bci 51-109 - issuers quoted in the u.s. over-the-counter markets you are about to be thrown into bc...

BCI 51-109 -Issuers Quoted in the U.S. Over-the-Counter Markets

You are About to be Thrown into BC Waters – Are You Ready?

Venture Law CorporationNovember 27, 2007

DISCLAIMER

Informational Purposes Only: The materials and information contained in this presentation are intended to provide information (not advice) about BCI 51-109 and related matters. You should not act on this information presented without first consulting with an attorney.

No Attorney-Client Relationship Created: This information on this presentation is not intended to create, and receipt of it does not constitute, an attorney-client relationship having been created by us with you or anyone else. Do not send us confidential information until you speak with us and receive our authorization to send that information to us. The act of talking to us informally or sending an Email to us will not create an attorney-client relationship. If you are not currently a client of Venture Law Corporation, your Email will not be considered privileged and may be disclosed to other persons . We promise, however, to keep you name confidential unless you tell us otherwise when talking to any regulators or third parties about BCI 51-109.

No Warranties: The information provided in this presentation, is provided "as is." We make no warranties, representations, or claims of any kind concerning the information presented is complete. We are not responsible for any errors or omissions in the content of this presentation or for damages arising from the use of the information provided under any circumstances.

AGENDA• Introduction

– Our background and experience with OTC Issuers;– The proposals put forward by the BC Securities Commission;– The comment period and why its important for you to comment; and– Expected implementation date.

• Why is the BC Securities Commission proposing these new regulations?– Stated Objectives; and– Unstated Objectives.

• Who will the regulations affect if they are implemented?– Issuers; insiders; stockholders; brokers and professionals who provide services to OTC issuers.

• How will these regulations affect OTCBB and PinkSheet Quoted Companies?– New reporting requirements;– Removal of private placement exemptions;– Removal of resale exemptions;– Removal of take-over bid exemptions;– Additional or new liability exposure; and– Increased expense.

• What can you do to stop some of the more harmful aspects of these proposals from being adopted?

• Questions & Comments from the Floor

INTRODUCTION

Introduction

• Our background and experience with OTC Issuers– First OTCBB company contact was in 1992.– Over 100 OTCBB reverse mergers closed.– Over 20: F-1; SB-1; SB-2; S-3 1933 Act registration statements filed.– Assisted over 50 companies becoming registered under the 1934 Act.

Introduction

• The proposals put forward by the BC Securities Commission– BCI 51-109 Issuers Quoted In the U.S. Over-the-Counter Markets;– New conditions of registration for investment dealers that trade in the US

over-the-counter markets;– Amendment to section 90 of the Securities Act to require directors, officers,

promoters and control persons of an OTC issuer to file personal information forms and consent to a criminal record search; and

– New fees.

Introduction

• The comment period and why its important for you to comment– The BC Securities Commission is accepting comments about these

proposals.– Comments must be in writing and must be received by December 31, 2007 to

be considered. – Email submissions are preferred and comments submitted by mail should

include a disk containing your submission.– All comment letters and emails received will be published.– If no comments are received or limited comments are received the new

regulations will be implemented at the end of the first quarter of 2008.– In our opinion, the BC Securities Commission believes there are no good

OTCBB or PinkSheet companies and that these companies add little to the BC economy. They need to be made aware that real companies and real lives will be negatively affected by these proposals.

WHY IS THE BC SECURITIES COMMISSION PROPOSING THESE

NEW REGULATIONS?

Why is the BC Securities Commission proposing these new regulations?

• Stated Objectives.

The BC Securities Commission in its introduction to the new regulations stated they believed the new regulations would provide the BC Securities Commission with “better legal tools” to:– Improve disclosure of OTC issuers based in B.C;– Discourage the manufacture and sale of shell companies in BC that may be used for

abusive purpose; and– Increase BC investment dealers’ accountability for their trading activities in securities

quoted in the U.S. OTC Bulletin Board and Pink Sheets.

Why is the BC Securities Commission proposing these new regulations?

• Unstated Objectives.– The BC Securities Commission, in not so many words, is also concerned

about optics. They want to seen as doing something about the OTCBB “problem” in BC as reported by the media.

• The BC Securities Commission believes “a disproportionate number of players in the U.S. OTC markets who engage in abusive activities have visible connections to B.C.”

• They also believe “Their activities damage the reputation of the province’s capital markets, harming the interests of legitimate issuers, investment dealers, and other market participants.”

– They are hoping the added financial and disclosure burdens will reduce or eliminate OTCBB and PinkSheet companies in BC.

