been that the provinces have taken control of the marketing of securities, differing in this respect from the G. . where the ecurities and %-change 8ommission has regulated trading and primary distribution of securities. I should not wish by anything said in this case to affect pre9udicially the constitutional right of $arliament to enact a general scheme of securities legislation pursuant to its power to make laws in relation to interprovincial and e-port trade and commerce. This is of particular significance considering the interprovincial and indeed international nature of the securities industry. 1uebec " a Da9este du 8hef# v. 6ntario ecurities 8ommission 88 HAsbestosI (merican company took over the defendant by agreement. Dinority shareholders, however, did not get an offer for their shares. 6ntario minority shareholders sued. 1uestion: 0as the fact that some of the shareholders were 6ntarians enough to warrant 6 8 involvementJ The S!! rules that ' selling shares to ,ntario #urchasers) the 0ue'ec de"endant

had 'rought itsel" within the am'it o" ,S! regulation. /6T%: This case is perhaps on the outer limit. 7aises questions as to how many 6ntario purchasers need to be involved and concerns for e-tra.national corporations. Irwin !aw says: =The court ruled that not even a transactional ne-us to 6ntario is required to trigger 6ntarioKs constitutional 9urisdiction. (ll that is required to invoke the public interest powers, as a matter of constitutional law, is that the transaction have an effect on 6ntario shareholders sufficiently to pre9udice the public interest.> =It appears that the public interest sanctions in the 6 ( may be invoked even where there is no security, and even where the transaction in question takes place outside the 9urisdiction, so long as the transaction has a pre9udicial impact on 6ntario security holders.> 87ITI8I D 63 T;I D%8I I6/: =2riefly, critics were concerned that the court sanctioned the application of provincial securities laws to e-traprovincial actions in circumstances where such actions had, at most, an indirect effect on 6ntario residents "in this case, those minority shareholders of (8! who resided in 6ntario#.> ays two problems: =3irst, it could seriously erode the traditional 8anadian constitutional division of powers. Hi.e. when things cross provincial borders, the feds take over+ however, any such transaction has a tangential effect on any province it steps intoI> = econd, the same transaction may have indirect effects on the residents of several provinces, thus e-posing market actors to several different, and perhaps contradictory, provincial regulatory schemes.> Global ecurities 8orp v. 2ritish 8olumbia " ecurities 8ommission# 2.8. securities regulator provided information on an issuer to the .%.8. 1: 0as providing data on an issuer to the (merican regulator ultra viresJ The S!! rules that it is necessar "or !anadian regulators wor+ with each other and with "oreign regulators to ensure the e""icienc and sta'ilit o" the securities mar+et. The 88 emphasi?es the minor role of helping the G. . and pays less attention to the matter of =due administration of securities law in 2.8.> Irwin !aw says: 6 8 has the power to both order an investigation and e-amination not only to enforce 6ntario securities law, but also =to assist in the due administration of the securities laws or the regulation of the capital markets in another 9urisdiction.> =The constitutional validity of this e-traterritorial aspect of the comparable investigation power in the 2.8. ecurities (ct was recently upheld by the 88 in Global&> =Going 3ederal>: can we and should weJ

$ro: Governor of the 2ank of 8anada, most issuers, foreign trading partners and economists. 8on: 1uebec and 2.8. everal reports and studies on this topic. Dost famous include the $orter 7eport and the 0ise $ersons 8ommittee. (ll have recommended a federal system. 0hile many have issued legal opinions that it is possible, the concerns are that constitutional challenges may prevent the federal government from assuming this power and the provinces, with L5 years of 9urisprudence affirming their authority in securities matters, may fight it to continue garnering revenue. ome argue that were the 3ederal government to create a federal regulator, it could assume dominance through the doctrine of primacy to render the e-isting legal framework inoperable. 0hy $rovincialJ 6pportunities for complaints being filed in separate markets (voids the Toronto.centric approach a federal regulator would likely adopt 2eing new might result in a painful transition period 0hy 3ederalJ %ase of markets ;armony of practices and efficient markets Increased foreign involvement by issuers and purchasers skeptical of 8anadaKs varying 9urisdictions 8ostly and inefficient duplication Inconsistency of prov. schemes

Darkets The #rimar mar+et is for the initial o""ering o" securities, whether in an 1P, or a P, The secondar mar+et is for the trading of seasoned securities among investors The involved parties are the issuers, the purchasers and the intermediaries "underwriters#. 2issuer3 means a person or company who has outstanding, issues or proposes to issue, a security+ "=Mmetteur># 2underwriter3 means a person or company who, as principal, agrees to purchase securities with a view to distribution or who, as agent, offers for sale or sells securities in connection with a distribution and includes a person or company who has a direct or indirect participation in any such distribution, but does not include, "a# a person or company whose interest in the transaction is limited to receiving the usual and customary distributorKs or sellerKs commission payable by an underwriter or issuer, "b# a mutual fund that, under the laws of the 9urisdiction to which it is sub9ect, accepts its shares or units for surrender and resells them, "c# a company that, under the laws of the 9urisdiction to which it is sub9ect, purchases its

shares and resells them, or "d# a bank listed in chedule I, II or III to the 2ank (ct "8anada# with respect to securities described in paragraph 4 of subsection EN "<# or to such banking transactions as are designated by the regulations+ "=souscripteur O forfait>#

8anadaKs Darkets 8anada has a variety of markets. ;owever, there is a general trend toward com#etition and consolidation "including privati?ation#. %-changes are different from electronic trading systems. %-changes guarantee the e-ecution of a sale according to its listed price. 8onsequently, e-changes have a listing component. If the e-change cannot find a buyer or a seller, they will act as a principle to do so themselves. In practice, this means various dealers take on the responsibility to fulfill this function with various securities as buyers:sellers of last resort. T ) "Toronto# 8anadaKs largest and most seasoned market, dealing in 'lue chi# companies. 8anadaKs largest issuers, senior equities, rely on this e-change. The T ) is privati?ed. It is regulated by 7 "Darket 7egulation ervices#, of which it is a ma9or shareholder. T ) ,enture "8algary# ;andles 9unior equities and is considered a speciali?ed market for oil, gas and resource corporations. ;as less onerous listing requirements and often features that do not yet qualify for T ). Dicro.cap issuers represent LA percent of issuers and small.cap <E percent. /G) ( T ) e-change market for the trading and clearing of natural gas and electricity contracts. 8/1 ( new "<55@# 8D/ stock e-change speciali?ing in equity securities for emerging companies using innovative trading technologies. It is web.based. 6ffers issuers reduced costs in raising capital, streamlined regulatory process and a market model that ma-imi?es liquidity by offering features of an auction market and dealer market. 2ourse de Dontreal "Dontreal# The Dontreal %-change trades in derivatives, which are securities, such as an option or futures contract, whose value depends on the performance of an underlying security or asset. 8onsidered a risky but essential part of the modern market. $rices are usually determined by supply and demand and most commonly, futures and options are traded. 45&T 1S T5E 61FFE.EN!E BET4EEN 6E.17&T17ES &N6 S5&.ES8

The subtle, but crucial, difference is that while shares are assets, derivatives are usually contracts "the ma9or e-ception to this are warrants and convertible bonds, which are similar to shares in that they are assets#. o whatJ 0ell, we can define financial assets "e.g. shares, bonds# as: claims on another person or corporation+ they will usually be fairly standardised and governed by the property or securities laws in an appropriate country. 6n the other hand, a contract is merely: an agreement between two parties, where the contract details may not be standardised. $ossibly because it is thought that investors may be wary of the woolly definition of derivatives, one frequently comes across references to Pderivatives securitiesP or Pderivatives productsP. These PsecuritiesP and PproductsP sound fairly solid, tangible things. 2ut in many cases these terms are rather inappropriately applied to what are really contracts. (n o#tion contract allows the holder to 'u 9call o#tion: or sell 9#ut o#tion: a specified underlying asset ' a s#eci"ied date at a s#eci"ied #rice. ( "utures contract requires the seller to deliver a s#eci"ic asset 9or cash e;uivalent: to the buyer on the s#eci"ied date "or a #redetermined #rice. Irwin !aw says: =In fact, every derivative security, no matter how comple-, can be characteri?ed as either an option contract, a future "or forward# contract, or a "frequently elaborate# combination of the two. The term derivative security is an umbrella term used to refer to a vast range of different types of financial instruments whose values vary with the underlying interests.> 8anadian Derivatives 8learing 8orporation The issuer, clearinghouse, and guarantor of interest rate, equity and inde- derivative contracts on the 2ouse "as well as other markets on a contractual basis#. Dembers must maintain margin deposits to cover market risk. 0innipeg 8ommodity %-change The national commodities futures and option e-change. /( D(1 8anada (mericaKs largest electronic stock market in the world. %ntered the 8D/ market to link 8D/ issuers and institutional investors w: a global trading network. /6T%: /( D(1 runs all of its operations in the G. . and seems to have had limited success in 8anada.

Issuers 2issuer3 means a person or company who has outstanding, issues or proposes to issue, a security+ "=Mmetteur># 8anada has only a small group of issuers that are national and international in scope. Indeed, only 455 8D/ sellers are cross.listed w: G. . markets. There are roughly LLL companies w: a market capitali?ation above QN55 mil. Issuers flock to certain markets based on area of specialty. (lberta'oil and gas and mining+ 2.8.'micro.cap issuers looking for less than QE55,555+ 6ntario'financial e-pertise. 2roker =dealer> means a person or company who trades in securities in the capacity of principal or agent+ "=courtier># This is the intermediary who assists in the trade. 6n the purchaserKs behalf, the broker buys or sells a security on the market. 6nline brokerages do not trade on the market+ rather, they do your trade on your behalf at a third.party market. The law requires that they be registered, which requires a minimum of tested competence. There is a distinction between a "ull service 'ro+erage which offers competent financial advice and charges a premium on trades and discount 'ro+erages which hold out their services as nothing beyond effecting trades. $earson v. 2oliden "<55<# (lbertan purchasers wished to sue under 6ntario law "preferable to (lbertan laws# w: a class of 6ntarian plaintiffs. The court ruled that #urchasers must sue under their own #rovincial regime. The real answer to this problem is to instigate national standards. Dutual 7eliance "/ational $olicy @E.<54# 6stensibly, an issuer would only have to seek approval from home province regulator and other provincial regulators would rubberstamp approval. In practice, however, provinces could opt out, causing delays to the issuer. This could add serious transaction costs to the issuer as well as resulting in the issuer missing a window of opportunity "capital markets are time sensitive#. This led to the passport system. The $assport ystem The $assport ystem is a response to the criticisms of the 0ise $ersons 8ommittee. This results from /I 44.454. The province of the head office of each issuer would become its

principle regulator. (ll provinces who have ratified /I 44.454 would accept the approval of the regulatory province. 6ntario has refused to participate, noting that this system does move toward a unilateral federal system. 8onsequently, 6ntario issuers have, until the near future, had to seek approval by either 2.8. or 1uebec, depending on the issue. &s o" (arch 2<<=, if your principle regulator is 6ntario, 6ntario is the only province from which an issuer needs approval. 8ynics are concerned that this move will prevent a future national security scheme from being implemented. %nforcement concerns 78D$ has authority to persecute securities violations under the 8riminal 8ode. The 6ntario ecurities (ct includes offences in s. 4<<:
4<<. "4# %very person or company that, "a# makes a statement in any material, evidence or information submitted to the 8ommission, a Director, any person acting under the authority of the 8ommission or the %-ecutive Director or any person appointed to make an investigation or e-amination under this (ct that, in a material respect and at the time and in the light of the circumstances under which it is made, is misleading or untrue or does not state a fact that is required to be stated or that is necessary to make the statement not misleading+ "b# makes a statement in any application, release, report, preliminary prospectus, prospectus, return, financial statement, information circular, take.over bid circular, issuer bid circular or other document required to be filed or furnished under 6ntario securities law that, in a material respect and at the time and in the light of the circumstances under which it is made, is misleading or untrue or does not state a fact that is required to be stated or that is necessary to make the statement not misleading+ or "c# contravenes 6ntario securities law, is guilty of an offence and on conviction is liable to a fine of not more than QN million or to imprisonment for a term of not more than five years less a day, or to both. 4CC@, c. 44, s. ELE+ <55<, c. <<, s. 4F4 "4#. %-emption "4.4# 8lauses "4# "a# and "b# do not apply to a statement made or given to the 8ommission in a submission in respect of a proposed rule or policy. 4CC@, c. EE, s. L. Defence "<# 0ithout limiting the availability of other defences, no person or company is guilty of an offence under clause "4# "a# or "b# if the person or company did not know and in the e-ercise of reasonable diligence could not have known that the statement was misleading or untrue or that it omitted to state a fact that was required to be stated or that was necessary to make the statement not misleading in light of the circumstances in which it was made. 4CC@, c. 44, s. ELE. Directors and officers "E# %very director or officer of a company or of a person other than an individual who authori?es, permits or acquiesces in the commission of an offence under subsection "4# by the company or person, whether or not a charge has been laid or a finding of guilt has been made against the company or person in respect of the offence under subsection "4#, is guilty of an offence and is liable on conviction to a fine of not more than QN million or to imprisonment for a term of not more than five years less a day, or to both. 4CC@, c. 44, s. ELE+ <55<, c. <<, s. 4F4 "<#. 3ine for contravention of s. LA "@# Despite subsection "4# and in addition to any imprisonment imposed under subsection "4#, a person or company who is convicted of contravening subsection LA "4#, "<# or "E# is liable to a minimum fine equal to the profit made or the loss avoided by the person or company by reason of the contravention and a ma-imum fine equal to the greater of, "a# QN million+ and

"b# the amount equal to triple the amount of the profit made or the loss avoided by the person or company by reason of the contravention. <55<, c. 4F, ched. ;, s. 44+ <55<, c. <<, s. 4F4 "E#+ <55<, c. <<, s. 4FF "E#. ame "N# If it is not possible to determine the profit made or loss avoided by the person or company by reason of the contravention, subsection "@# does not apply but subsection "4# continues to apply. 4CC@, c. 44, s. ELE. Definitions: =loss avoided>, =profit made> "A# In subsections "@# and "N#, =loss avoided> means the amount by which the amount received for the security sold in contravention of subsection LA "4# e-ceeds the average trading price of the security in the twenty trading days following general disclosure of the material fact or the material change+ "=perte MvitMe># =profit made> means, "a# the amount by which the average trading price of the security in the twenty trading days following general disclosure of the material fact or the material change e-ceeds the amount paid for the security purchased in contravention of subsection LA "4#, "b# in respect of a short sale, the amount by which the amount received for the security sold in contravention of subsection LA "4# e-ceeds the average trading price of the security in the twenty trading days following general disclosure of the material fact or the material change, or "c# the value of any consideration received for informing another person or company of a material fact or material change with respect to the reporting issuer in contravention of subsection LA "<# or "E#. "=profit rMalisM># 4CC@, c. 44, s. ELE. 8onsent of 8ommission "L# /o proceeding under this section shall be commenced e-cept with the consent of the 8ommission. 4CC@, c. 44, s. ELE. Trial by provincial 9udge "F# The 8ommission or an agent for the 8ommission may by notice to the clerk of the court having 9urisdiction in respect of an offence under this (ct require that a provincial 9udge preside over the proceeding. 4CC@, c. 44, s. ELE. (dditional remedies 4<<.4 "4# If a person or company is convicted of an offence under this (ct, the court may, in addition to any penalty, order the convicted person or company to make restitution or pay compensation in relation to the offence to an aggrieved person or company. <55A, c. EE, ched. R.N, s. 4<. /otice "<# If a court makes an order for restitution or compensation, it shall cause a copy of the order or a notice of the content of the order to be given to the person or company to whom the restitution or compensation is ordered to be paid. <55A, c. EE, ched. R.N, s. 4<. 3iling "E# (n order for restitution or compensation may be filed with a local registrar of the uperior 8ourt of Sustice and the responsibility for filing shall be on the person or company to whom the restitution or compensation is ordered to be paid. <55A, c. EE, ched. R.N, s. 4<. %nforcement "@# (n order for restitution or compensation filed under subsection "E# may be enforced as if it were an order of the court. <55A, c. EE, ched. R.N, s. 4<. $ost9udgment interest "N# ection 4<C of the 8ourts of Sustice (ct applies in respect of an order for restitution or compensation filed under subsection "E# and, for that purpose, the date of filing shall be deemed to be the date of the order. <55A, c. EE, ched. R.N, s. 4<. !imitation "A# ( person or company is not entitled to participate in a proceeding in which an order may be made under this section solely on the basis that the person or company has a right of action against a defendant to the proceeding or that the person or company may be entitled to receive an amount under the order. <55A, c. EE, ched. R.N, s. 4<.

8ivil remedies protected "L# ( civil remedy for an act or omission is not affected by reason only that an order for restitution or compensation under this section has been made in respect of that act or omission. <55A, c. EE, ched. R.N, s. 4<.

