Monthly Archives: February 2012

Reverse Stock Splits – What are they and how to effect them

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What are Stock Splits / Reverse Splits

This post is the second part on my Stock Splits series. The first part is a comparative table of the law on Stock Splits across some selected US and Canadian jurisdictions and can be read here.

Simply stated a stock split (or forward split) is a corporate action, usually effected by amendment to the articles, to increase by a multiple the number of outstanding shares of a class without altering the equity capital of the corporation. Thus, in a 2 for 1 split of a class of par value shares, the corporation will replace each outstanding shares of that class with 2 new shares of half the original par value. The amount of equity capital stays the same, only the number and the value of each share will change. Likewise, in corporations with no par value shares, the market value of the stock should decrease in a manner inversely proportional to the increase in the number of shares.

A reverse stock split (or share consolidation) is the mirror transaction of a forward split. The number of outstanding shares of a class is reduced by a fraction without altering the equity capital of the corporation. For instance, a 5 to 1 reverse stock split of shares of a given class will result in the corporation replacing each block of 5 outstanding shares of that class by a single share of 5 times the par value. Thus the stated par value (or market value in the case of a corporation with no par value shares) will be increased by the converse of the percentage reduction in the number of outstanding shares.

A bit of Comparative Law: how Stock Splits / Reverse Splits are effected

United Kingdom, Delaware

In jurisdictions with mandatory par value stock (e.g. the U.K.) and jurisdictions that encourage par value stock (Delaware), the corporate action effecting the forward / reverse split will have to set both the multiple by which the number of outstanding shares is increased or decreased and the new par value. This implies that the corporate action will always be effected by amendment to the articles (or, in the case of the UK, by filing a new statement of capital[1]) if only to set the new par value and will also give rise to a class vote of the shares whose par value is affected[2].

Canada, Ontario

Jurisdictions with mandatory no-par value stock (e.g. the CBCA and its progeny; California) and jurisdictions that encourage no-par value stock (MBCA), tend to deal with forward / reverse splits in one of two ways.

The Canada Business Corporations Act (CBCA) and its progeny (e.g. Ontario)

Jurisdictions with mandatory no-par value stock (e.g. the CBCA and its progeny; California) and jurisdictions that encourage no-par value stock (MBCA), tend to deal with forward / reverse splits in one of two ways.

The Canada Business Corporations Act (CBCA) and its progeny (e.g. Ontario) handle forward and reverse splits homogeneously: both presuppose an amendment to the articles approved by a special resolution of the shareholders[3]. Having rejected the notion of par value stock, in theory it should have been possible to subdivide / consolidate shares without going through the amendment process. However, the CBCA considers that a stock split is a “fundamental adjustment in the outstanding share capital of a corporation and may therefore be construed as a matter properly allocated to the shareholders”[4]. The amendment will not give rise to special voting rights by the class of shares that is forward/reverse split unless the rights and privileges attached to the shares are somehow affected, viz. in the event of a reclassification.

Model Business Corporations Act

The Model Business Corporations Act (MBCA), California and Alberta handle forward and reverse splits differentially. The latter are always effected through an amendment to the articles. Forward splits are adopted by the board when the corporation has only one class of shares outstanding[5]; however, they require shareholder approval if more than 1 class of shares is outstanding. The reasons for this is that, as we shall see, reverse splits have the greatest potential of mischief; forward splits in single-class shares corporations are innocuous if performed judiciously; whereas forward splits in multiple-class shares corporations can alter the relative position and privileges of a class.

Because the accounting treatment of share dividends and forward splits in regard to no-par value shares is the same, the MBCA assimilates the two. Forward splits require shareholder approval only in the event that the corporation has more than 1 class of shares: inter-class share dividends will require the special approval of the class of shares to be issued[6] whereas intra-class dividends will require the special assent of the class that is being forward split[7]. The MBCA requires that the articles state the number of shares that the corporation is entitled to issue and assimilates a reverse split to an amendment of the articles reducing the number of authorized shares[8]. Thus, in corporations with only one class of shares, forward splits will be effected by an amendment to the articles according to the procedure set forth in §10.03; and in corporations with more than one class of shares, will give rise to class voting rights for the class of shares that is being reverse split[9].

California

Similarly to the MBCA, California allows single-class share corporations to implement forward stock splits with sole board approval[10]. Class voting is limited to reverse-splits and, for some reason, explicitly excludes forward splits from the realm of reclassifications that give rise to special voting rights[11]. In any event, forward splits in multiple-class share corporations require shareholder consent.