– The BC Securities has offered no statistical support for their negative assertions about OTCBB and PinkSheet companies and ignore entirely the economic and other benefits these companies add to BC economy.

WHO WILL THE REGULATIONS AFFECT IF THEY ARE

IMPLEMENTED?

Who will the regulations affect if they are implemented?

• Issuers who are defined as OTC issuers subject to BCI 51-109; • Directors, executive officers, promoters, control persons; • Stockholders; • Brokers; and • Other professionals who provide services to OTC issuers:

• Investor relations person and firms;• Management service companies;• Accountants;• Lawyers; and• Transfer agents.


OTC issuers who have a significant connection to BC• Who is an OTC issuer/public issuer?

– Issuers whose securities have been assigned a ticker symbol on the OTCBB or PinkSheet;

– Excluding those issuers whose securities are also traded on the TSX, TSX Venture Exchange, NYSE, AMEX or NASDAQ.

• What is considered a significant connection to BC?– The issuer’s business is directed or administered from BC;– Investor relations activities are conducted from BC;– A BC resident or group controls the issuer;– A promoter was a B.C. resident at the time the issuer became a public issuer; – The majority of shares were sold to BC resident before the issuer became a public

issuer (excluding sold to directors, officers, and control persons); or– BC residents make up the majority of stockholders of the issuer just prior to it becoming

a public issuer (again excluding the directors, officers and control person of the issuer).


The impact on OTC issuers will be significant but these proposals will also have a significant impact if adopted on:• Directors, executive officers, promoters, control persons of OTC

issuers subject to BCI 51-109;• Stockholders of OTC issuers;• Brokers who trade securities of OTC issuers; and • Other professionals who provide services to OTC issuers:

– Investor relations person and firms;– Management service companies;– Accountants;– Lawyers; and– Transfer agents.

HOW WILL THESE REGULATIONS AFFECT OTCBB AND PINKSHEET

QUOTED COMPANIES?

How Will These Regulations Affect OTCBB And PinkSheet Quoted Companies?

• New reporting requirements;• Removal of private placement exemptions;• Removal of resale exemptions;• Removal of take-over bid exemptions;• Additional or new liability exposure; and• Increased expense.


• New reporting requirements– OTC issuers will be required to file:

• Annual financial statements; quarterly financial statements; MD&A for each financial period; and officers certification certificates on SEDAR:

– SEC domestic issuer can file financial statements prepared using US GAAP and US GAAS or Canadian GAAP and Canadian GASS;

– SEC foreign issuers and PinkSheet issuers are required to file financial statements prepared using Canadian GAAP and GAAS even if they already prepare financial statements using US GAAP and US GAAS or International Financial Reporting Standards and International Standards of Auditing;

– Audit firm used must be registered with the Canadian Public Accountability Board;– These statements are due on or before the earlier Canadian filing date or date filed in a

foreign jurisdiction;• Annual information forms:

– SEC domestic issuers can file their Form 10-K or Form 10-KSB as their AIF assuming these documents contain any additional Canadian disclosure required

– SEC foreign issuers can file their Form 20-F as long as the financial information is prepared using Canadian GAAP and Canadian GAAS;

– AIFs of OTC issuers who are not SEC issuers will need to prepared in the required form.– AIFs are due 90 days from an OTC issuer’s fiscal year end.


• New reporting requirements – OTC issuers will be required to file (continued):

• Most recent registration statement;• Investor relations disclosure;• Corporate governance disclosure• Material change reports

– Required to use forms adopted by BC Securities Commission • Business acquisition reports; • Proxy solicitation materials and information circulars; • All shareholder documents (charter documents etc);• All material contracts; and • All documents, including exhibits, filed with the SEC on the date filed.

– Directors, executive officers, promoters, and control persons of an OTC issuer are required to file insider reports on SEDI.

– OTC issuers who are also SEC issuers are denied the exemption from duplicate filings provided by NI 71-101 The Multi-Jurisdictional Disclosure System which other SEC issuers can rely on to avoid duplicate filings in US and Canada.


• New reporting requirements (continued)– Justification for these new reporting requirements

• Improve continuous disclosure of OTC issuers; and• Make OTC issuers meet the same periodic disclosure requirements as other Canadian

reporting issuers;– Effect

• There is no shortage of information or lack of regulatory oversight of SEC domestic issuers or most SEC foreign issuers.

– Any one with a computer can “Google” the name of an SEC issuer and obtain all their annual and quarterly financial statement filings, their material change reports file on Form 8-K and all insider reports associated with that company. Posting almost identical information on SEDAR is not going to add to the information available on these companies.