The 6ntario ecurities (ct grants authority to punish under s. 4<L:

6rders in the public interest 4<L. "4# The 8ommission may make one or more of the following orders if in its opinion it is in the public interest to make the order or orders: 4. (n order that the registration or recognition granted to a person or company under 6ntario securities law be suspended or restricted for such period as is specified in the order or be terminated, or that terms and conditions be imposed on the registration or recognition. <. (n order that trading in any securities by or of a person or company cease permanently or for such period as is specified in the order. <.4 (n order that acquisition of any securities by a particular person or company is prohibited, permanently or for the period specified in the order. E. (n order that any e-emptions contained in 6ntario securities law do not apply to a person or company permanently or for such period as is specified in the order. @. (n order that a market participant submit to a review of his, her or its practices and procedures and institute such changes as may be ordered by the 8ommission. N. If the 8ommission is satisfied that 6ntario securities law has not been complied with, an order that a release, report, preliminary prospectus, prospectus, return, financial statement, information circular, take.over bid circular, issuer bid circular, offering memorandum, pro-y solicitation or any other document described in the order, i. be provided by a market participant to a person or company, ii. not be provided by a market participant to a person or company, or iii. be amended by a market participant to the e-tent that amendment is practicable. A. (n order that a person or company be reprimanded. L. (n order that a person resign one or more positions that the person holds as a director or officer of an issuer. F. (n order that a person is prohibited from becoming or acting as a director or officer of any issuer. F.4 (n order that a person resign one or more positions that the persons holds as a director or officer of a registrant. F.< (n order that a person is prohibited from becoming or acting as a director or officer of a registrant. F.E (n order that a person resign one or more positions that the person holds as a director or officer of an investment fund manager. F.@ (n order that a person is prohibited from becoming or acting as a director or officer of an investment fund manager. F.N (n order that a person or company is prohibited from becoming or acting as a registrant, as an investment fund manager or as a promoter. C. If a person or company has not complied with 6ntario securities law, an order requiring the person or company to pay an administrative penalty of not more than Q4 million for each failure to comply. 45. If a person or company has not complied with 6ntario securities law, an order requiring the person or company to disgorge to the 8ommission any amounts obtained as a result of the non.compliance. 4CC@, c. 44, s. ELN+ 4CCC, c. C, s. <4N+ <55<, c. <<, s. 4FE "4#+ <55N, c. E4, ched. <5, s. F. Terms and conditions "<# (n order under this section may be sub9ect to such terms and conditions as the 8ommission may impose. 4CC@, c. 44, s. ELN. 8ease trading order

"E# The 8ommission may make an order under paragraph < of subsection "4# despite the delivery of a report to it under subsection LN "E#. 4CC@, c. 44, s. ELN. %-ception "E.4# ( person or company is not entitled to participate in a proceeding in which an order may be made under paragraph C or 45 of subsection "4# solely on the basis that the person or company may be entitled to receive any amount paid under the order. <55@, c. E4, ched. E@, s. N. ;earing requirement "@# /o order shall be made under this section without a hearing, sub9ect to section @ of the tatutory $owers $rocedure (ct. 4CC@, c. 44, s. ELN. Temporary orders "N# Despite subsection "@#, if in the opinion of the 8ommission the length of time required to conclude a hearing could be pre9udicial to the public interest, the 8ommission may make a temporary order under paragraph 4, < or E of subsection "4# or subparagraph ii of paragraph N of subsection "4#. 4CC@, c. 44, s. ELN. $eriod of temporary order "A# The temporary order shall take effect immediately and shall e-pire on the fifteenth day after its making unless e-tended by the 8ommission. 4CC@, c. 44, s. ELN. %-tension of temporary order "L# The 8ommission may e-tend a temporary order until the hearing is concluded if a hearing is commenced within the fifteen.day period. 4CC@, c. 44, s. ELN. ame "F# Despite subsection "L#, the 8ommission may e-tend a temporary order under paragraph < of subsection "4# for such period as it considers necessary if satisfactory information is not provided to the 8ommission within the fifteen.day period. 4CC@, c. 44, s. ELN. /otice of temporary order "C# The 8ommission shall give written notice of every temporary order made under subsection "N#, together with a notice of hearing, to any person or company directly affected by the temporary order. 4CC@, c. 44, s. ELN.

The 6 8 hears these matters at its own board. ;owever, fines are issued by the 8ourts, not by administrative bodies. This is controversial as the 2oard dra"ts rules) investigates o""ences) #rosecutes o""ences and *udiciall decides the matter. tudies have shown that people view a lack of apparent fairness in the way 6 8 pursues violations "due to lack of division of powers#. The 6 8 is however limited in its 9urisdiction by the tatutory $owers and $rocedures (ct. The 6 8 consists of a commission level, which includes F.45 commissioners, two vice. chars, and a single chair, staff "hundreds, divided among different divisions#, and enforcement. The enforcement division consists of litigators, former 78D$ and police officers, forensic accountants, who prepare files, investigate, compel witnesses and issue statements of violations. 8ommittee for the %qual Treatment of (sbestos Dinority hareholders v. 6ntario " ecurities 8ommission# <554 88 ;eld: The appeal should be dismissed.

$ursuant to s. 4<L"4# of the ecurities (ct, the 6 8 has the 9urisdiction and a broad discretion to intervene in 6ntario capital markets if it is in the public interest to do so. The permissive language of s. 4<L"4# e-presses an intent to leave it to the 6 8 to determine whether and how to intervene in a particular case. In e-ercising its discretion, the 6 8 should consider the protection of investors and the efficiency of, and public confidence in, capital markets generally. In addition, s. 4<L"4# is a regulatory provision. The sanctions under the section are preventive in nature and prospective in orientation. Therefore, s. 4<L cannot be used in response to ecurities (ct misconduct alleged to have caused harm or damages to private parties or individuals. The standard of review applicable in this case is one of reasonableness. The 6 8 is a speciali?ed tribunal with a wide discretion to intervene in the public interest and the protection of the public interest is a matter falling within the core of the 6 8Ks e-pertise. Therefore, although there is no privative clause shielding the decisions of the 6 8 from review by the courts, taking into consideration that bodyKs relative e-pertise in the regulation of the capital markets, the purpose of the (ct as a whole and s. 4<L"4# in particular, and the nature of the problem before the 6 8, those factors all militate in favour of a high degree of curial deference. ;owever, as there is a statutory right of appeal from the decision of the 6 8 to the courts, when this factor is considered with all the other factors, an intermediate standard of review is indicated. 8ondon: The courts have proven less willing to intervene, largely due to a lack of e-pertise. Iacobucci was the securities e-pert, and since his retirement, the 88 has been reluctant to get involved. Irwin !aw says: =The 88 upheld the 6 8Ks decision not to make an order pursuant to its Tpublic interestK 9urisdiction under section 4<L of the 6 (&6 8 decisions still should be accorded a Thigh degree of curial deferenceK because of the 6 8Ks speciali?ed e-pertise, the purpose of the statute, and the nature of the problem before the 6 8.> The T/D7D of 7,0: =intermediate> lying between the e-tremes of correctness on the one hand and patently unreasonable on the other. 7e: 8artaway 7esources 8orp. <55@ 2rokers had taken 8artway, a garbage removal company, and turned it into a mining co. They persuaded several of the brokerage clients to purchase shares. They did not update the purchasers that 8artaway had changed its business to mining. The 2.8. securities regulator was outraged and levied an administrative fine, citing future deterrence as its motivation. 1: 8ould the 2.8. 7eg. issue a fine for purposes of deterrence "is that not too similar to criminal lawJ

;%!D: The appeal should be allowed and the 8ommissionKs order restored. The balance of factors in the pragmatic and functional analysis pointed towards the reasonableness standard of review and away from the more e-acting standard of correctness. TD of 7,0: 0as it rational for the 7eg. to issue this fineJ General deterrence is an appropriate factor to consider, albeit not the only one, in formulating a penalty in the public interest. ince general deterrence is both prospective and preventative in orientation, it falls squarely within the public interest 9urisdiction of securities commissions to maintain investor confidence in the capital markets. /o one factor should be considered in isolation because to do so would skew the te-tured and nuanced evaluation conducted by the 8ommission in crafting an order in the public interest. ;ere, the imposition of the ma-imum penalty was rationally connected to the respondentsK conduct globally. Investment Dealers (ssociation "ID(# Takes the role of defining detailed roles and record keeping for brokerKs investment requirements. ;owever, it also acts as a lobby group for brokers, raising concerns as to how it can both regulate brokers and lobby for them. Darket 7egulation ervices "7 # 0holly owned subsidiary of the T ), 7 regulates the trading process, including monitoring ongoing trades. 0atches for such violations as front.running "a broker dealing w: his brokerageKs accounts prior to his clients#, taking advantage of the market, and empty trading "making non.e-istent trades to generate market e-citement#. Gses comple- computer programs to watch for anomalies and deviations from trading patterns. $lans for 7 to merge w: ID(, as both monitor the same individual. Dutual 3und.Dealers 6rgani?ation %nsure ethical conduct by mutual fund dealers, especially as mutual funds are targeted at non.sophisticated retail.end investors. The T ) imposes listing requirements as well+ consequently, the T ensures that listers follow listing requirements. ecurity: Definitions
=security> includes, "a# any document, instrument or writing commonly known as a security, "b# any document constituting evidence of title to or interest in the capital, assets, property, profits, earnings or royalties of any person or company, "c# any document constituting evidence of an interest in an association of legatees or heirs, "d# any document constituting evidence of an option, subscription or other interest in or to a security, "e# any bond, debenture, note or other evidence of indebtedness, share, stock, unit, unit certificate, participation certificate, certificate of share or interest, preorgani?ation certificate or subscription other than a contract of insurance issued by an insurance company licensed under the Insurance (ct and an evidence of deposit issued by a bank listed in chedule I or II to the 2ank (ct "8anada#, by a

credit union or league to which the 8redit Gnions and 8aisses $opulaires (ct, 4CC@ applies or by a loan corporation or trust corporation registered under the !oan and Trust 8orporations (ct, "f# any agreement under which the interest of the purchaser is valued for purposes of conversion or surrender by reference to the value of a proportionate interest in a specified portfolio of assets, e-cept a contract issued by an insurance company licensed under the Insurance (ct which provides for payment at maturity of an amount not less than three quarters of the premiums paid by the purchaser for a benefit payable at maturity, "g# any agreement providing that money received will be repaid or treated as a subscription to shares, stock, units or interests at the option of the recipient or of any person or company, "h# any certificate of share or interest in a trust, estate or association, "i# any profit.sharing agreement or certificate, "9# any certificate of interest in an oil, natural gas or mining lease, claim or royalty voting trust certificate, "k# any oil or natural gas royalties or leases or fractional or other interest therein, "l# any collateral trust certificate, "m# any income or annuity contract not issued by an insurance company, "n# any investment contract, "o# any document constituting evidence of an interest in a scholarship or educational plan or trust, and "p# any commodity futures contract or any commodity futures option that is not traded on a commodity futures e-change registered with or recogni?ed by the 8ommission under the 8ommodity 3utures (ct or the form of which is not accepted by the Director under that (ct, whether any of the foregoing relate to an issuer or proposed issuer+ "=valeur mobiliUre>#

0e are most concerned with def. %. ;owever, note that =commonly known> is commonly known by investors and market e-perts. Irwin !aw says: =The first thing to note about this definition is that it states that the term security =includes> the various enumerations. The definition is not exhaustive: things other than those appearing on the list may also be found to be securities. It is unlikely that any court or securities regulator would have to venture outside of the list, however, because the various terms are Tcatchalls.K Designed to cast the net as wide as possible. In fact, the definition of security is so wide that it can be reasonably asserted that only the common sense of securities regulators and the courts places limits on what will be regulated as a security.> 3actors the court considers: "4# Investor $rotection: If the court perceives that the purchaser of an interest is an investor in need of legislative protection, it is likely that the interest will be defined a security. If the investor is protected by another act or is situated to protect own interests, the court is less likely to see it as a security. "<# %-pectation of profit: 0here one secures money from another one the promise of profit, e-pect a security, especially where the e-pected return is to e-ceed the initial value of the investment "E# 7isk factor: /eed not be speculative, as even some risk is sufficient "though increased risk, increased likelihood of being considered a security#.

"@# $urchaserKs degree of control: less control of an investor of the money invested, the increased likelihood of legislative protection. "N# Independent value: if there is value in the sub9ect matter independent of the success of the enterprise, may be characteri?ed "such as selling an interest in a real estate transaction#. Does not matter that an item may have value e-ternal "i.e. land can be sold on its own#. "A# ubstance over form: court cares less about what something is touted as and cares more about what it is. Does not matter if something says it is not a security. "L# 6verlap in definition: remember that the 6 (Ks definition includes =any investment contract>. Thus wide, wide, wide definition. "F# G. . caselaw: G. . cases are usefully cited. "C# %-plicit e-clusions: the act specifically e-cludes contracts of insurance, as well as evidence of a deposit issued by a bank "these are essentially dealt w: under the 2an (ct. Definitions: 2ond'debt security issued by a business where there is an obligation to pay the face value of the instrument and the interest "principle is returned#. hare'an equitable interest "with an open.ended return# that can be traded on the seasoned market. If designed as such, may involve voting rights , dividends, and:or rights to assets on dissolution. 6ption'7ight to buy or sell a specified item at a specified price at a specified time. 7isky, often given to management to motivate and reward performance. ecurities and %-change 8ommission v. 0.S. ;owey 8o. et al. "4C@A# ; sold interests in plots of lands which grew orange groves. $urchasers could then buy a service contract from ; to farm the land. $s could not farm land themselves and in some cases were restricted from accessing it. %ach lot could be individually quite small. /ote that some people did actually hire other party than ;. 1: 0as ; selling securitiesJ (: *es, and the court defined a test. 3our elements to a security: "4# The paying out of money "<# 8ommon enterprise "E# %-pectation of profit "note: that profit is an open.ended concept+ no set return#

"@# $rofits are earned solely from the efforts of the promoter or the third party "profits which are e-pected are earned by the efforts of others# (s applied to ;owey: "4# Investors paid out money "<# The common enterprise was the farming of the lots "E# (ll e-pected ; to farm their lots and sell the oranges at a profit "@# $urchasers made no effort to farm the land+ ; did all Irwin !aw says: =the combination of the land sales contract, the deed giving title to land, and the service contract was a security> ays this is the test: =H(In investment contract for the purposes of the ecurities (ct means a contract, transaction or scheme, whereby a person invests his money in a common enterprise and is led to e-pect profits solely from the efforts of the promoter or third party.> tate of ;awaii v. ;awaii Darket 8enter, Inc., et al. "4CL4# $s could purchase m:ships in ;D8, which would involve them getting different items "i.e. toasters#, depending on m:ship package. 2y buying a m:ship, $s could then generate profits by getting other people to become members. $rofits were to be earned at set amounts. 1: Did the fact that $s were supposed to do part of the work in selling m:ships mean that ;D8 was not selling securitiesJ (: /o, these were securities. ;awaii 8.(. held that this was in fact an investment. The clients were motivated by an investment opportunity. The court partially re9ected the ;owey test, noting that it was too rigid and introduced a new four.part test "referred to as the 7I B 8($IT(! T% T#. "4# (n offeree furnishes initial value to an offeror, and "<# ( portion of this initial offering is sub9ected to the risks of the enterprise, and "E# The furnishing of the initial value is induced by the offerorKs promises or representations which give rise to a reasonable understanding that a valuable benefit of some kind, over and above the initial value, will accrue to the offeree as a result of the operation of the enterprise, and "@# The offeree does not receive the right to e-ercise practical and actual control over the managerial decisions of the enterprise. 8ondon: /otice how concerned this method is with the separation between management and investment. This was a very results.oriented finding as ;D8Ks plan was so effectively designed to evade responsibility for securities. Irwin !aw says: =0hile consistent with&;owey, the ;awaii test makes it clear that not

all of the =initial value> needs to be sub9ected to the risks of the enterprise. It also sidesteps the problem created by Howeys requirement that the purchaser be led to e-pect profits =solely> from the efforts of a third party, by requiring only that the purchaser have no =practical and actual control> over management decisions.> $acific 8oast 8oin %-change of 8anada v. 6ntario " ecurities 8ommission# 4CLF 88 D sells options to buy bags of silver coins to investors. Investors have choice to either buy a legit bag for full price, or could simply make a down payment of only EN percent. $urchasers in effect acquired an option to purchase silver whenever they wanted "and would have to pay the remainder if bought on margin# provided $88 had received @F hour notice. 8lear theory is that this an investment scheme with futures overtone. D holds out bags as good investment, =a good hedge against inflation.> Doreover, D emphasi?es its e-pert knowledge of silver market, and when necessary to enter the futures market. !ike Hawaii, there is a dependence on the e-pertise of the offeror to guarantee a profit for all concerned parties. DI TI/8TI6/: whereas everyone involved in ;owey was involved for a common reason, here they find that everyone is interested in making money "note that this is a much lesser e-ample of commonality as some bought silver for the sake of owning silver#. The court here waters down the test element significantly. The ma9ority in this case adopts a ;6!I TI TI8 approach, concerning itself with the goal of the legislature "investor protection, which is obvious where sellers are doing margin transactions#. The court holds that a strict test approach does not best protect investors. Irwin !aw says: =The $88 turned on whether the interests sold by $88% constituted Tinvestment contracts.> In finding that the interests were indeed investment contracts, the 88 purported to adopt the ;owey test. ;owever, applying the ;owey test literally would likely have resulted in the finding that there was no security&To get around this difficulty, the 88 accepted a modification of the word =solely> stating: =0e adopt a more realistic test, whether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.> The court further amends =common enterprise>: 8ommon means between investors and promoters+ not among investors themselves !askinKs Dissent !askin feels that this is not a security. !askin notes that D assumes serious risk here "ensuring it has enough silver to meet its needs#. !askin says that the business of ensuring assets are managed appropriately is not enough to say that the money is at risk for the investors and that while there is a fi-ing of base price, that is the ongoing business capacity of D to stay in business. =I do not see any controlling factor in managerial effort, to which the 8ourt in Jenson alluded, when it is the market that determines profitability and not the promoter.>