Alberta

Following the Saskatchewan lead, the amended Alberta Business Corporations Act (ABCA) adds a new section 27.1 on stock splits in the corporate finance section of the statute. For some reason that escapes me it also leaves s. 173 ABCA on fundamental changes unmodified. The confusing effect is compounded by the lack of proper terminological distinction between splits and reverse splits or subdivisions and consolidations. In any event, the net effect seems to be the following:

  • where the corporation has only 1 class of shares outstanding, the Board of directors may decide to effect stock subdivisions and consolidations either by Board resolution under s. 27.1(1) ABCA, in which case it will have to notify the shareholders after the fact pursuant to s. 27.1(3) ABCA, or under the traditional process of amendment set forth by s. s. 173(1)(f) ABCA, in which case shareholder approval will be required;
  • where, however, the corporation has more than 1 class of shares outstanding, subdivisions and consolidations always require a separate vote by each class of shares outstanding (not merely the classes directly concerned).

Saskatchewan

As we have already noted, shares of a class can be split or reverse split into the same or a different class of shares. In no-par value stock jurisdictions, intraclass forward / reverse splits can in theory be effected without directly varying any of the fundamental rights attaching to shares. Inter-class forward / reverse splits however will always change the rights and privileges of the class that is being forward / reverse split and potentially affect other classes as well. That is why during the 1992 revision of its corporation law, the province of Saskatchewan had amended its then s. 167(1)(g)[12] on amendments to articles of incorporation to remove the reference (still present in the CBCA) to intra-class forward / reverse splits. In its stead it created a new s. 25.1 in the corporate finance section which allowed a corporation to effect intra-class forward / reverse splits by adopting of a special shareholder resolution without amending the articles.

British Columbia

Likely influenced by the history of its corporate law, British Columbia‘s new Business Corporations Act (2002) (BCA) is by and large the most rational as far as forward/reverse splits are concerned. Upon incorporation, the founders file a notice of articles and articles of the company. The notice of articles contains a description of the authorized share structure of the company[13], namely: the classes of shares, the maximum number of shares that it is authorized to issue for each class or a statement that there is no maximum number, the par value of any shares with par value or a statement identifying the no-par value shares as such[14]. The articles will set out most other important information about the company, notably for each class of shares the special rights and restrictions attached to the shares of that class[15].

Section 54 of the BCA empowers a BC corporation to subdivide or consolidate its share capital. If the subdivision or consolidation would render the information on the notice of articles incorrect or incomplete, then the company must effect that change by altering the notice of articles. In other words, if the subdivision / consolidation results in a change in the authorized share structure the company must proceed through amendment. Thus, a company will take this route if it wants to subdivide / consolidate par value shares.

Whenever the subdivision / consolidation would render information on both the notice of articles and the articles incorrect or incomplete, the company must seek shareholder authorization to amend both documents. Any inter-class forward / reverse split (reclassification) will result in such an amendment.

Unless the articles provide otherwise, alterations to the notice of articles and the articles must be authorized by special resolution of the shareholders[16]. Inter-class forward / reverse splits will be subject to special voting rights of the holders of shares of the class whose rights are being prejudiced[17].

Finally, whenever the subdivision / consolidation does not alter the authorized share structure and does not require an amendment to the articles, the company must seek shareholder authorization in the manner set forth by the articles or by special resolution if the articles do not specify another type of resolution. This situation covers any intra-class forward / reverse splits of no-par value shares. Note that the Table 1 model articles do not specify the type of resolution and thus most BC single-class companies will likely proceed in this manner.

[1] Companies Act 2006, s. 619
[2] DGCL, §242(b)(2)
[3] CBCA, 173(1)(h); OBCA, 168(1)(h)
[4] Industry Canada. Canada Business Corporations Act Discussion Paper: Proposals for Technical Amendments. Ottawa: Industry Canada, 1995, p. 73-74
[5] MBCA, §10.04(a)(4)
[6] MBCA, §6.23 (b)
[7] MBCA, §10.04(a)(4)
[8] MBCA, comment to §6.23
[9] MBCA, §10.04(a)(4)
[10] California Corporations Code, §902(c)
[11] California Corporations Code, §903(a)(2)
[12] Which corresponds to current CBCA 173(1)(h)
[13] BCA, s. 11(g)
[14] BCA, s. 53
[15] BCA, s. 12(2)(b)
[16] BCA, s. 257, 259(4)
[17] BCA, s. 61

How to de-quote securities from Pink Sheets

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How to de-quote securities from Pink Sheets by adopting stock transfer restrictions

A while back I wrote about proposed Multilateral Instrument 51-105 and wondered that quite a few Canadian issuers with shares quoted on Pink Sheets would have to, somehow, “privatize” by de-quoting their stock. There are a few ways to go about doing this, but only one that does not entail buying out all of the outstanding stock, making extensive securities disclosures on both sides of the border and creating undesirable tax liabilities. I propose that these Canadian issuers de-quote their securities from Pink Sheets by reclassifying their outstanding securities into restricted shares of stock.