– The SEC has a mandate to conduct a comprehensive review of all annual reports filed by SEC issuers once every three years. Problem issuers are subject to more frequent reviews. Continuous disclosure reviews by the BC Securities Commission will add nothing to this effort.

– Requiring SEC foreign issuers to prepare their financial statements to Canadian GAAP and Canadian GAAS is imposing an unnecessary and heavy financial burden on these OTC issuers. The SEC reviews the filing documents of these issuers with equal frequency as all other SEC issuers.


• New reporting requirements – Effect (continued)

• The new rules are particularly unfair to PinkSheet companies. – These companies intentionally structured their affairs to avoid being a reporting issuer in

Canada and the US.– PinkSheet companies cannot remove themselves from the PinkSheets and therefore will

be subject to the new BC regulations without choice. – These companies may have never even participated in the original 15c211 application

submitted by a market maker to obtain the quote. – There is no active step a company can take to ensure that its shares are no longer

quoted on the PinkSheets. In fact, a company that de-registers as a reporting issuer with the SEC and loses its OTCBB quote will find it stock quoted on the PinkSheets the following morning. Again, it too cannot cause its stock not to be quoted. If a company follows the rules of the BC Business Corporation's Act and sends out its financial statements every year to its stockholders it may never lose its PinkSheet quote or get out of being subject to the new BC legislation. Any one of its stockholders (which may include a market maker) can forward those statements to the market maker and the informational requirement to quote and make a market in the stock has been met.

– The initial costs faced by a PinkSheet company who has never made regulatory filings before is likely to be equivalent to filing an initial public offering prospectus of a TSX Venture Issuer which the BC Securities Commission estimates costs $250,000 on average.


• Removal of private placement exemptions– OTC issuers will not be able to rely on the following exemptions provided in 45-106 Prospectus and

Registration Exemptions and the BC Securities Act:• Shares for debt exemption;• The non-reporting issuer exemption to issue shares to employees, directors, executive officers,

or consultants. The OTC issuer will have to rely on the exemption used by non-listed reporting issuers to issue shares to these parties which has volume limitations; and

• The private agreement and non-reporting issuer exemptions to the take-over bid requirements.– Reasons for removal of these exemptions

• The BC Securities Commission is concerned that these exemptions were being abused by OTC issuers to flip the company in an RTO or to create shares for a pump and dump.

– Effect• Shares for debt transactions have just become more complicated with a bit more risk exposure

to the parties but I doubt if they will be effectively blocked.• As long as an OTC issuer gets blanket stockholder approval each year for issuance of shares

over the volume limitations set out in the new exemption they must use to issue shares to employees, directors, executive officers, or consultants there should be no or little change. This rule has just made matters a bit more complicated for legitimate companies with no real affect on those individuals they wish to address.


• Removal of resale exemptions– Securities acquired before an OTC issuer became a public issuer cannot be sold or transferred

unless a registration statement is filed qualifying those securities with the BC Securities Commission, or they are sold pursuant to a take-over bid or issuer bid. An OTC issuer, however, may trade in securities of its own issue.

– Employees, executive officers, directors and consultants are not allowed to rely on the exemption that allows trades in and amongst themselves.

– All resale exemptions have been removed (or these sections are poorly drafted) other than the two resale exemptions provided, but the instrument seems to contradict itself by pointing out specific exemptions that no longer apply – why do that if they are all removed?

• Form of resale allowed– BCI contains two resale exemption provisions holders of stock of an OTC issuer may rely on to sell

their securities.• The first provision refers to shares acquired prior to the OTC issuer becoming a private issuer.

A holder may sell if the securities acquired if the trade is made through a registered dealer and the dealer executes the trade on an exchange or quote system outside of Canada;


• Form of resale allowed (continued)– The second provision refers to shares acquired after the OTC issuer became an public issuer. They

may be sold: • If the seller has held them at least four months prior to sale (control persons 6 months); • The sale is conducted through a registered investment dealer;• No unusual efforts are taken to ready the market for the shares;• No extra-ordinary commission or consideration is paid;• The trade is executed in a market outside of BC;• The seller sells no more than 5% of the issued and outstanding shares of the issuer in a 12

month period; and• If the seller is an insider - the seller reasonably believes the issuer is not in default of its

reporting requirements.– Reasons for limiting resale exemptions

• The only method of resale now appears to be a broker trade with volume limitations.• By seriously restricting how a stockholder can sell his or her securities the BC Securities

Commission has eliminated the ability for a pump & dump – assuming individuals used their own names and only one account to conduct this type of activity.