!ittle difference between buying silver on the spot market and from $88 save solvency. This should not be sufficient to make this a security. Irwin !aw says: =if solvency risk is enough to render an interest a security, it is difficult to know when to stop finding that particular interests are securities.> 0hat did the court consider here in defining a securityJ Investment of money, common enterprise between investors and managers, risk element+ profit potential+ managers and not investors making effort to produce profits and minimi?e losses Gniversal ettlements: the ,iaticals Decision Terminally ill patients would sell their life insurance policies to a company that would then partially pay out to the survivor, based on the notion it will reali?e a profit on the plan. The other party then continues to pay the premiums. 1: (re viaticals a securityJ 3actors: There is a core contract+ Gni is acting as a promoter "a recogni?ed security role# by putting terminally ill in contact w: investor pools+ investors invest by paying for life insurance contract, risk that the party will not predecease the profitability point, managers do the research into the terminally ill+ The 8ourt had to differentiate from Life Partners, which was not found to be a security. Bey difference: in !ife $artners, investors were brought on after the work was complete. ;ere, investors were on board and then the ill were sought. /6T%: buyers could have contact w: the ill if they wished. 3ound: Gniversal ettlements is a security for the above reasons. (lbino Decision (n 6ntario natural resource company was compensating employees with incentive units "part of an award plan#. Dr. (lbino, an employee of 7io (lgom was given an incentive plan whereby he would be paid the difference between the price at which the stock of 7( was trading on its award, and the price at which it was trading when encashed. This was a #hantom stoc+ o#tion "$ 6# as (lbino was never awarded the actual common share, 9ust the difference in price from when he was granted the $ 6 and when he chose to cash it. ;e was charged w: insider trading but it first had to be proved said $ 6 was a security, as per the act. 1: (re $ 6s recogni?ed securitiesJ ;eld: Three 9udgmentsVVV

$D4: /ot a security /ot commonly recogni?ed as such by the security e-perts $ 6s are akin to employment contracts w: interest in performance of the comp. %-ecutive paid no money, was not allowed to trade, and no stock changed hands (lso, only specific windows of time in which ( could cash option "lim. liquidity# $D<: *es a security (pplied dicta from Pacific Coast, and said law had to be read broadly and purposively 7elevant provision was the prohibition against insider trading, which ( did $ 6s are akin to derivative securities "which draw value from underlying security# %ncashing awards was a =constructive sale> anctions should be applied and ob9ectives relating to insider trading would be awarded $DE: 7efused to decide, but said 6 8 had 9urisdiction. 7efused to decide 3ound sufficient ne-us between $ 6s and capital markets for 6 8 to regulate (lso, found (Ks behaviour was =seriously pre9udicial to public confidence in the capital markets> (Ks abuse of insider knowledge in encashing the awards was e-actly what the law was made to prevent Irwin !aw says: =the 9urisdictional test for the issuance of a public interest order is not whether there is a security, but whether the transaction e-hibits a significant connection to the capital markets of 6ntario.> 0hile this does seem broad, Irwin !aw cites (sbestos as proof the courts agree.

Trade and Distributions ( trade is:

=trade> or =trading> includes, "a# any sale or disposition of a security for valuable consideration, whether the terms of payment be on margin, instalment or otherwise, but does not include a purchase of a security or, e-cept as provided in clause "d#, a transfer, pledge or encumbrance of securities for the purpose of giving collateral for a debt made in good faith, "b# any participation as a trader in any transaction in a security through the facilities of any stock e-change or quotation and trade reporting system, "c# any receipt by a registrant of an order to buy or sell a security, "d# any transfer, pledge or encumbrancing of securities of an issuer from the holdings of any person or company or combination of persons or companies described in clause "c# of the definition of =distribution> for the purpose of giving collateral for a debt made in good faith, and "e# any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the foregoing+ "=opMration>#

3or the purposes of insider trading, trading includes purchasing and selling. 3or a =trade,> it is only selling, but for insider =trades> it can include the buyer. 0hy worry about regulators:registrants:brokersJ They can easily manipulate customers and for the ecurities (ct to be triggered, it is necessary to label such actors as =trading in securities.> Dost trades are conducted through brokers, with the e-ception of a discount brokerage. Irwin !aw notes five key points: "4# (ny sale or disposition for valuable consideration a. Gifts are e-cluded b. ,aluable consideration can be widely defined "<# %-cludes "most# share pledges a. hare pledges "generally as loan collateral# are e-cluded save in two cases: i. The debt must have been incurred in Tgood faithK "i.e. cannot use this e-ception to avoid securities regulation ii. ( pledge is a TtradeK if the grantor is a control person "E# $articipation as a trader: receipt of an order by a registrant a. $rinciple: (ctivities of professional traders can have a critical impact on the functioning of the capital markets and must be regulated to protect investors b. =any participation by a trader in any transaction in a security through the facilities of any stock e-change or quotation and trade reporting system> and =any receipt by registrant of an order to buy or sell a security> "@# (cts in furtherance of a trade

a. =any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance ofK any of the other activities constituting a tradeK b. The law is not simply reactive, it is preventative as well "N# Trades that are not distributions a. ( trade that is not a distribution can still be regulated b. Traders must register w: regulators either as dealers or as advisers c. This is to ensure minimum levels of integrity, competence and financial soundness 7e 0orld tock %-change "<555# (lberta ecurities 8ommission 1: Does a stock offering not based in (lberta trigger (lbertan securities regulationJ ;eld: It does unless& 3actors: (n offeror : broker must include disclaimers that it is clearly not part of said provinceKs 9urisdiction and that it is limiting its business to R 9urisdiction. $6I/T: %ven if you are trading in a way that does not amount to a distribution, regulators are ?ealous enforcers of their authority. 3or the relevance of the 6 8Ks powers, see below:
E. "4# The 6ntario ecurities 8ommission is continued as a corporation without share capital under the name 6ntario ecurities 8ommission in %nglish and 8ommission des valeurs mobiliUres de lK6ntario in 3rench. 4CCL, c. 45, s. EL. 8omposition "<# The 8ommission is composed of at least nine and not more than 4@ members. 4CCL, c. 45, s. EL. Deficiency in number "E# If there are fewer than nine but at least two members in office, the 8ommission shall be deemed to be properly constituted for a period not e-ceeding C5 days after the deficiency in the number of members first occurs. 4CCL, c. 45, s. EL. (ppointment "@# The members shall be appointed by the !ieutenant Governor in 8ouncil for such term of office not e-ceeding five years as the !ieutenant Governor in 8ouncil determines. ( member may be reappointed. 4CCL, c. 45, s. EL. 8hair and ,ice.8hairs "N# The !ieutenant Governor in 8ouncil shall, by order, designate a member of the 8ommission as 8hair and may designate one or two members as ,ice.8hairs. 4CCL, c. 45, s. EL. ame "A# The 8hair and each ,ice.8hair holds office for the term specified by the !ieutenant Governor in 8ouncil which shall not e-ceed his or her term as a member of the 8ommission. 4CCL, c. 45, s. EL. Duties of 8hair "L# The 8hair is the chief e-ecutive officer of the 8ommission and shall devote his or her full time to the work of the 8ommission. 4CCL, c. 45, s. EL. Duties of members "F# The members "other than the 8hair# shall devote such time as may be necessary for the due performance of their duties as members. 4CCL, c. 45, s. EL.

$rotection from liability "C# ( member is not liable for an act, an omission, an obligation or a liability of the 8ommission or its employees. ( member is not liable for any act that in good faith is done or omitted in the performance or intended performance of his or her duties as a member of the 8ommission under this or any other (ct. 4CCL, c. 45, s. EL. (cting 8hair "45# If the office of 8hair is vacant or if the 8hair is absent or is unable to act for any reason, a ,ice.8hair shall act as 8hair. 4CCL, c. 45, s. EL. 1uorum "44# Two members of the 8ommission constitute a quorum. 4CCL, c. 45, s. EL. 8rown agency "4<# The 8ommission is an agent of ;er Da9esty in right of 6ntario, and its powers may be e-ercised only as an agent of ;er Da9esty. 4CCL, c. 45, s. EL.

Distribution: ( distribution occurs when an issuer makes a public offering of a security that has not previously been traded. The first distribution by an issuer is an initial public offering "I$6#+ however, subsequent issues are still labeled distribution.
=distribution>, where used in relation to trading in securities, means, "a# a trade in securities of an issuer that have not been previously issued, "b# a trade by or on behalf of an issuer in previously issued securities of that issuer that have been redeemed or purchased by or donated to that issuer, "c# a trade in previously issued securities of an issuer from the holdings of any control person, "d# a trade by or on behalf of an underwriter in securities which were acquired by that underwriter, acting as underwriter, prior to the 4Nth day of eptember, 4CLC if those securities continued on that date to be owned by or for that underwriter, so acting, "e# a trade by or on behalf of an underwriter in securities which were acquired by that underwriter, acting as underwriter, within eighteen months after the 4Nth day of eptember, 4CLC, if the trade took place during that eighteen months, and "f# any trade that is a distribution under the regulations, and on and after the 4Nth day of Darch, 4CF4, includes a distribution as referred to in subsections L< "@#, "N#, "A# and "L#, and also includes any transaction or series of transactions involving a purchase and sale or a repurchase and resale in the course of or incidental to a distribution and =distribute>, =distributed> and =distributing> have a corresponding meaning+ "=placement>, =placer>, =placM># =distribution company> means a person or company distributing securities under a distribution contract+ "=compagnie de placement># =distribution contract> means a contract between a mutual fund or its trustees or other legal representative and a person or company under which that person or company is granted the right to purchase the shares or units of the mutual fund for distribution or to distribute the shares or units of the mutual fund on behalf of the mutual fund+ "=contrat de placement># =distribution to the public>, where used in relation to trading in securities, means a distribution that is made for the purpose of distributing to the public securities issued by an issuer, whether such trades are made directly or indirectly to the public through an underwriter or otherwise+ "=placement dans le public>#

Distribution is triggered in three situations: "4# trade by issuers, "<# trades by control persons, and "E# sales of restricted securities held by e-empt purchasers. 8anada 2usiness 8orporations (ct holds that were an issuer to purchase its shares, it e-tinguishes said shares. ( corporation cannot, according to the 828(, hold shares in itself.
(d9ustment of stated capital account

EC. "4# 6n a purchase, redemption or other acquisition by a corporation under section E@, EN, EA, @N or 4C5 or paragraph <@4"E#"f#, of shares or fractions thereof issued by it, the corporation shall deduct from the stated capital account maintained for the class or series of shares of which the shares purchased, redeemed or otherwise acquired form a part an amount equal to the result obtained by multiplying the stated capital of the shares of that class or series by the number of shares of that class or series or fractions thereof purchased, redeemed or otherwise acquired, divided by the number of issued shares of that class or series immediately before the purchase, redemption or other acquisition. 8ancellation or restoration of shares "A# hares or fractions thereof of any class or series of shares issued by a corporation and purchased, redeemed or otherwise acquired by it shall be cancelled or, if the articles limit the number of authori?ed shares, may be restored to the status of authori?ed but unissued shares of the class. %-ception "L# 3or the purposes of this section, a corporation holding shares in itself as permitted by subsections E4"4# and "<# is deemed not to have purchased, redeemed or otherwise acquired such shares. Idem "F# 3or the purposes of this section, a corporation holding shares in itself as permitted by paragraph E<"4#"a# is deemed not to have purchased, redeemed or otherwise acquired the shares at the time they were acquired, but "a# any of those shares that are held by the corporation at the e-piration of two years, and "b# any shares into which any of those shares were converted by the corporation and held under paragraph E<"4#"b# that are held by the corporation at the e-piration of two years after the shares from which they were converted were acquired are deemed to have been acquired at the e-piration of the two years.

!ontrolled !om#anies: ( controlled company is one in which more than N5 percent of the shares are owned by one entity "an investor or a company# or where voting rights are such that one party has the right to elect the entire board.
D%3I/ITI6/ : 4"E# ( company shall be deemed to be controlled by another person or company or by two or more companies if, /ote: 6n a day to be named by proclamation of the !ieutenant Governor, subsection "E# is amended by the tatutes of 6ntario, <55L, chapter L, chedule EF, subsection 4 "@# by adding at the beginning =%-cept for the purposes of $art ))>. ee: <55L, c. L, ched. EF, ss. 4 "@#, 4N "<#. "a# voting securities of the first.mentioned company carrying more than N5 per cent of the votes for the election of directors are held, otherwise than by way of security only, by or for the benefit of the other person or company or by or for the benefit of the other companies+ and "b# the votes carried by such securities are entitled, if e-ercised, to elect a ma9ority of the board of directors of the first.mentioned company. 7. .6. 4CC5, c. .N, s. 4 "E#.

3or a definition of a control person see below. The bright line test prima facie holds an investor with a <5 percent or greater share a control person by default. This presumption is rebuttable where a party can show that others have greater influence. That same test, however, can find a shareholder w: less <5 percent a control person if said investorKs influence is such that it can affect material control. /ote that through "b#, where an agreement e-ists, a combination of persons can be deemed controlling persons if their influence is such to trigger for all effects and purposes control person status. 3or the most part, reporting issuers start as issuers. In the past, a commonly e-ploited loophole allowed parties listed on other 8anadian e-changes to transfer to the T ). ;owever, said loophole is now gone.
=control person> means,

"a# a person or company who holds a sufficient number of the voting rights attached to all outstanding voting securities of an issuer to affect materially the control of the issuer, and, if a person or company holds more than <5 per cent of the voting rights attached to all outstanding voting securities of an issuer, the person or company is deemed, in the absence of evidence to the contrary, to hold a sufficient number of the voting rights to affect materially the control of the issuer, or "b# each person or company in a combination of persons or companies, acting in concert by virtue of an agreement, arrangement, commitment or understanding, which holds in total a sufficient number of the voting rights attached to all outstanding voting securities of an issuer to affect materially the control of the issuer, and, if a combination of persons or companies holds more than <5 per cent of the voting rights attached to all outstanding voting securities of an issuer, the combination of persons or companies is deemed, in the absence of evidence to the contrary, to hold a sufficient number of the voting rights to affect materially the control of the issuer+ "=personne qui a le contrWle>#

7eporting issuer is any issuer who has at one point issued securities after Darch 4, 4CAL, has filed a prospectus, has filed a take.over bid, has had securities listed on an 6ntario stock e-change, is offering securities and is recogni?ed by the 828(, is the continuance of another company that was previously listed, etc.
=reporting issuer> means an issuer, "a# that has issued voting securities on or after the 4st day of Day, 4CAL in respect of which a prospectus was filed and a receipt therefor obtained under a predecessor of this (ct or in respect of which a securities e-change take.over bid circular was filed under a predecessor of this (ct, "b# that has filed a prospectus and for which the Director has issued a receipt under this (ct, "b.4# that has filed a securities e-change take.over bid circular under this (ct before December 4@, 4CCC, "c# any of whose securities have been at any time since the 4Nth day of eptember, 4CLC listed and posted for trading on any stock e-change in 6ntario recogni?ed by the 8ommission, regardless of when such listing and posting for trading commenced, "d# to which the 2usiness 8orporations (ct applies and which, for the purposes of that (ct, is offering its securities to the public, "e# that is the company whose e-istence continues following the e-change of securities of a company by or for the account of such company with another company or the holders of the securities of that other company in connection with, "i# a statutory amalgamation or arrangement, or "ii# a statutory procedure under which one company takes title to the assets of the other company that in turn loses its e-istence by operation of law, or under which the e-isting companies merge into a new company, where one of the amalgamating or merged companies or the continuing company has been a reporting issuer for at least twelve months, or "f# that is designated as a reporting issuer in an order made under subsection 4 "44#+ "=Mmetteur assu9etti>#

$reparing, filing and offering a prospectus hort.form regime covered by /I @@.454 0hy go publicJ Dore fle-ible than working w: banks hareholders better able to retain control $rivate owners can diversify their wealth "without going public, the corporation is dependant on their continued investment# 8an capitali?e future plans 6ngoing visibility for public company "analysts follow the stock# 8an acquire other corporations through stocks "which are not ta-ed until cashed# versus cash "which is ta-ed immediately#

Gse the trading market for the securities to offer the owner of an asset securities of oneKs own company as opposed to cash for consideration on the transaction 8reate a base for future capital needs (ttractive for investors as their investments gain liquidity

(lternativesJ 2anking debt "which must a. must be paid back and b. often involves acquiescing to banking decisions# $rivate placement, i.e. seeking private equity o $riced less competitively o 2uyer wants a price that reflects their increased interest "they can liquidate their investment as readily# o (ctual restrictions on when a party can private placement

0hat are the negativesJ %-pensive: requires ongoing costs w: accountants, securities lawyers, etc. Increased scrutiny o hareholders and competitors alike can monitor reports o Information maintained on %D7 "system for electronic disclosure and retrieval# 8ertain groups of shareholders e-pect immediate returns and have little concern for long.term strategy Ta-es on equity $otential for loss of control 7educed fle-ibility

ecurity $rocess There are four stages: #re-"iling, waiting #eriod, #re-closing and #ost-closing. In pre. filing, the issuer files a preliminary prospectus. During the waiting period, the issuer waits for approval from the regulator. The issuer can advertise the shares during this period. The 6 8 does not simply approve:disapprove+ there is room for negotiation. Issuers can also distribute copies of the preliminary prospectus at so.called road shows "note: obligations flow from distributing these documents+ issuers must keep a record of to whom they are issued#. The issuer must also practice due.diligence and inspect the prospectus "do not want to trigger s. 4E5#. 6nce the prospectus has been approved, the issuer enters the pre.closing stage and can print copies of final prospectus. The cooling. off period begins to run. 3inally, at post.closing, money and securities change hands. The underwriter will advise the issuer when the distribution is complete.
$rospectus required NE. "4# /o person or company shall trade in a security on his, her or its own account or on behalf of any other person or company if the trade would be a distribution of the security, unless a preliminary prospectus and a prospectus have been filed and receipts have

been issued fofailry onerous requirements r them by the Director. <55A, c. EE, ched. R.N, s. <. 3iling without distribution "<# ( preliminary prospectus and a prospectus may be filed in accordance with this $art to enable the issuer to become a reporting issuer, despite the fact that no distribution is contemplated. 7. .6. 4CC5, c. .N, s. NE "<#.

Gnderwriting The underwriter sells the issuerKs securities. 0hy employ an underwriterJ %-tensive capital markets e-perience (bility to assess market demand for an issuerKs securities Bnowledge regarding setting the terms of the offering $roviding advice w: respect to business management, and ownership structure changes that may be necessary to make investment more attractive

(n underwriter is defined as:

=underwriter> means a person or company who, as principal, agrees to purchase securities with a view to distribution or who, as agent, offers for sale or sells securities in connection with a distribution and includes a person or company who has a direct or indirect participation in any such distribution, but does not include, "a# a person or company whose interest in the transaction is limited to receiving the usual and customary distributorKs or sellerKs commission payable by an underwriter or issuer, "b# a mutual fund that, under the laws of the 9urisdiction to which it is sub9ect, accepts its shares or units for surrender and resells them, "c# a company that, under the laws of the 9urisdiction to which it is sub9ect, purchases its shares and resells them, or "d# a bank listed in chedule I, II or III to the 2ank (ct "8anada# with respect to securities described in paragraph 4 of subsection EN "<# or to such banking transactions as are designated by the regulations+ "=souscripteur O forfait>#

The underwriter has a precarious position. 6n the one hand, they are an interested financial party with a clear stake in the issue. 6n the other, they have a fiduciary duty as a =gatekeeper> and is e-pected to assume an =adversarial> role to ensure the issue is legitimate. The underwriter is e-pected to act as a third.party. *2D Dagne- International Inc. 6 828 <55E *2D was initially a magnet company that shifted industries. In this instance, *2D stands for the principle that underwriters can be pursued as well. The court noted that =The phrase =to the best of our knowledge, information and belief> carries with it a requirement to obtain information before an underwriter can make that affirmation&(n underwriter must go beyond the statements of the issuerKs directors, officers and counsel and must avoid automatic reliance.> ;owever, this is to be balanced against their limited access. Types of Gnderwriter : Issuer 7elationships Issuers and underwriters can have four relationships: direct issue, =best efforts> underwriting, firm commitment and bought deal.

6irect 1ssue: In a direct issue, there is no underwriter "such as occurred in GoogleKs I$6#. This rarely occurs as underwriters are the parties e-perienced w: capital markets and it is often their reputation which helps ensure the success of the offering. 2Best E""orts3 >nderwriting- The underwriter makes no agreement to purchase offering as a principle. This is governed by /I @4.454 part F. The underwriter is only undertaking to make the best effort to sell the securities on the issuerKs behalf. The underwriter in effect is acting as an agent for the issuer. The risk of unsold securities is strictly that of the issuer. The underwriter has C5 days to distribute the security, at which point, the distribution ends. Gnderwriter only collects commission on securities sold. Firm !ommitment- The underwriter makes an agreement to purchase the securities and resell them. The undertaker likely is confident that the s:he can reali?e a profit on the sale of the securities to the capital market, the difference being the underwriterKs spread. (n e-ample of a firm commitment is the 'ought deal "see below#. The issuer can also agree to sell the issue at the agreed price and instead charge an underwriting fee linked to the issue price. /6T%: (n underwriter can use 2mar+et out3 clauses as a way to limit liability for sales here but must contract to do so. These occur generally in unstable markets and are often contingent on some unforeseen crisis "i.e. tsunami#. 1ndemnit clauses will allow the underwriter to indemnify if there is a mistake in the prospectus. /ot clear if the court will enforce these. Bought 6eal: ( form of firm commitment in which the underwriter agrees to buy all shares. These are made before the preliminary prospectus is filed. These are more common in 8anadian distributions than in the G. . These generally occur where the underwriter has lined up an institutional investor who is interested in the issue. 7etail investors complain because these are often attractive issues to which they have no access "rather than the normally speculative shares aimed at the retail investor#. 86Is and Gnderwriting Gnderwriting 86Is are governed by /I EE.45N. The law recogni?es three potential levels of 86Is: !ow !evel: The underwriter and issuer are not related but are connected "the test being would a reasonable investor be right to ask if the two are independent# Dedium !evel: Issuer has a relation to the underwriter. ;igh !evel: 2ank is both issuing and underwriting the security 0hat kind of relationships are we discussingJ

Imagine an issuer who has a loan w: 2D6. aid issuer wants to reduce loan and goes to /esbitt 2urns. /2 is likely to have a 86I w: 2D6. The regulator has responded by requiring such relationships be made e-plicit and evident to investors. (lso, where the underwriter is related, a portion of the underwriting work must go to an independent underwriter. Da9or underwriters complained that this was simply a hand.out of work to smaller underwriters, but the government did not care.

$reliminary $rospectus
$reliminary prospectus N@. "4# ( preliminary prospectus shall substantially comply with the requirements of 6ntario securities law respecting the form and content of a prospectus, e-cept that the report or reports of the auditor or accountant required by the regulations need not be included. 7. .6. 4CC5, c. .N, s. N@ "4#+ 4CC@, c. 44, s. EAA. Idem "<# ( preliminary prospectus may e-clude information with respect to the price to the underwriter and offering price of any securities and other matters dependent upon or relating to such prices. 7. .6. 4CC5, c. .N, s. N@ "<#.

(s per s. N@, a preliminary prospectus is not a dra"t.

7eceipt for preliminary prospectus NN. The Director shall issue a receipt for a preliminary prospectus forthwith upon the filing thereof. 7. .6. 4CC5, c. .N, s. NN. 3ull, true and plain disclosure required NA. "4# ( prospectus shall provide full, true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed and shall comply with the requirements of 6ntario securities law. 7. .6. 4CC5, c. .N, s. NA "4#+ 4CC@, c. 44, s. EAL. upplemental material "<# The prospectus shall contain or be accompanied by such financial statements, reports or other documents as are required by this (ct or the regulations. 7. .6. 4CC5, c. .N, s. NA "<#. (mendment to preliminary prospectus on material change NL. "4# ub9ect to subsection "<#, where a material adverse change occurs after a receipt is obtained for a preliminary prospectus filed in accordance with subsection NE "4# and before the receipt for the prospectus is obtained or, where a material change occurs after the receipt for the prospectus is obtained but prior to the completion of the distribution under such prospectus, an amendment to such preliminary prospectus or prospectus, as the case may be, shall be filed as soon as practicable and in any event within ten days after the change occurs. 7. .6. 4CC5, c. .N, s. NL "4#. /ote: 6n a day to be named by proclamation of the !ieutenant Governor, subsection "4# is amended by the tatutes of 6ntario, <55L, chapter L, chedule EF, subsection E "4# by striking out = ub9ect to subsection "<#> at the beginning. ee: <55L, c. L, ched. EF, ss. E "4#, 4N "<#. Idem "<# 0here an amendment to a prospectus is filed under subsection "4# for the purpose of distributing securities in addition to the securities previously disclosed in the prospectus or an amendment to the prospectus such additional distribution shall not be proceeded with for a period of ten days after the amendment is filed or, in the event the 8ommission informs the party filing in writing within ten days of the filing that it ob9ects to the further distribution until such time as a receipt for the amended prospectus is obtained from the Director. 7. .6. 4CC5, c. .N, s. NL "<#. /ote: 6n a day to be named by proclamation of the !ieutenant Governor, subsection "<# is repealed by the tatutes of 6ntario, <55L, chapter L, chedule EF, subsection E "<# and the following substituted: ame, additional securities "<# If, after a receipt for a prospectus or for an amendment to a prospectus is issued but before the distribution under the prospectus or amendment is completed, securities in addition to those previously disclosed in the prospectus or amendment are to be distributed, the issuer making the distribution shall file an amendment to the prospectus disclosing the additional securities as soon as practicable and, in any event, within 45 days after the decision to increase the number of securities offered is made. <55L, c. L, ched. EF, s. E "<#. 7eceipt "<.4# The Director shall issue a receipt for an amendment to a prospectus that must be filed under subsection "4# or "<# unless the Director refuses in accordance with subsection A4 "<# to issue the receipt. <55L, c. L, ched. EF, s. E "<#. 7estriction "<.<# Gnless otherwise permitted by regulation, an issuer shall not proceed with a distribution or an additional distribution until a

receipt is issued for an amendment to the prospectus that must be filed under subsection "4# or "<#. <55L, c. L, ched. EF, s. E "<#. ee: <55L, c. L, ched. EF, ss. E "<#, 4N "<#. /otice of amendment "E# (n amendment to a preliminary prospectus referred to in subsection "4# shall, forthwith after it has been filed, be forwarded to each recipient of the preliminary prospectus according to the record maintained under section AL. 7. .6. 4CC5, c. .N, s. NL "E#.

(s per s. NL there is a general requirement to amend preliminary prospectus when on the occurrence of =material adverse change> %ssentially, the preliminary prospectus does not include all of the detailed data that will be included in the final. The director is to issue the receipt for the preliminary pro forma "=shall issue a receipt>#, which is not the case for final prospectuses. /ote that any material change must be filed as soon as possible and not later than 45 days, if prior to distribution. Irwin !aw says: =The preliminary prospectus is a draft of the final prospectus that must be delivered in connection with a public offering of securities. It must Tsubstantially complyK with the rules governing final prospectuses. 6nce filed, the waiting period begins. During the waiting period, 6 8 staff who have reviewed the preliminary prospectus issue comment letters to the issuer. The issuer is obliged to respond in an effort to resolve any regulatory concerns so that when the issuer files the final prospectus "with any necessary amendments#, it can obtain a receipt promptly.> 0aiting $eriod During the waiting period, the regulator reviews the prospectus and the issuer awaits the issuance of a final receipt. The waiting period begins when the initial receipt for the preliminary receipt is issued. Gnder 6ntario law, the waiting period is to last a minimum of 45 days. In practice, however, an issuer will receive a comment letter within E.N days. The prospectus is reviewed only in a single 9urisdiction. /ote: the 6 8 openly admits to having adopted a risk.based approach to review so as to better allocate resources. Thus, only the riskier of prospectuses will be sub9ect to e-tensive scrutiny. uch factors that would trigger such scrutiny include: issuer has no active business, minimal e-perience, fluctuating financial assets, abnormally small business issue, no clear plan for money sought, failure to contract an underwriter, etc. Irwin !aw says: =The waiting period shall be at least ten days&. The purpose appears to be so that the regulators have an adequate opportunity to vet the prospectus&HandI because it would permit prospective purchasers to Tstudy the merits of the security issueK and Tpermit underwriters to test the market.K> /6T%: hort form can be approved in less than ten days. IssuerKs (gency during 0aiting $eriod

This is governed by 6 ( ss. AN, AA and AL "see below#. During the waiting period, it is permissible to distribute advertisements and the preliminary prospectus+ however, doing so triggers requirements under the (ct.
AN. "4# In this section, =waiting period> means the interval, which shall be at least ten days, between the issuance by the Director of a receipt for a preliminary prospectus relating to the offering of a security and the issuance by the Director of a receipt for the prospectus. 7. .6. 4CC5, c. .N, s. AN "4#. /ote: 6n a day to be named by proclamation of the !ieutenant Governor, the definition of =waiting period> is repealed by the tatutes of 6ntario, <55L, chapter L, chedule EF, section A and the following substituted: =waiting period> means the period prescribed by regulation or, if no period is prescribed, the period between the DirectorKs issuance of a receipt for a preliminary prospectus relating to the offering of a security and the DirectorKs issuance of a receipt for the prospectus. ee: <55L, c. L, ched. EF, ss. A, 4N "<#. Distribution of material during waiting period "<# Despite section NE, but sub9ect to $art )III, it is permissible during the waiting period, "a# to distribute a notice, circular, advertisement or letter to or otherwise communicate with any person or company identifying the security proposed to be issued, stating the price thereof, if then determined, the name and address of a person or company from whom purchases of the security may be made and containing such further information as may be permitted or required by the regulations, if every such notice, circular, advertisement, letter or other communication states the name and address of a person or company from whom a preliminary prospectus may be obtained+ "b# to distribute a preliminary prospectus+ and "c# to solicit e-pressions of interest from a prospective purchaser if, prior to such solicitation or forthwith after the prospective purchaser indicates an interest in purchasing the security, a copy of the preliminary prospectus is forwarded to him, her or it. 7. .6. 4CC5, c. .N, s. AN "<#. Distribution of preliminary prospectus AA. (ny dealer distributing a security to which section AN applies shall, in addition to the requirements of clause AN "<# "c#, send a copy of the preliminary prospectus to each prospective purchaser who, without solicitation, indicates an interest in purchasing the security and requests a copy of such preliminary prospectus. 7. .6. 4CC5, c. .N, s. AA. Distribution list AL. (ny dealer distributing a security to which section AN applies shall maintain a record of the names and addresses of all persons and companies to whom the preliminary prospectus has been forwarded. 7. .6. 4CC5, c. .N, s. AL.

Irwin !aw says: =During the waiting period, it is unlawful to sell any of the securities. ;owever, it is possible for the underwriters to distribute copies of the preliminary prospectus+ to solicit =e-pressions of interest> from prospective purchasers, provided that the underwriter delivers a copy of the preliminary prospectus to the prospective purchasers either before the solicitation or after a prospective purchaser has e-pressed interest+ and to distribute certain limited notices and advertisements, provided any such communication indicates how a copy of the preliminary prospectus may be obtained.> 8ontent of $rospectus Bey sections: 6 ( s. NA /I @4.454
3ull, true and plain disclosure required NA. "4# ( prospectus shall provide full, true and plain disclosure of all material facts relating to the securities issued or proposed to be

distributed and shall comply with the requirements of 6ntario securities law. 7. .6. 4CC5, c. .N, s. NA "4#+ 4CC@, c. 44, s. EAL. upplemental material "<# The prospectus shall contain or be accompanied by such financial statements, reports or other documents as are required by this (ct or the regulations. 7. .6. 4CC5, c. .N, s. NA "<#.