– Effect• The bad guys are unlikely to be stopped and the legitimate stockholders are limited in how they

may deal with their assets. • OTC issuers will likely find it much more difficult to raise funds given the restrictions on their

securities.


• Removal of take-over bid exemptions– OTC issuers subject to BCI 51-109 are barred from relying on the take-over bid exemptions set out

in sections 98(1)(c) (“private agreement exemption”) and 98(1)(d) (“non-reporting issuer exemption”) of the BC Securities Act. These two exemptions allowed for a quick change of control of a company in situations where either very few people were involved or the number of stockholders of a non-reporting issuer was less than 50. The first of these two exemptions is not available to an OTC issuer for two years. The second is removed forever.

– Reason for removal of this exemption• The removal of the availability of these exemptions was to stop a quick flip of an issuer in an

RTO transaction and supposedly a follow-on pump and dump.– Effect

• OTC issuers will need to restructure their change of control transactions as mergers, amalgamations or reorganizations or another more creative structure to rely on an exemption.

• It is our opinion fraudsters will not be stopped by the loss of this exemption. Instead, it will be more difficult and expensive for legitimate OTC issuers to affect a change control. The majority of small companies are formed with the view that they will one day be bought out by someone larger and more capable of managing and growing the technology or asset of the issuer. The loss of this exemption puts an unnecessary hurdle in the way of that goal.


• Additional or new liability exposure– OTC issuers will need to file certification certificates with their annual and quarterly financial

statement filings with the BC Securities Commission;– OTC issuers who are breach of a BC rule or regulation may be cease traded and its officers,

directors, promoters and control persons may be sanctioned or barred from the securities market in British Columbia;

– The BC Securities Commission imposes late filing fees on issuers who do not timely file their Annual, quarterly or AIF;

– Insiders of OTC issuers will face a financial penalty of $50 for each day their insider report is late in being filed;

– OTC issuers may face investigations by the SEC and BC Securities Commission simultaneously for the same matter with differing results; and

– SEC issuers may have their filing documents reviewed by the SEC and BC Securities Commission and face different or conflicting disclosure requests increasing the exposure to class action lawsuits in the US.

– Effect• Directors and officers will be more reluctant to serve OTC Issuer companies in BC; and• Cost of doing business will increase.


• Increased expense– SEDAR and SEDI filing fees ($701 + tax each year);– Annual filing fee with BC Securities Commission ($600 + tax);– Annual information form filing fee to BC Securities Commission ($1,000 + tax);– Filing agent fees (varies expect a minimum of $1,200 per year);– Cost of preparing AIF ($60,000 to $70,000);– Cost of preparation of Canadian GAAP financials statements (SEC foreign issuers and

PinkSheet companies);– Additional cost of Canadian document audit reviews;– Additional cost of Canadian legal counsel to review SEC issuer documents for

compliance to additional BC disclosure requirements and new forms or prepare BC compliant disclosure documents for issuers who have never prepared these documents previously;

– Increased director and officers liability insurance; and– Internal man hours expended on complying with new rules and loss of business growth

as a result.

WHAT CAN YOU DO TO STOP

SOME OF THE MORE HARMFUL

ASPECTS OF THESE PROPOSALS

FROM BEING ADOPTED?

What can you do to stop some of the more harmful aspects of these

proposals from being adopted?• Do not sit back and do nothing.

– The BC Securities Commission is strongly attached to these proposals and having them implemented.

– We are of the view that these new regulations may be adopted by other provincial securities regulators if adopted in BC.

– Being passive will ensure they are adopted in their present form.• Send in a comment letter to the BC Securities Commission.

– Information about your business, employees and success as an OTC issuer is particularly useful.

– For those of you uncertain as to what to say we will be preparing a form letter you can place on your letterhead to send in to the BC Securities Commission. Numbers are just as important as content.

• Be vocal. – If you are attending the BC Securities Commission information seminar let them know

some of the negative consequences you see from these proposals. Call your provincial alderman and let him or her know what a bad idea these proposed regulations are to BC’s economy.

QUESTIONS & COMMENTS FROM THE FLOOR

THANK-YOU

Thank-you to Marsh Pitzman and Heather Swaile for their efforts in putting together the meeting materials and to each attendee for participating in this presentation.

Venture Law Corporation618 - 688 West Hastings StreetVancouver, BC V6B 1P1Phone: 604-659-9188Fax: 604-659-9178

Email: [email protected]

©2007 Venture Law Corporation. All rights reserved.

bci 51-109 - issuers quoted in the u.s. over-the-counter markets you are about to be thrown into bc...

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