. NA establishes the two key points to a prospectus: "4# it will include a "ull) true and #lain disclosure of all material facts and "<# it will com#l with ,ntario securities law. Financial Statements: These are governed by /I @4.454 part @ and 3orm @4.454 34 item E<. (n issuer must include a minimum of numerical data. ection E<"<#"4# defines which specific financial statements: an income statement, a statement of retained earnings, a cash flow statement, and a balance sheet. The income statement lists the revenue and losses of the business and can include non. cash items, such as appreciating e-penses, capacity to write off depreciating value of an asset over time. The cash "low statement is that with which the analysts and investors are most concerned. It shows what cash sources the business has and where that money is going. The 'alance sheet is a two.sided document that lists assets on one side and liabilities on the other. The two figures are supposed to balance out. To ensure they do, shareholder equity is listed on the liability side. The statement o" retained earnings is the money the issuer has retained in the businessKs coffers for future needs "such as future pro9ects, dividends and reinvestment#. Issuers are supposed to include three ears worth of "inancial statements, if possible. (s per sJJJ, there is a requirement for e-ternal audit Irwin !aw says: =2oth final and preliminary prospectuses must comply w: regulatory requirements found in a number of sources.> "4# The 6 ( a. The overriding duty of full, true and plain disclosure i. Dost requirements are in the 6 8 rules ii. The 6 ( contains guiding principle: =full, true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed> iii. Thus: securities lawyers must make difficult 9udgment calls b. /o half.truths i. Disrep includes untrue statement of a material fact& ii. (nd omission to state a material fact iii. Thus, statements that are literally true but misleading are

"<#

"E# "@# "N#

unacceptable c. 8ertificate requirements i. IssuerKs must include signature by 8%6, 836, on behalf of the 2ofD, and any promoter of the issuer that =the foregoing constitutes full, true and plain disclosure of all material facts relating to the securities offered> ii. Gnderwriter must also supply a certificate that =to the best of our knowledge, information and belief, the foregoing&> iii. (ll are potentially civilly liable for any misrepresentations 7equirements in the regulations, rules and forms a. Dust comply w: requirements of 6ntario securities law. Thus includes: i. 6 (, 6 ( regulation, 6 8 rules and decisions of the 6 8 or the director ii. (ll additional requirements are found in /I @4.454, rule @4.N54, @4.N548$ Decision of the 6 8 or the director a. 6 8 or its director has authority to demand additional information be disclosed in prospectus $olicy statements a. /ot really an issue in 6ntario, as the 6 8 has rule.making 9urisdiction (mending the prospectus a. If a material adverse change occurs, the issuer must file an amendment to the prospectus as early as possible and in any case within 45 days b. /ote: this is different than final prospectus which cares about any material change

$rospectuses II 8ooling 6ff $eriod . L4 of the 6 ( entitles purchaser to make use of a cooling off period.
L4. "4# ( dealer not acting as agent of the purchaser who receives an order or subscription for a security offered in a distribution to which subsection NE "4# or section A< is applicable shall, unless the dealer has previously done so, send by prepaid mail or deliver to the purchaser the latest prospectus and any amendment to the prospectus filed either before entering into an agreement of purchase and sale resulting from the order or subscription or not later than midnight on the second day, e-clusive of aturdays, undays and holidays, after entering into such agreement. 7. .6. 4CC5, c. .N, s. L4 "4#. 0ithdrawal from purchase "<# (n agreement of purchase and sale referred to in subsection "4# is not binding upon the purchaser, if the dealer from whom the purchaser purchases the security receives written or telegraphic notice evidencing the intention of the purchaser not to be bound by the agreement of purchase and sale not later than midnight on the second day, e-clusive of aturdays, undays and holidays, after receipt by the purchaser of the latest prospectus and any amendment to the prospectus. 7. .6. 4CC5, c. .N, s. L4 "<#. (pplication of subs. "<# "E# ubsection "<# does not apply if the purchaser is a registrant or if the purchaser sells or otherwise transfers beneficial ownership of the security referred to in subsection "<#, otherwise than to secure indebtedness, before the e-piration of the time referred to in subsection "<#. 7. .6. 4CC5, c. .N, s. L4 "E#. Time of receipt "@# 3or the purpose of this section, where the latest prospectus and any amendment to the prospectus is sent by prepaid mail, the latest prospectus and any amendment to the prospectus shall be deemed conclusively to have been received in the ordinary course of mail by the person or company to whom it was addressed. 7. .6. 4CC5, c. .N, s. L4 "@#. 7eceipt of prospectus by agent "N# The receipt of the latest prospectus or any amendment to the prospectus by a dealer who is acting as agent of or who thereafter commences to act as agent of the purchaser with respect to the purchase of a security referred to in subsection "4# shall, for the purpose of this section, be receipt by the purchaser as of the date on which the agent received such latest prospectus and any amendment to the prospectus. 7. .6. 4CC5, c. .N, s. L4 "N#. 7eceipt of notice by agent "A# The receipt of the notice referred to in subsection "<# by a dealer who acted as agent of the vendor with respect to the sale of the security referred to in subsection "4# shall, for the purpose of this section, be receipt by the vendor as of the date on which the agent received such notice. 7. .6. 4CC5, c. .N, s. L4 "A#. Dealer as agent "L# 3or the purpose of this section, a dealer shall not be considered to be acting as agent of the purchaser unless the dealer is acting solely as agent of the purchaser with respect to the purchase and sale in question and has not received and has no agreement to receive compensation from or on behalf of the vendor with respect to the purchase and sale. 7. .6. 4CC5, c. .N, s. L4 "L#. 6nus of proof "F# The onus of proving that the time for giving notice under subsection "<# has e-pired is upon the dealer from whom the purchaser has agreed to purchase the security. 7. .6. 4CC5, c. .N, s. L4 "F#.

The cooling off period functions as follows. 0ithin two days of receipt of a prospectus and any additional amendments, a buyer can revoke his purchase. This e-ists to ensure that where there is a material change, the investor can move on. /ote that the right listed in L4"<# is closely connected to the obligation in s. NL "to file amendments for a m:c#. /6T% that the cooling off period runs w: the delivery of the final prospectus. Irwin !aw ays, =The 6 ( provides a =special two day cooling off> period for the

purchasers of securities in a public offering. Gnder s. L<"<#, such a purchaser has two business days after receiving the prospectus or any prospectus amendment to withdraw from any purchase agreement by providing written notice. This withdrawal right is absolute and does not require the purchaser to prove'or even allege'any misrep or deficiency in the prospectus. 7ationale&is twofold. 3irst, &the right is intended to act as an antidote to high pressure sales techniques. econd, it helps ensure that purchasers have had at least the opportunity to review the detailed information in the prospectus before committing to purchase the securities offered.> /6T%: 6nly those within the cooling off period en9oy the opportunity of the cooling off period restarting. %-ample 4 T receives prospectus on day 4. Day < agrees to buy. Day N T receives an amendment. Day A T wants out. 3(I!. The cooling off period runes for two days after receipt of latest prospectus. %-ample < T agrees to buy on day 4. Day @ T receives final prospectus. Day N prospectus amendment filed. Day F (mendment delivered. Day C T wants out. $( . The cooling. off period began on day @ but restarted on day N and remained paused until day F. Day C is within the two day time period. %-ample E T receives prospectus on day 4. Day @, T agrees to buy. Day N prospectus amendment filed. 3(I!. 8ooling off period ended on day E, before T even agreed to purchase.

%nforcement Penal Sanction: . 4<<"4#"c# provides that anyone who has violated 6ntario securities law is guilty of an offence and on conviction is liable to a fine of not more than QN million or to imprisonment for a term of not more than five years less a day, or to both. ,rders in the Pu'lic 1nterest) including com#liance w? S&: s. 4<L empowers the 6 8 to make orders in the public interest. 3ailure to 3ile $roper Documentation 3ailure to file the proper prospectus documentation can trigger penal sanctions under s. 4<<, admin sanctions under s. 4<L and civil sanctions under s. 4<F " uperior 8ourt of Sustice applications#. (s a practical matter, the 6 8 rarely makes court applications as the 6 8 has greater e-pertise than the courts do. Sones v. 3.;. Deacon ;odgson Inc. "4CFA# 8 ;8S The court distinguished between an absolute failure to provide a prospectus "whether or not by virtue of incorrectly understanding an e-emption# and the failure to provide a prospectus that had been filed to a specific purchaser, which as per the statute must be filed within three years. ( failure to a prospectus w: the regulator rendered the contracts of purchase and sale void, so there is no question of limitation period. This case stands for the principle that a prospectus is so key to markets that where it is not filed, a claim will not be barred.

%-ceptions to !ong 3orm $rospectuses hort form prospectus helf prospectus $7%$ prospectus DSD 8apital $ool 8ompanies Dutual 3und $rospectus

(ll of the above do not require a standard form prospectus hort form prospectus o /I @@.454 o <.<: 2asic 1ualification 8riteria: "a# issuer files electronically under /I 4E.454+ reporting issuer in at least one 8D/ 9urisdiction+ has filed in all active 9ur. $eriodic and timely disclosure documents, has annual financial statements and (I3, the issuerKs equity securities are listed and posted on a short form eligible e-change In the alt. for approved rating non.convertible securities, all of the above and the securities have received an approval rating provincially, In the alt. for issuers of guaranteed non.convertible debt securities, preferred shares, and cash settled derivatives o (vailable to larger issuers: must be a reporting issuer in 8anada, must be on 8D(7+ where not a reporting issuer, one must have filed all documents, be up to date w: fin. Info and forms+ continuing disclosure o The short form prospectus includes: cover page, summary desp. 6f business, con. capitali?ation, use of proceeds, plan of distr., earnings coverage ratios, desc. 6f securities being distr., selling security holder, mineral prop., sig. acquisitions, doc. incorp. 2y reference, add. Disclosure for issues of guaranteed securities, e-emptions for certain issues of guar. ec., r:s between issuer or selling security holder and underwriter, interst of e-perts, promoters, risk factors, other material facts, e-emptions from the instrument or this form, stat. rights of w:drawal and rescission, and certificates o /ote item 44: documents that are automatically incorporated: current (I3, current annual fin. tate., interim fin. tat., news release and public communications if more recent than above, material change report "e-cept where confidential#, business acquisition report, info circular, any other disclosure document w: the issuer has filed pursuant to an undertaking to a regulator, any other disclosure doc. of the type listed above which the issuer has filed pursuant to an e-emption from any requirement since the beg. 6f the fin. *ear in respect of which the current (I3 is field o /6T%: any mistake in docs. Incorporated is treated like a violation of the

short form, which thus triggers continuous disclosure requirements o T;%67*: 6n the one hand, /I @@.454 wants to ease the prospectus requirements on regular and larger issuers who have other securities on the market and therefore already have ongoing reporting requirements. 6n the other, nothing in the short form is intended to provide relief from liability. (ny untrue statement will trigger liability. /ote that the instructions put requirements for clear language and no boiler plate provisions. D67%6,%7, @@.454 is more interested in issuers e-plaining the security being offered than it is in requiring the company to e-plain itsK long term plans : prospects Shel" #ros#ectus o =a disclosure document that is prepared, filed and put on the metaphorical shelf "for up to <N months# until the issuer decides that it wishes to take some or all of the qualified securities Toff the shelfK and distribute them.> o (t time of sale, issuer prepares doc. w: info e-cluded from earlier doc., which is then incorporated by ref o /ote that issuer must satisfy req. at time of filing shelf prospectus and again at time securities are sold o 3urther note that a shelf prospectus can be filed relating to any number and type of securities o /I @@.45< o 6nly those issuers who qualify for short form issuing can qualify for a shelf prospectus "@@.4548$"4.A##+ advises that issuers look first to @@.454 and then to @@.45< o To be included: statement at top of cov. $g. indentifying s:f prospectus as base shelf pros., < a statement to that effect, E all shelf info omitted from the bas.shf. pros. 0ill be contained in suppl that will be del to purchasers, @ each supplement w: incorp by ref, N. ( statement of aggregate dollar amount, A disclosure of type of security that may be distr., L if an undertaking then a statement to that effect, F prosp. 8ertificates, and C list all e-emptions from the provisions granted to issuer o $ermitted omissions: variable terms of the securities "if not known at that date#, < the dollar amount of teanche of securities that may be distributed "ifnotknown#, E variable terms of the distribution "if nk#, @ name and certificate of underwriter "if nk#, N if one or more underwriter has agreed to purchase securities at a specified price, A if underwriting is on a best efforts basis, L any other info that pertains only to a specific distribution of securities under the base shelf prospectus, if nk, and F any other info req. under @@.454 or other securities reg and cannot be ascertained at time of filing $7%$ prospectus o @@.45E o This is similar to a shelf prospectus. (n issuer files in two stages: a base document that omits certain deal.specific info is filed and cleared w: the

6 8+ second, at the time of sale, a second, shorter supplement w: is not pre.cleared w: regulators is used. o /ote that $7%$ is available to all issuers, that it faces a shorter shelf time "C5 days from receipt# and that a $7%$ cannot be used to offer multiple types of securities o $;I!6 6$;*: 8apital markets are time sensitive and often companies have a very small window in which they can operate+ $7%$s and helfs allow issuers to be ready in advance and rush to market DSD o Dulti.9urisdictional disclosure systems are governed by /I L4.454 o G issuers who wish to issue in 8anadian mrkts o Dutual recognition "if G says fine, 8(/ says fine# o %ligibility: rep. issuer in 8(/ for 4 year, public float of QLNm o G issuers essentially allowed to distribute in 8anada using G docs o This allows 8(/ issuers to target G mrkt without review by the %8 o 8(/ issuers must have a 8(/ prospectus X relevant G form "gen. 3.45# o 3in. tatements must be in G(($ format o Dust also face continuous disclosure req. 8(/ disclosure X 3orm @53 8apital $ool 8ompanies o 6 8 $olicy @4.A54 o Issuer files a 8$8 prospectus and is permitted to obtain a 8D/) listing for a co. without any assets and that does not carry on any business o 6nce financing complete, 8$8 has 4F months within which to use money to complete a =qualifying transaction> and become eligible for tier Y listing status on the T ) ,enture o /6T%: ,ery open to abuse, so T ) ,enture listing requirements are used to watch for abuse Dutual 3und $rospectus o Governed by 7ule @4.N5< o Gnits are in continuous distribution o 6ne can walk in and purchase them at any time directly from the mutual fund o Danager must be aware of ongoing liability for misrepresentation o These are targeted to the retail end of market o %-pect future enforcement around this end

7easons for an %nforcement 7egime $arties concerned w: securities have generally conceived of two ways in which to ensure compliance: empower regulators to look into and ensure compliance or empower shareholders to seek remedies where abuses occur. (rguments in favour of government regulation: 7egulators have the larger marketKs interest in mind, not 9ust their own bank book tudy by 7afael !a $orta shows that countries that rely on private market forces were less efficient than markets that rely on regulation "however, study also shows that investor.friendly law and remedies are necessary# (rguments in favour of shareholder remedies: hareholders are the hurt parties. (s such, it is in their interest to seek a remedy+ their motivation is stronger and they are less likely to make a deal Government resources are finite Individual investors are often fully capable, competent investors "i.e. hedge funds, pension funds# $itiful record of enforcement by 6 8 tatistics suggest rampant insider trading yet little action by 6 8 !a $ortaKs argument "see above# found that s:holder remedies and regulation works by setting a general standard "to prevent parties starting from scratch w: a different B each time 7emedies 8ommon !aw: /egligent Disrepresentation 0hile this tort remedy is available, it adds a burden in that each investor must prove individual reliance to qualify for the remedy, which is not the case with the statutory regime. 8ivil !iability under . 4E5
4E5. "4# 0here a prospectus, together with any amendment to the prospectus, contains a misrepresentation, a purchaser who purchases a security offered by the prospectus during the period of distribution or during distribution to the public has, without regard to whether the purchaser relied on the misrepresentation, a right of action for damages against, "a# "b# "c# the issuer or a selling security holder on whose behalf the distribution is made+ each underwriter of the securities who is required to sign the certificate required by section NC+ every director of the issuer at the time the prospectus or the amendment to the prospectus was filed+

"d# every person or company whose consent has been filed pursuant to a requirement of the regulations but only with respect to reports, opinions or statements that have been made by them+ and "e# every person or company who signed the prospectus or the amendment to the prospectus other than the persons or companies included in clauses "a# to "d#, or, where the purchaser purchased the security from a person or company referred to in clause "a# or "b# or from another underwriter of

the securities, the purchaser may elect to e-ercise a right of rescission against such person, company or underwriter, in which case the purchaser shall have no right of action for damages against such person, company or underwriter. 7. .6. 4CC5, c. .N, s. 4E5 "4#+ <55@, c. E4, ched. E@, s. A. Defence "<# /o person or company is liable under subsection "4# if he, she or it proves that the purchaser purchased the securities with knowledge of the misrepresentation. 7. .6. 4CC5, c. .N, s. 4E5 "<#. Idem "E# /o person or company, other than the issuer or selling security holder, is liable under subsection "4# if he, she or it proves, "a# that the prospectus or the amendment to the prospectus was filed without his, her or its knowledge or consent, and that, on becoming aware of its filing, he, she or it forthwith gave reasonable general notice that it was so filed+ "b# that, after the issue of a receipt for the prospectus and before the purchase of the securities by the purchaser, on becoming aware of any misrepresentation in the prospectus or an amendment to the prospectus he, she or it withdrew the consent thereto and gave reasonable general notice of such withdrawal and the reason therefor+ "c# that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on the authority of an e-pert or purporting to be a copy of or an e-tract from a report, opinion or statement of an e-pert, he, she or it had no reasonable grounds to believe and did not believe that there had been a misrepresentation or that such part of the prospectus or the amendment to the prospectus did not fairly represent the report, opinion or statement of the e-pert or was not a fair copy of or e-tract from the report, opinion or statement of the e-pert+ "d# that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an e-pert or purporting to be a copy of or an e-tract from his, her or its own report, opinion or statement as an e-pert but that contains a misrepresentation attributable to failure to represent fairly his, her or its report, opinion or statement as an e-pert, "i# the person or company had, after reasonable investigation, reasonable grounds to believe and did believe that such part of the prospectus or the amendment to the prospectus fairly represented his, her or its report, opinion or statement, or "ii# on becoming aware that such part of the prospectus or the amendment to the prospectus did not fairly represent his, her or its report, opinion or statement as an e-pert, he, she or it forthwith advised the 8ommission and gave reasonable general notice that such use had been made and that he, she or it would not be responsible for that part of the prospectus or the amendment to the prospectus+ or "e# that, with respect to a false statement purporting to be a statement made by an official person or contained in what purports to be a copy of or e-tract from a public official document, it was a correct and fair representation of the statement or copy of or e-tract from the document, and he, she or it had reasonable grounds to believe and did believe that the statement was true. 7. .6. 4CC5, c. .N, s. 4E5 "E#. Idem "@# /o person or company, other than the issuer or selling security holder, is liable under subsection "4# with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an e-pert or purporting to be a copy of or an e-tract from his, her or its own report, opinion or statement as an e-pert unless he, she or it, "a# failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation+ or "b# Idem "N# /o person or company, other than the issuer or selling security holder, is liable under subsection "4# with respect to any part of the prospectus or the amendment to the prospectus not purporting to be made on the authority of an e-pert and not purporting to be a copy of or an e-tract from a report, opinion or statement of an e-pert unless he, she or it, "a# failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation+ or "b# believed there had been a misrepresentation. 7. .6. 4CC5, c. .N, s. 4E5 "N#. believed there had been a misrepresentation. 7. .6. 4CC5, c. .N, s. 4E5 "@#.

!imitation re underwriters "A# /o underwriter is liable for more than the total public offering price represented by the portion of the distribution underwritten by the underwriter. 7. .6. 4CC5, c. .N, s. 4E5 "A#.

!imitation in action for damages "L# In an action for damages pursuant to subsection "4#, the defendant is not liable for all or any portion of such damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon. 7. .6. 4CC5, c. .N, s. 4E5 "L#. Soint and several liability "F# (ll or any one or more of the persons or companies specified in subsection "4# are 9ointly and severally liable, and every person or company who becomes liable to make any payment under this section may recover a contribution from any person or company who, if sued separately, would have been liable to make the same payment provided that the court may deny the right to recover such contribution where, in all the circumstances of the case, it is satisfied that to permit recovery of such contribution would not be 9ust and equitable. 7. .6. 4CC5, c. .N, s. 4E5 "F#. !imitation re amount recoverable "C# In no case shall the amount recoverable under this section e-ceed the price at which the securities were offered to the public. 7. .6. 4CC5, c. .N, s. 4E5 "C#. /o derogation of rights "45# The right of action for rescission or damages conferred by this section is in addition to and without derogation from any other right the purchaser may have at law. 7. .6. 4CC5, c. .N, s. 4E5 "45#. !iability for misrepresentation in offering memorandum 4E5.4 "4# 0here an offering memorandum contains a misrepresentation, a purchaser who purchases a security offered by the offering memorandum during the period of distribution has, without regard to whether the purchaser relied on the misrepresentation, the following rights: 4. The purchaser has a right of action for damages against the issuer and a selling security holder on whose behalf the distribution is made. <. If the purchaser purchased the security from a person or company referred to in paragraph 4, the purchaser may elect to e-ercise a right of rescission against the person or company. If the purchaser e-ercises this right, the purchaser ceases to have a right of action for damages against the person or company. <55@, c. E4, ched. E@, s. L. Defence "<# /o person or company is liable under subsection "4# if he, she or it proves that the purchaser purchased the securities with knowledge of the misrepresentation. 4CCC, c. C, s. <4F. !imitation in action for damages "E# In an action for damages pursuant to subsection "4#, the defendant is not liable for all or any portion of the damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon. 4CCC, c. C, s. <4F. Soint and several liability "@# ub9ect to subsection "N#, all or any one or more of the persons or companies specified in subsection "4# are 9ointly and severally liable, and every person or company who becomes liable to make any payment under this section may recover a contribution from any person or company who, if sued separately, would have been liable to make the same payment, unless the court rules that, in all the circumstances of the case, to permit recovery of the contribution would not be 9ust and equitable. 4CCC, c. C, s. <4F. ame "N# Despite subsection "@#, an issuer shall not be liable where it is not receiving any proceeds from the distribution of the securities being distributed and the misrepresentation was not based on information provided by the issuer, unless the misrepresentation, "a# "b# was based on information that was previously publicly disclosed by the issuer+ was a misrepresentation at the time of its previous public disclosure+ and

"c# was not subsequently publicly corrected or superseded by the issuer prior to the completion of the distribution of the securities being distributed. 4CCC, c. C, s. <4F. !imitation re amount recoverable

"A# In no case shall the amount recoverable under this section e-ceed the price at which the securities were offered. 4CCC, c. C, s. <4F. /o derogation of rights "L# The right of action for rescission or damages conferred by this section is in addition to and without derogation from any other right the purchaser may have at law. 4CCC, c. C, s. <4F. (pplication "F# This section applies only with respect to an offering memorandum which has been furnished to a prospective purchaser in connection with a distribution of a security under an e-emption from section NE of the (ct that is specified in the regulations for the purposes of this section. <554, c. <E. s. <4A. Go back to C:<:N for more info

!iable $arties Gnder 6 ( s. 4E5 "4# Issuer : selling shareholder "<# %ach underwriter signing prospectus "E# %very director at time of prospectus filing "@# %very e-pert, in relation to reports : opinion : statements they have given "N# %very other signing party of the prospectus $roving Disrepresentation in the $rospsectus Test "4# $urchase of securities offered under the prospectus "<# $urchase made during period of distribution "E# ( misrepresentation was made in the prospectus a. Definition of the misrepresentation b. Deemed reliance (mending a $reliminary $rospectus for a Daterial 8hange
NL. "4# ub9ect to subsection "<#, where a material adverse change occurs after a receipt is obtained for a preliminary prospectus filed in accordance with subsection NE "4# and before the receipt for the prospectus is obtained or, where a material change occurs after the receipt for the prospectus is obtained but prior to the completion of the distribution under such prospectus, an amendment to such preliminary prospectus or prospectus, as the case may be, shall be filed as soon as practicable and in any event within ten days after the change occurs. 7. .6. 4CC5, c. .N, s. NL "4#. /ote: 6n a day to be named by proclamation of the !ieutenant Governor, subsection "4# is amended by the tatutes of 6ntario, <55L, chapter L, chedule EF, subsection E "4# by striking out = ub9ect to subsection "<#> at the beginning. ee: <55L, c. L, ched. EF, ss. E "4#, 4N "<#. Idem "<# 0here an amendment to a prospectus is filed under subsection "4# for the purpose of distributing securities in addition to the securities previously disclosed in the prospectus or an amendment to the prospectus such additional distribution shall not be proceeded with for a period of ten days after the amendment is filed or, in the event the 8ommission informs the party filing in writing within ten days of the filing that it ob9ects to the further distribution until such time as a receipt for the amended prospectus is obtained from the Director. 7. .6. 4CC5, c. .N, s. NL "<#. /ote: 6n a day to be named by proclamation of the !ieutenant Governor, subsection "<# is repealed by the tatutes of 6ntario, <55L, chapter L, chedule EF, subsection E "<# and the following substituted: ame, additional securities "<# If, after a receipt for a prospectus or for an amendment to a prospectus is issued but before the distribution under the prospectus or amendment is completed, securities in addition to those previously disclosed in the prospectus or amendment are to be distributed, the issuer making the distribution shall file an amendment to the prospectus disclosing the additional securities as soon as practicable and,

in any event, within 45 days after the decision to increase the number of securities offered is made. <55L, c. L, ched. EF, s. E "<#. 7eceipt "<.4# The Director shall issue a receipt for an amendment to a prospectus that must be filed under subsection "4# or "<# unless the Director refuses in accordance with subsection A4 "<# to issue the receipt. <55L, c. L, ched. EF, s. E "<#. 7estriction "<.<# Gnless otherwise permitted by regulation, an issuer shall not proceed with a distribution or an additional distribution until a receipt is issued for an amendment to the prospectus that must be filed under subsection "4# or "<#. <55L, c. L, ched. EF, s. E "<#. ee: <55L, c. L, ched. EF, ss. E "<#, 4N "<#. /otice of amendment "E# (n amendment to a preliminary prospectus referred to in subsection "4# shall, forthwith after it has been filed, be forwarded to each recipient of the preliminary prospectus according to the record maintained under section AL. 7. .6. 4CC5, c. .N, s. NL "E#.

,ersus: ection 4E5: !iability for misrepresentation in prospectus

4E5. "4# 0here a prospectus, together with any amendment to the prospectus, contains a misrepresentation, a purchaser who purchases a security offered by the prospectus during the period of distribution or during distribution to the public has, without regard to whether the purchaser relied on the misrepresentation, a right of action for damages against, "a# the issuer or a selling security holder on whose behalf the distribution is made+ "b# each underwriter of the securities who is required to sign the certificate required by section NC+ "c# every director of the issuer at the time the prospectus or the amendment to the prospectus was filed+ "d# every person or company whose consent to disclosure of information in the prospectus has been filed pursuant to a requirement of the regulations but only with respect to reports, opinions or statements that have been made by them+ and "e# every person or company who signed the prospectus or the amendment to the prospectus other than the persons or companies included in clauses "a# to "d#, or, where the purchaser purchased the security from a person or company referred to in clause "a# or "b# or from another underwriter of the securities, the purchaser may elect to e-ercise a right of rescission against such person, company or underwriter, in which case the purchaser shall have no right of action for damages against such person, company or underwriter. 7. .6. 4CC5, c. .N, s. 4E5 "4#+ <55@, c. E4, ched. E@, s. A+ <55A, c. EE, ched. R.N, s. 4E. Defence "<# /o person or company is liable under subsection "4# if he, she or it proves that the purchaser purchased the securities with knowledge of the misrepresentation. 7. .6. 4CC5, c. .N, s. 4E5 "<#. Idem "E# /o person or company, other than the issuer or selling security holder, is liable under subsection "4# if he, she or it proves, "a# that the prospectus or the amendment to the prospectus was filed without his, her or its knowledge or consent, and that, on becoming aware of its filing, he, she or it forthwith gave reasonable general notice that it was so filed+ "b# that, after the issue of a receipt for the prospectus and before the purchase of the securities by the purchaser, on becoming aware of any misrepresentation in the prospectus or an amendment to the prospectus he, she or it withdrew the consent thereto and gave reasonable general notice of such withdrawal and the reason therefor+ "c# that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on the authority of an e-pert or purporting to be a copy of or an e-tract from a report, opinion or statement of an e-pert, he, she or it had no reasonable grounds to believe and did not believe that there had been a misrepresentation or that such part of the prospectus or the amendment to the prospectus did not fairly represent the report, opinion or statement of the e-pert or was not a fair copy of or e-tract from the report, opinion or statement of the e-pert+ "d# that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an e-pert or purporting to be a copy of or an e-tract from his, her or its own report, opinion or statement as an e-pert but that contains a misrepresentation attributable to failure to represent fairly his, her or its report, opinion or statement as an e-pert,

"i# the person or company had, after reasonable investigation, reasonable grounds to believe and did believe that such part of the prospectus or the amendment to the prospectus fairly represented his, her or its report, opinion or statement, or "ii# on becoming aware that such part of the prospectus or the amendment to the prospectus did not fairly represent his, her or its report, opinion or statement as an e-pert, he, she or it forthwith advised the 8ommission and gave reasonable general notice that such use had been made and that he, she or it would not be responsible for that part of the prospectus or the amendment to the prospectus+ or "e# that, with respect to a false statement purporting to be a statement made by an official person or contained in what purports to be a copy of or e-tract from a public official document, it was a correct and fair representation of the statement or copy of or e-tract from the document, and he, she or it had reasonable grounds to believe and did believe that the statement was true. 7. .6. 4CC5, c. .N, s. 4E5 "E#. Idem "@# /o person or company, other than the issuer or selling security holder, is liable under subsection "4# with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an e-pert or purporting to be a copy of or an e-tract from his, her or its own report, opinion or statement as an e-pert unless he, she or it, "a# failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation+ or "b# believed there had been a misrepresentation. 7. .6. 4CC5, c. .N, s. 4E5 "@#. Idem "N# /o person or company, other than the issuer or selling security holder, is liable under subsection "4# with respect to any part of the prospectus or the amendment to the prospectus not purporting to be made on the authority of an e-pert and not purporting to be a copy of or an e-tract from a report, opinion or statement of an e-pert unless he, she or it, "a# failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation+ or "b# believed there had been a misrepresentation. 7. .6. 4CC5, c. .N, s. 4E5 "N#. !imitation re underwriters "A# /o underwriter is liable for more than the total public offering price represented by the portion of the distribution underwritten by the underwriter. 7. .6. 4CC5, c. .N, s. 4E5 "A#. !imitation in action for damages "L# In an action for damages pursuant to subsection "4#, the defendant is not liable for all or any portion of such damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon. 7. .6. 4CC5, c. .N, s. 4E5 "L#. Soint and several liability "F# (ll or any one or more of the persons or companies specified in subsection "4# are 9ointly and severally liable, and every person or company who becomes liable to make any payment under this section may recover a contribution from any person or company who, if sued separately, would have been liable to make the same payment provided that the court may deny the right to recover such contribution where, in all the circumstances of the case, it is satisfied that to permit recovery of such contribution would not be 9ust and equitable. 7. .6. 4CC5, c. .N, s. 4E5 "F#. !imitation re amount recoverable "C# In no case shall the amount recoverable under this section e-ceed the price at which the securities were offered to the public. 7. .6. 4CC5, c. .N, s. 4E5 "C#. /o derogation of rights "45# The right of action for rescission or damages conferred by this section is in addition to and without derogation from any other right the purchaser may have at law. 7. .6. 4CC5, c. .N, s. 4E5 "45#. !iability for misrepresentation in offering memorandum 4E5.4 "4# 0here an offering memorandum contains a misrepresentation, a purchaser who purchases a security offered by the offering memorandum during the period of distribution has, without regard to whether the purchaser relied on the misrepresentation, the following rights:

4. The purchaser has a right of action for damages against the issuer and a selling security holder on whose behalf the distribution is made. <. If the purchaser purchased the security from a person or company referred to in paragraph 4, the purchaser may elect to e-ercise a right of rescission against the person or company. If the purchaser e-ercises this right, the purchaser ceases to have a right of action for damages against the person or company. <55@, c. E4, ched. E@, s. L. Defence "<# /o person or company is liable under subsection "4# if he, she or it proves that the purchaser purchased the securities with knowledge of the misrepresentation. 4CCC, c. C, s. <4F. !imitation in action for damages "E# In an action for damages pursuant to subsection "4#, the defendant is not liable for all or any portion of the damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon. 4CCC, c. C, s. <4F. Soint and several liability "@# ub9ect to subsection "N#, all or any one or more of the persons or companies specified in subsection "4# are 9ointly and severally liable, and every person or company who becomes liable to make any payment under this section may recover a contribution from any person or company who, if sued separately, would have been liable to make the same payment, unless the court rules that, in all the circumstances of the case, to permit recovery of the contribution would not be 9ust and equitable. 4CCC, c. C, s. <4F. ame "N# Despite subsection "@#, an issuer shall not be liable where it is not receiving any proceeds from the distribution of the securities being distributed and the misrepresentation was not based on information provided by the issuer, unless the misrepresentation, "a# was based on information that was previously publicly disclosed by the issuer+ "b# was a misrepresentation at the time of its previous public disclosure+ and "c# was not subsequently publicly corrected or superseded by the issuer prior to the completion of the distribution of the securities being distributed. 4CCC, c. C, s. <4F. !imitation re amount recoverable "A# In no case shall the amount recoverable under this section e-ceed the price at which the securities were offered. 4CCC, c. C, s. <4F. /o derogation of rights "L# The right of action for rescission or damages conferred by this section is in addition to and without derogation from any other right the purchaser may have at law. 4CCC, c. C, s. <4F. (pplication "F# This section applies only with respect to an offering memorandum which has been furnished to a prospective purchaser in connection with a distribution of a security under an e-emption from section NE of the (ct that is specified in the regulations for the purposes of this section. <554, c. <E. s. <4A.

Disrepresentation
=misrepresentation> means, "a# an untrue statement of material fact, or "b# 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+ "=prMsentation ine-acte des faits># =mutual fund> means an issuer whose primary purpose is to invest money provided by its security holders and whose securities entitle the holder to receive on demand, or within a specified period after demand, an amount computed by reference to the value of a proportionate interest in the whole or in part of the net assets, including a separate fund or trust account, of the issuer+ "=fonds mutuel># =mutual fund in 6ntario> means a mutual fund that is a reporting issuer or that is organi?ed under the laws of 6ntario, but does not include a private mutual fund+ "=fonds mutuel de lK6ntario>#

T% T: $roving an Issuer ;as 3ailed to 7eport a Daterial 3act : 8hange "4# 0as this information about the emerging result a material change : factJ "<# Does the issuer have a continuing obligation to ensure that all material facts are disclosed until time of purchaseJ 7emedies and !imitations . 4E5 holds that shareholders are essentially limited to the cost of the security "s. 4E5"L## or to rescission "against the underwriter, not the issuer save in a best efforts situation# in the award they seek. Is this trueJ Three limitations e-ist on the plaintiffKs right to recover. The amount sought cannot e-ceed the price of the securities "opportunity cost is not recoverable#. 0here a defendant can prove that the damages e-ceeded the depreciation, the defendant is only responsible for the depreciation. !astly, underwriters are only responsible for the portion they underwrote. (vailable Defences to the Issuer The purchaser can claim that the purchaser knew about the misrepresentation in making the purchase "s. 4E5"<## or that the depreciation was not caused by the misrepresentation "s. 4E5"L##. /ote that the onus lies on the issuer to prove either claim. (vailable Defences for directors, officers and underwriters The liable party has a defence if he can show that he did not know about the prospectus or that he did not consent to its filing "4E5"E#"a##+ the defendant upon learning of the misrepresentation withdrew any consent previously given "4E5"E#"b##+ any official statement in the prospectus fairly reflected the official statement that the defendant believed to be true and had no reasonable grounds to doubt+ and the defendant did not in fact believe that there had been a misrepresentation and conducted a Treasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation "aka the due diligence defence s.4E5"N##. (vailable Defences for %-perts 3irst, is the e-pert advice made by the expert in questionJ If not, then no liability. If yes, then the e-pert has two defences. 3irst, if the information in the prospectus does not reflect his advice "4E5"E#"d#, then he is not liable provided he prove that he reasonably believed the information in the prospectus was correct. To do this, he will likely have to have made a reasonable effort to check the prospectus after the fact and if incorrect took steps to have it corrected "i.e. informed the issuer and the 6 8#.

econd, if he can prove due diligence "4E5"@##, he is fine. Due Diligence: .4E5"@#,"N# Dust actually believe that there was no misrepresentation. This belief is reasonable and is based on reasonable investigation. The onus falls on the would be non.liable defendant. . 4E< defines reasonable as: =the standard of reasonableness shall be that required of a prudent person in the circumstances of the particular case.> Berr v. Danier Day A: receipt obtained for final prospectus. 3inal prospectus included a 1@ forecast for 4CCF. Day 4A.4C, D received info re: first Y of 1@ that results will be down due to unseasonably warm weather. Day <5 distribution closed. Sune @, Danier revises forecast and material change report+ share price drops. Sune <L, 1@ has ended and Danier has substantially achieved 1@ forecast. 1: 0as Danier in violation of its reporting dutiesJ (: /o. The weather was a material fact, not a material change. /ote that weather is e-ternal to the issuerKs control. ;owever, weather does play a key component in the companyKs business, so therefore it constituted a material fact. 3or it to be a material change, it would have to qualify as a change in business, operations or capital. This case stands for the principle that the legislature intended material change to include changes in business, operations and capital.

8ontinuous Disclosure $olicy 7ationale ( continuous disclosure regimes assists in ensuring that the securities are efficiently and correctly valued on the market. It further reduces fraud possibilities, assist w: achieving corporate governance goals, equality of opportunities for all investors, and increases market confidence. %8D;: %fficient 8apital market ;ypothesis'at any given time the price should reflect the state of the knowledge in the company. (rguments against continuous disclosure Issuers face serious costs keeping information up.to.date, as do regulators. 7eporting emphasi?es short.term results at the e-pense of long.term success:prospects. If continuous disclosure creates confidence, that may be a bad thing as insider trading is rampant. ensitive information can lead to crippling results for companies that if said info was withheld, said companies might stand better chances at survival. !astly, continuous disclosure creates information overload. 7ules in this area are fossili?ed and fail to meet modern needs. Information Issuers (re 6bliged to Disclose $eriodic Disclosure of . 3inancial statements "annual and interim# o (nnual (nnually and within 4@5 days following end of fin. *ear "6 ( LF# To consist of balance sheet, income statement, statement of retained earnings and cash flow statement "6 8 7ule N<.N54 s <.4# aid docs must be reviewed by audit committee "N<.N54 <.4#, approved by 2oD and signed by two directors "6 ( 7eg 454N# tatements must comply w: gen. accepted accounting principles and include report of auditor "6 ( s. LF"4#,"<## o Interim To be filed within A5 days of quarterKs end "6 ( s. LL, LF# . DDZ( . (I3 "annual information form# o "N4.45< s.@# distinguishes between venture and non.venture issuers o Da9or issuers must be listed on (ID, within C5 days as N4.45< s. @.< o ,enture issuers have 4<5 days o . $ro-y 8irculars Timely Disclosure "6 ( s. LN#

. Daterial 8hange 7eports 6ngoing Disclosure for 3inancial tatements "/I N4.45< 8ontinuous Disclosure 6bligations# Dust $rovide 3inancial tatements "@# Dust file annual statements including "a# income statement, a statement of retained earnings and a cash flow statement for "i# most recently completed fin. *ear and "ii# immediate. $rec. *ear, if any+ "b# a balance sheet as at the end of each period and "c# notes to fin. tate. "@.4# "@.4"<## all docs. Dust be audited "@.<# 7ep. Iss. Dust file in C5 days+ ven. Iss. Dust fil w: 4<5 days "@.E"<## must file interim financial statements, including: "a# balance sheet at end of interim period and preceding year+ "b# income statement, a statement of retained earnings and cash flow statement' all for the year to date interim period w: comparative data from previous time and "d# notes to said forms If no auditor, must disclose "@.E"E## 7I in @N days and venture issuers in A5 days "@.@"a#,"b## 3in. tatements under @.4 and @.E must be approve by 2oD before filing 7I and ,I must sent request forms to reg. and ben. 6wners if said parties wish to request materials, and to provide free of cost "@.A"E## 3orward !ooking Information "@(# /ot to disclose 3!I without reasonable basis for the belief "@(.<# Dust, when doing so, make it clear that it is forward looking, cautions that results may vary, states material facts or assumptions that lead to conclusion and describe policy for updating forward.looking info "@(.E# 363I and 3inancial 6utlooks "@2# o 363I: =3orward.looking information about prospective results of operations, financial position or cash flows, based on assumption about future economic conditions and courses of action, and presented in the format of a historical balance sheet, income statement or cash flow statement> o 3in. 6ut.: =forward.looking info about prospective results of operation, financial position or cash flows that is based on assumption about future economic conditions and courses of action and that is not presented in the format of a historical balance sheet, income statement or cash flow statement.> 6ral statements and statutory obligations are e-cepted "@2.4"<## 7Is not to disclose 363I or 36 without reasonable assumptions "@2.<# 363IsZ36s are to be limited to periods that can reasonably be estimated and use accounting policies the 7I e-pects to use to prepare its historical financial statement "@2.<"<#

363IsZ36s must include the date mgmt approved the 363I:36 and e-plains the purpose of the 363I:36 and warns that it may be inappropriate for other purposes "@2.E# DDZ( "DanagementKs Discussion Z (nalysis# "N# o =( 8ompleted 3orm N4.45<34 DDZ(> or if %8 issuer, that plus additional info DDZ( are to accompany annual and interim fin. tate. "N.4.4# e-cept for years 7I was not a 7I "N.4"4.4## %-pected to file at the date financial statements are filed, e-cepting that, when financial statements are due "N.4"<## ,enture issuers who lack significant revenue from operations in the last two years must include a breakdown of material components of development, research, deferred development, general and admin, and any other material costs "N.E# Dust include the designation and number or principle amount of outstanding shares "and their classification# "N.@# (I3 "(nnual Information 3orm# "A# o =( completed (I3 3orm "N4.45<3<#+ if G then 45B or <53> (pplies only to 7Is "A.4# and must be filed within C5 days "A.<# Daterial 8hange 7eport "L# o =Daterial change means "a# a change in the business, operations or capital of the reporting issuer that would reasonably be e-pected to have a significant effect on the market price or value of any of the securities of the reporting issuer+ or o ="b# a decision to implement a change referred to in paragraph "a# made by the board of directors or other persons acting in a similar capacity or by senior management of the reporting issuer who believe that confirmation of the decision by the board of directors or any other persons acting in a similar capacity is probable> 0here a material change occurs, the 7I must immediately issue and file a news release authori?ed by e-ecutive officer disclosing the nature and substance of the change "L.4"4#"a## and =as soon as is practicable and in any event within 45 days> file a material change report "L.4"4#"b## There is an e-emption where the disclosure would in a reasonable opinion be detrimental "L.4"<#"a## or where the material change awas decided on by senior mgmt who believe that confirmation by the 2oD is probable and management has no belief that insider selling is occurring "L.4"<#"b## 2usiness (cquisition 7eport "F# o Dust report a significant acquisition within LN days "F.<# or if said acquired businessK fin year ended @N days or less before acquisition, then said acquisition must be reported within C5 days if 7I or 4<5 days if ,I "F.<"<## o (s per F.E, for 7I, significant acquisitions must meet any of the following: (sset Test "share of consolidated assets e-ceeds <5 percent#

Investment Test "investments or advances to the business e-ceed <5 percent of the consolidated assets# Income Test "share of the income from the continuing operations e-ceeds <5 percent# o (s per F.E, for ,I, any of the above tests e-cept read @5 percent for (sset Test or Investment Test $ro-y olicitation and Information 8ircular "C# o $ro-y: =a completed and e-ecuted form of pro-y by which a securityholder has appointed a person or company as the securityholderKs nominee to attend and act for the securityholder and on the securityholderKs behalf at a meeting of securityholders> "C.4# 0hen mgmt of 7I gives notice of a meeting to its registered shareholders, mgmt must also at the same time or prior give a pro-y

Disclosure 6bligations on 6ther $arties (s per 6 ( 45L, insiders must report insider status to the 6 8. (s per 6 ( 454, parties that acquires control or direction over 45 percent or more of the outstanding shares must forthwith issue a news release and within two business days file a report containing the info contained in the press release "the so.called early warning system#. The rationale behind this is that if a takeover bid is in play, shareholders want to know. 6ther 7elevant DIs and /Is /I N<.45F [ auditor oversight /I N<.45C [ 8ertification of annual and interim filings DI N<.445 [ audit committees /I NF.454:/$ NF.<54 [ Disclosure of 8orporate Governance $ractices These amendments e-ist to improve regulation standards and align 8anadian efforts with (merican reform under the 6-ley (ct. /ote that 28 and 1uebec have resisted, feeling that these additional requirements were unnecessary. /I N<.45F The 8anadian $ublic (ccountability 2oard e-ists to oversee the credentials of auditors and ensures standards "i.e. accredited accountant, etc.# are followed. It ensures that auditors do not also perform other activities for the issuer that are more profitable than the auditing work and thus raise 86I issues. /I N<.45C /I N<.45C governs the certification of disclosure in annual and interim filings. It includes a boiler.plate form for officers to sign. Bey point is part 4<, which defines liability for

false certification: =an officer providing a false certification potentially could be sub9ect to quasi.criminal, administrative or civil proceedings under securities law>. DI N<.445 DI N<.445 defines the characteristics of non.venture issuer audit committees. . 4.@ defines independence =if he or she Haudit committee memberI has no direct or indirect material relationship with the issuer.> uch a relationship occurs where it could =be reasonably e-pected to interfere w: the e-ercise of a memberKs independent 9udgment.> $art < defines audit committeeKs responsibility, which includes having a written charter, overseeing the work of an independent auditor, reviewing the financial statements, ensuring adequate procedures are in place for reviewing fin info and establishing procedures for receiving and responding to complaints re: accounting practices "which includes allowing confidential, anonymous complaints by employees#. $art E defines the composition of an audit committee: all members must be directors, independent, and must be financially literate. (lso, part E provides that an audit committee must consist of three members. ;owever, ,I are e-empt from $art E via $art A. /ote that many critici?e the requirements for independence as overly burdensome. /I NF.454 : /$ NF.<54 /I NF.454 establishes a disclose and e-plain approach to corporate governance practices and requires that said information be included in a management circular. This circular must be distributed w: pro-ies for the purposes of selecting board members "form NF. 45434#. aid national instrument has a corresponding form that goes out to investors. /I NF.454 does not define specific corporate governance practices+ rather it requires issuers to disclose their practices. Issuers must disclose the nature of their boards, including matters such as independence of members, number of independent members, e-planation of why ma9 are not independent. Dust also define what steps are taken to ensure independent 9udgment and ethical business conduct. It also must define how compensation decisions are made. /$ NF.<54 does try to define what issuers ought to do, but as it is a policy, it remains non.binding. /I NF.454, which is binding, concerns itself w: the management circular.

Timely Disclosure ources of !aw for Timely Disclosure 6 ( s. LN "nature and substance of the change# Definition of material change /I N4.45<, $art L /$ N4.<54

In essence, issuers must report any material change, which is generally considered to be a change that would reasonably be e-pected to have a significant effect on the value of the issuerKs securities. (s per s. LN of the 6 (, such news must be reported as soon as practicable and in any event within 45 days. 8onsider the 6 ( definition of material change: "i# a change in the business, operations or capital of the issuer that would reasonably be e-pected to have a significant effect on the market price or value of any securities of the issuer, or "ii# a decision to implement a change referred to in subclause "i# made by the board of directors or other persons acting in a similar capacity or by senior management of the issuer who believe that confirmation of the decision by the board of directors or such other persons acting in a similar capacity is probable This definition has been fleshed out in caselaw. $e?im v. 28 " uperintendent of 2rokers# "4CC@# 88 62 instituted proceedings against $e?im in connection w: events occurring in KFC, alleging that $ had violated timely disclosure provisions and insider trading prohibitions. $e?im was head of $rime, which was head of 8alpine. 8 tests for gold in its mines and awards stock options to its e-ecutives. 8 was awarding stock options to e-ecutives 9ust prior to releasing news as to gold findings. (lso, 8 had planned to place @m units w: an underwriter who had already arranged to sell 4m to a GB underwriter who subsequently w:drew. Issue 4: ;ad 8 properly disclosed its testing resultsJ (: The 88 applies reasonableness as the standard of review. 88 affirmed that information from a drilling program is tantamount to a material change as it touches on the business operations, assets and ownership. The 88 says that mineral property directly touches on assets of the company and that any change in these assets is disclosable. Issue <: ;ad 8 improperly placed its shares privatelyJ (: The 88 held that a change in the ownership of the 8 most certainly must be disclosed. 7etail investors are going to want to know about the ownership of the company.

Issue E: Did 8 have to disclose the problems w: the underwriterJ (: The 88 held that there was a requirement to disclose these problems. 0here a contract dispute is significant, issuers have a requirement to report even where the contract has not yet been formally repudiated. *2D Dagne- International Inc. "<55E# 6 82 Due to inconsistencies w: the finances "money was bleeding into a separate entity without e-planation#, auditor insisted that *2D e-plain. *2D refused to do so, so auditor threatened to w:drew services. *2DKs counsel said no need to disclose at this point. 6n (pril 4C, DZT makes clear that it is w:drawing its auditing services. (t roughly same time, *2D issues a positive, rosy press release, listing none of its difficulties w: DZT. Two Issues: Is an audit suspension disclosable in and of itselfJ 6r, is the potential that such a suspension will result in issuer being unable to meet filing requirements the key factor to materialityJ The 6 8 held that what triggers the materiality "and thus requirement to disclose# is that *2D would be unable to meet its financial obligations. /ote that the 6 8 declares materiality to be a mi-ed test of fact and law. In effect, some factors are material in and of themselves while others are conte-tually material. 8ontrast this case w: Berr v. Danier, which raises the bar for materiality. 8onsider the following however. Berr v. Danier is an 88 decision+ *2D is an 6 8 decision. (lso, Berr v. Danier is a shareholder suit whereas *2D is an 6 8 application. It might be argued that the law is more willing to consider materiality where regulation is the concern and less willing to allow it to lead to shareholder damages. The 8ontinuing 7elevance of the $robability Dagnitude Test for Determining Dateriality *2D had a high probability of being unable to meet its filing obligations if DZT w:drew, which it did. 3urther, the magnitude of such a failure is huge'effectively destroys public trust in issuer. ( bright.line testJ /$ N4.<54Ks !ist of Daterial 8hanges ection @.E defines a list of events or information which =may be material.> /ote that =this list is not e-haustive and is not a substitute for companies e-ercising their own 9udgments in making materiality determinations.> !hanges in cor#orate structure: share ownership+ ma9or reorgani?ations+ mergers+ takeover bids !hanges in ca#ital structure: public:private sale of securities+ planned repurchases of securities+ planned splits of common shares+ share consolidations+ change in dividend

payment policies+ possible pro-y fights+ material modification to shareholder rights !hanges in "inancial results: significant increase:decrease in near.term earnings prospects+ une-pected changes in financial results+ shifts in financial circumstances "cash flow, ma9or asset write offs, etc.#+ change in value or composition of assets+ material change in accounting policy !hanges in 'usiness and o#erations: developments that affect resources, tech, products or market+ significant change in capital investment or corporate ob9ectives+ ma9or labour : supplier disputes+ significant new contracts, products or losses thereof+ significant discoveries by resource companies+ changes to the 2ofD or e-ecutive officers+ developments in legal proceedings+ waivers of corporate ethic or conduct rules for key employees+ any notice that prior audits are unreliable+ delisting of securities &c;uisitions and dis#ositions: significant acquisitions or dispositions of assets, property or 9oint venture interests+ takeovers !hanges in credit arrangement: borrowing or lending significant amounts of money+ mortgaging assets+ defaults on debt obligations+ changes in rating agency decisions+ significant new credit arrangements . LN: Timeline for $ublic Disclosure 3ile a press release w: regulators and issue to the public and file a material change report w: the regulators as soon as practicable and in any event within 45 days. 8onsider how the caselaw develops this. $e?im makes clear that timing is relevant in relation to other actions "i.e. issuing securities and disclosing information after that was known prior#. *2D makes clear that something that may not have been disclosable can later become disclosable if a faction pattern emerges making it clear that said info is relevant. (gain, apply the prob:mag test. If at some point the prob increases then the previous uncertain info may become disclosable. /I N4.45< [ 8ontinuous Disclosure 6bligations 8onfidential Disclosure 8onfidential disclosure is a uniquely 8anadian invention. In essence, it allows issuers to disclose a material change but not to the public if it believes that general disclosure will unfairly pre9udice it in the market. This allows issuers to meet their disclosure obligations but not protect their companies. . LN"E# makes this possible: =0here "a# in the opinion of the reporting issuer, and if that opinion is arrived at in a reasonable manner, the disclosure required by subsections "4# and "<# would be unduly detrimental to the interests of the reporting issuer+ or "b# the material change consists of a decision to implement a change made by senior management of the issuer who believe that confirmation of the decision by the board of directors is probable and senior management of the issuer has no reason to believe that

persons with knowledge of the material change have made use of that knowledge in purchasing or selling securities of the issuer, the reporting issuer may, in lieu of compliance with subsection "4#, forthwith file with the commission the report required under subsection "<# marked so as to indicate that it is confidential, together with written reasons for non.disclosure. /ote however that this relief is temporary. . LN"@# gives the issuer 45 days to advice the 6 8 in writing where it believes that this confidentiality ought to be e-tended and if insiders are trading "LN"N## says disclose forthwith. /ote that this is not a routine matter for issuers and should be considered an e-ceptional form of relief. (iT Technologies 3eb 4L, <55<, (iT receives a call from ED re: t:o, unsolicited. Darch <A.<F, first due diligence visit by ED. (pril 44.4<, meeting re: valuation of company. (pril <N, (iT board meeting and e.mail to 8I28. (pril <A, !6I signed. Day L.C second due diligence visit. Day C, <55< call from 7 re: unusual trading activity. Day 4@, ED delivers a draft merger agreement. and approves takeover sub9ect to due diligence. Day <<, (iT approves final merger agreement. Day <E, final agreement e-ecuted and press release issued. 1: (t what point were (iTKs dealings w: ED disclosableJ $anel holds that the deciding to disclose a !6I "letter of intent# is a fact specific matter and is to be decided in each case "in other words, do not simply see as a case that is to be followed w: all !6Is#. ;ere, this need not be disclosed as "a# the !6I was non.binding, "b# ED assumed no legal liability, "c# price was not firm, and "d# most of the conditions were beyond (iTKs control. /ote that initial meetings showed much distance between the two companies on price "QE5m offer v. QLNm asking# and strategy "only low level e-ecutive from ED ever contacted (iT+ long delays between contact#. /ote as well that initially this was to be a takeover and then became an amalgamation. 1: (t what point has (iT =implemented> a change in corporate planJ ;eld that the fact situation here does not reflect (iT being a realistic position to implement the merger. 7umours /$ N4.<54 s. <.E and A.4E are relevant here. . <.E holds: =If the confidential material change, or rumours about it, have leaked or appear to be impacting the share price, a company should take immediate steps to ensure that a full public announcement is

made.> A.4E recommends that issuers =(dopt a Tno commentK policy with respect to market rumours and make sure that the policy is applied consistently.> It further warns that inconsistent application could appear to be tipping and notes that e-changes may require issuers to make a clarifying statement where trades are seemingly influenced by rumours. elective Disclosure (gain, /$ N4.<54 is relevant, particularly $arts III "ss E.E"N#,"L#+ E.L#, , "ss. N.<, N.E#, ,I. The %8 "and likely the 6 8 by e-tension# has become concerned w: issuers communicating directly to investors but not to the market in general, which can potentially trigger tipping. E.E"N# says that the general course of business e-ception for disclosing selectively does not apply to analysts, institutional investors or other market professionals. E.E"L# says that where an investor is =brought over the wall> to act as an advisor, said investor is in a special relationship and is sub9ect to prohibitions against tipping and insider trading. uch an individual is estopped from informing others of disclosed material. E.L holds that where a pattern of =unintentional selective disclosures> e-ists, it will be harder to show that a particular selective disclosure was truly unintentional. N.< says that a company takes on a high degree of risk of violating securities legislation where in selectively confirms that analysts are on target, too low or too high in relation to estimates. N.E says that even where a confidentiality agreement e-ists, an issuer has violated securities law when informing such an analyst of non.publicly disclosed information. A advises companies that it is best practice to avoid selective disclosure. To ensure no violations, issuers should establish a corporate disclosure policy, which is reviewed by the board and the audit committee. (uthori?ed spokespersons should be designated and policies drafted re: analyst conference calls, quiet periods, insider trading monitoring and electronic communications. $ublic %nforcement of 8ontinuous Disclosure 6bligations . 4<< and 4<<"E# quasi.criminal proceedings Due diligence defence . 4<L enforcement order 6 8 8D compliance reviews 8 ( taff /otice NL.E54 : 6 8 $olicy NL.A5E

8ontinuous Disclosure: 8ivil !iability $rivate %nforcement Investors have the option of suing issuers who do not follow comply w: disclosure obligations. 6ther than negligent or fraudulent misrepresentation, there were no remedies available to investors. ;owever, this requires showing reliance on a document or statement and must demonstrate duty of care. <E.4 was created in recognition of the hurdles presented by the common law remedy. $art of this was motivated by "a# the reality that C5 percent of trades are in the secondary market and "b# a need to be in line w: G securities law. 8ause of (ction 7equires !eave of 8ourt . 4EF.F requires that no action under s.4EF"E# can be commenced without leave of the court, which must be satisfied that the action is "a# brought in good faith and "b# there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff. !imitation $eriod 4EF.4@ holds that no cause of action can be filed under s. 4EF"E# later than the earlier of three years following the release of the doc, the public statement, the date of which disclosure was required and si- months after the issuance of a news release disclosing that leave has been granted to commence an action. $rospectus Disrepresentation s. 4E5"4# !iability for misrepresentation in prospectus'where a misrepresentation is made in the prospectus and purchaser purchases during the period of distribution or during the distribution to the public, without regard for reliance, said purchaser has a right of action against "a# the issuer or selling security beholder on whose behalf the distribution is made, "b# each underwriter who is required to sign the certificate, "c# every director of the issuer at time of misrepresentation, "de# every person whose consent to disclosure form has been filed "but only w: respect to info to which they are responsible, "e# every person or company who signed the prospectus. In the alternative, s. 4E5 empowers purchasers who purchased directly from "a# or "b# to a right of rescission "but this election eliminates right to damages# Disrepresentation in 6ffering Demorandum 4E5.4"4# 0here there is a misrepresentation in an offering memorandum, the purchaser "during period of distribution# has rights to "4# action for damages against issuer and a selling security holder on whose behalf the distribution was made and "<# rescission against the parties mentioned in "4E5."4#"4##.

!iability for Disrepresentation in 8ircular VE4"4# 0here a takeover bid circular sent to the security holders or a notice of change to said circular contains a misrepresentation, a security holder may elect to e-ercise a right of action for rescission or damages against the offeror or a right of action for damages against "(# every director then active, "b# e-perts who signed off, "c# every person who signed a certificate "other than those in "a##. !iability where material fact or change undisclosed 4E@"4# Those in a special relationship w: an 7I, w: knowledge of an undisclosed material change or fact who buy or sell securities is liable to compensate the seller or purchaser of the security for damages unless "a# can prove that s:he reasonably thought info had been generally disclosed or "b# the material fact or change ought reasonably to have been known to the seller or purchaser. N,TE: 4E@"<# contemplates a cause of action for tipping against the responsible party 8ivil !iability for econdary Darket Disclosure =Influential $erson> as per 4EF.4 means =in respect of a responsible issuer, "a# a control person, "b# a promoter, "c# an insider who is not a director : officer, or "d# an investment fund manager, if the responsible issuer is an investment fund.> =7esponsible Issuer> Hhereafter 7II is "a# a reporting issuer or "b# any other issuer w: a =real and substantial connection to 6ntario>, any securities of which are publicly traded. Documents 7eleased by 7I 4EF.E Documents released by responsible issuer'where a 7I or a party w: =actual, implied or apparent authority> releases a doc w: a misrep, a person who acquires or disposes of said 7IKs security =during the time the when the doc was released> and before the mistake was corrected has a right of action against "a# issuer, "b# each director of the resp issuer at time of period, "c# each officer who authori?ed, permitted or acquiesced in the release of the doc, "d# each influential person and each director and officer of an influential person who knowingly influenced "i# the responsible issuer or its rep into releasing the docs, "e# each e-pert where the misrep "i# is contained in his report:statement:opinion, "ii# the doc includes, summari?es or quotes from the report statement or opinion of the e-pert, "iii# the e-pert consented in writing to the use of the report, etc. in the document $ublic 6ral tatements by 7I 4EF.E"<# statements made by a person w: =actual, implied apparent> authority that relate to the =business or affairs> of the 7I and that contain a misrep, parties who

acquire:dispose of securities during the time between statement and its correction has without reliance a cause of action against "a# the 7I, "b# the person who made the public statement, "c# each director:officer who authori?ed the public oral statement, "d# each influential person who knowingly influenced "i# the maker of said statement to make said statement, "ii# the director:officer to authori?e, permit or acquiese in the making of the public oral statement, and "e# each e-pert where "i# the misrep is also contained in the e-pertKs report:statement:opinion, "ii# the person making the statement acknowledges the e-pertKs r:s:o and "iii# if the statement was made by other than the e-pert, said e-pert consented in writing to the use of his r:s:o. Influential $ersons "I$# 4<F.E"E# Disrepresentations in documents released by or statements made by an influential person or a person of a company w: actual, implied or apparent authority to act:speak on behalf of the influential person can be the a cause of action by a party who acquires:disposes of securities in the period between the misrep and its correction without reliance against "a# the 7I, if 7I authori?ed, permitted or acquiesced in the release of the doc:statement, "b# the speaker, "c# each director:officer of the 7I who authori?ed, permitted or acquiesced, "d# the influential person, "e# each director:officer of the I$, and "f# each e-pert "i# misrep in r:s:o, "ii# the doc:statement refers to the e-pertKs r:s:o and "iii# the e-pert consented in writing to the use of the r:s:o in the doc:oral statement. 3ailure to Dake Timely Disclosure 4<F.E"@# 0here a 7I fails to make a timely disclosure, a person who acquires:disposes of a security from the time the material change was required to be disclosed until the subsequent disclosure, a purchaser, without reference to reliance, has a right of action for damages against "a# the 7I, "b# each director or officer who authori?ed, permitted or acquiesced in the failure to make timely disclosure, and "c# each influential person "and its directors:officers# who knowingly influenced the 7I in the failure to make timely disclosure 2urden of $roof "4# 0here a misrepresentation is made in a non.core document or a public oral statement, the responsible party is not liable unless the plaintiff can prove that the defendant "a# knew about the misrepresentation, "b# deliberately avoided acquiring knowledge that the doc or statement contained the misrepresentation, or "c# was through action or failure to act guilty of gross misconduct in connection in regard to the doc:statement. 4EF.@"<# /ote that in regard to an e/#ert, the #lainti"" does not have to #rove the above.

4EF.@"E# Timely disclose'/ot liable unless the plaintiff can prove the defendant "a#

knew that the change occurred and that said change was a material change, "b# deliberately avoided knowing or "c# was guilty of gross misconduct. 4EF.@"@# /ote that an 7I, an officer of an 7I, an investment fund manager, or an officer of an investment fund manager, the defendant must disprove these allegations "no burden of proof on plaintiff#. Dain Defences (re $laintiff Bnowledge and 7easonable Investigation The guilty defendant must either prove that: "a# the plaintiff knew about the misrepresentation or about the material change "4EF.@"N##, "b# It conducted a reasonable investigation "w: requires reasonable investigation and no reasonable grounds for believing otherwise# "4EF.@"A##. ome 6ther Defences 8onfidential Disclosure [ 0here a timely disclosure is the cause of action and the defendant can prove that "a# a material change was disclosed by the 7I on a confidential basis+ "b# the 7I had a reasonable basis for disclosing confidentially+ "c# the info was made public promptly w: the basis for confidentially disappeared, "d# there was no public statement:doc that due to the confidential info was a misrep+ and "e# where the info was disclosed incorrectly, the 7I promptly disclosed the material change, there will be no liability "4EF.@"F##. 3orward.!ooking Information "3!I# [ ( defendant has a defence for 363Is containing a misrepresentation if he can prove "4# the doc contained "i# reasonable cautionary language indentifying the 3!I as 3!I and indentifying material factors that could cause actual results to differ materially and "ii# a statement of the material factors : assumptions that were applied in reaching the 3!I conclusions and "<# the person had a reasonable basis for coming to these 3!I conclusions "4EF.@"C##. In regards to oral 3!I, the speaker must "a# make a cautionary statement that the oral statement includes 3!I, "b# state that the "i# the actual results might differ and "ii# certain material factors:assumptions were used in coming to the 3!I and "c# state that additional info about "i# the material factors that could cause a variance and "ii# the material factors that were relied upon are contained in a readily.available document and identify said doc "4EF.@"C.4##. Note that section C does not a##l to 3!I that is included in a financial statement required by the (ct released in connection w: an initial public offering "4EF.@"45##. The %-pert Defence "for 7Is# [ /o liability under 4EF"E# where a person:company can prove the doc:oral statement that includes, summari?es or quotes from an e-pert r:s:o in respect of which the person:company obtained the written consent of the e-pert to use and that this consent was not w:drawn prior to the release of the doc or statement if the person:company can prove "a# the person:company did not know and had no reasonable

grounds to believe that there had been a misrep and "b# the doc:statement did not distort the e-pertKs r:s:o "4EF.@"44## The %-pert Defence "for %-perts# [ (n e-pert must prove that s:he had withdrawn the written consent in writing before the doc was released or statement made "4EF.@"4<##. $rivate Documents Defence [ ( person:company is not liable if the document other than documents which are required to be released if s:he:it can prove that "a# did not know doc was going to be released and "b# had no reasonable grounds to believe it would be released "4EF.@"4E##. Derivative Information Defence [ ( person:company is not liable if s:he:it can prove that "a# the misrep was also contained in doc filed by someone other than the 7I w: the 6 8 or similar securities commission in 8anada and was corrected before the doc:statement in question was made+ "b# that the doc:statement contained a reference to that doc that was the source of the misrep and "c# when the doc:statement was made said party did not know and had no reasonable grounds to believe there was a misrep. The 8orrective (ction Defence [ ( person:company other than the ! is not liable if the misrep or failure to make timely disclosure was made without the knowledge or consent of the person or company and if after becoming aware of the misrep before it was corrected "a# the person or company promptly notified the 2oD of the 7I and "b# if no correction was made within T06 business days after notification, the person or company promptly and in writing notified the 6 8 of the misrep or failure to make timely disclosure "4EF.@"4N##.

Damages 4EF.N.L deals w: damages and their calculation. 3or $arties 0ho (cquired a ecurity: 4EF.N"4# (fter the release of a doc or the making of an oral statement containing a misrepresentation or the failure to make a timely disclosure will result in damages to be assessed as follows 4. ecurities disposed of up to the 45th day following the public correction of the misrepresentation, damages are to equal the difference between the average price paid for those securities "and commissions# and the price received upon the disposition of those securities "without deducting any commissions paid in respect to dispositions# w: consideration to hedging or other risk limitation transactions <. ecurities disposed of after the 45th day after the correction damages are to equal the lesser of& "i# an amount equal to the difference between the average price paid and the price received upon disposition, w: consideration for risk limitation (/D "ii# an amount equal to the number of securities that the person disposed of, multiplied by the dif between the average price paid and "a# the issueKs trading price on the principle market for the 45 trading days following the correction "if publicly traded# and "b# if no published market, the amount the court considers 9ust. E. In respect of securities not disposed of, damages to equal the number of securities acquired, multiplied by the dif between the average price per security paid "incl commission# and "i# if publicly traded on a published market, the trading price of the security for the 45 days following the public correction 67 "ii# in no published mrkt, price the court deems 9ust. 3or $arties 0ho Disposed of a ecurity: 4EF.N"<# 4. (ny security sold on or before the 45th day after the public correction of the misrep, damages to equal the dif between the average received upon disposition of those securities "deducting commission paid# and the price paid for those securities "without including commissions# w: consideration for risk limitation. <. 0: respect to securities acquired 45 days after the public correction, assessed damages to equal the lesser of& "i# amount equal to the dif between average price received upon disposition "deducting commission# and the price paid "not deducting# calculated w: consideration for risk reduction activities (/D "ii# (n amount equal to the number of securities that the person disposed of, multiplied by the dif between the average price per security received "deducting# upon the disposition of these securities "not deducting# (/D "a# If the issuer is trading on a published market, the trading price on the principle market for the 45 trading days following the public correction 67 "b# If no published market, the amount the court considers 9ust E. In respect of securities not acquired JJJ

N,TE that damages not to include any sum that the defendant can prove are attributable to a change in the mrkt price of securities that is unrelated to the misrepresentation or the failure to ma"e a timely disclosure. G%T 6D%6/% T6 %)$!(I/ T;% !IDIT 63 D(D(G% I/ %8G7ITI% 4EF.L"4# /ote that where .

Test: 14: Does this transaction involve the concept of a securityJ 1<: If so, what is a securityJ 1E: If so, then the act is somewhat triggered. Is there a trade in this securityJ 1@: Does this trading in this security amount to a distributionJ