Assumptions

This is not a one-size fits-all solution; it responds to a precise set of legal, regulatory and financial constraints. It only applies to Delaware corporations whose one class of outstanding common shares (Common Shares) are held of record by less than 300 persons, and I will assume that these holders of record represent 1000 beneficial security holders. Furthermore, the issuer is neither a reporting issuer in a Canadian jurisdiction nor currently a SEC reporting issuer, having filed a Form 15 to terminate a Section 12(g) registration under the Securities Exchange Act of 1934 (Exchange Act) and suspend its Section 15(d) reporting requirements in relation to the Common Shares. Although a majority of shareholders are resident in Canada, more than 40% of the Common Shares are held by US residents, the majority of whom are not accredited investors.

S. 202(b) – No retroactive application of transfer restrictions

The transaction I propose is molded by two major legal constraints. The first derives from § 202(b) of the Delaware General Corporation Law (DGCL) which makes validly adopted transfer restrictions unenforceable with respect to priorly issued securities unless the holders of the securities are parties to an agreement or voted in favor of the restriction. The second concerns the availability of the exemption from registration provided by Section 3(a)(9) (Exchange Exemption) of the Securities Act of 1933 (Securities Act).

With regard to § 202(b) DGCL, one can circumvent the constraint by merging the corporation whose stock is outstanding (Parent) with and into a wholly-owned subsidiary (Merger Sub, the surviving corporation). In the merger, each outstanding Parent Common Share would be converted into the right to receive a Merger Sub restricted common share. Because the merger occurs after the creation of the restrictions to the Merger Sub common shares and the Parent Common Shares cease to exist as a result of the merger, the restrictions bind all holders of the Merger Sub common shares. See: Shields v. Shields, 498 A.2d 161 (Del. Ch.), appeal denied, 497 A.2d 791 (Del. 1985).

From our point of view there is but one problem with this type of transaction: there is no identity between the issuer of the securities surrendered (Parent) and the issuer of the securities received by the exchanging stockholders (Merger Sub). This entails that the Section 3(a)(9) exemption is inapplicable and, pursuant to Securities Act Rule 145, the merger is a registerable event under Section 5 of the Securities Act (I leave the extended discussion of the notion of “sale” in Section 2(a)(3), Rule 145 and of the unavailability of the change of domicile exception thereunder to another setting).

How to adopt transfer restrictions while preserving the Exchange Exemption

The solution to this apparently insoluble conundrum is, in effect, quite simple. Whereas only consenting shareholders are bound by newly adopted transfer restrictions, it is unnecessary for the purposes of the transaction that all shareholders consent to or vote in favor of the adoption of new transfer restrictions to their already issued stock; it is only necessary that enough shareholders accept the restrictions to render the buyout of the non-consenting shareholders by the corporation economically feasible.

In other words, the issuer can submit a proposal to the stockholders that they adopt the merger of a wholly-owned subsidiary into the parent corporation (the surviving corporation), in the course of which each share of Common Stock then held by a shareholder of record will be cancelled and converted into the right to receive, at the election of the shareholder, either (i) the newly restricted stock or (ii) cash . At the same time, the conclusion of the transaction can be made conditional on a relatively high percentage of shareholders accepting the stock consideration or, conversely, on the company not being required to acquire more than a defined number of shares for cash either pursuant to the terms of the merger or pursuant to dissenters’ rights of appraisal.

The shareholders that vote in favor of the restrictions receive the new restricted stock; those that do not are cashed out. Because the issuer of the securities surrendered is the same as the issuer of the newly issued restricted securities (the parent being the surviving corporation), there are no peculiar obstacles to the application of the Exchange Exemption. Because some shareholders will be cashed out, the Board will be well advised to adopt procedural protections likely to establish the entire fairness of the transaction, such as a special committee or a majority of the minority provision.

How not to trigger Exchange Act reporting obligations

Another concern needs to be addressed. Simply put, restricted shares cannot be held in a brokerage account. This will set off an undesirable chain reaction: upon effecting the conversion, the broker will cease to hold the shares in street name and their overt ownership will revert back to the ultimate beneficiary; the number of record holders of common stock will increase to more than five hundred persons and this, in turn, will automatically trigger Exchange Act reporting requirements under section 12(g). The solution is to reclassify the issuer’s stock in two or more classes in the course of the merger. As indicated above, I have laid out an assumption that the issuer has more than 1,000 beneficial shareholders. We will therefore reorganize the issuer’s equity capital into one or more new classes of preferred stock of less than 2000 overall shareholders and 500 non-accredited shareholders each in order not to trigger Exchange Act registration requirements. Furthermore, because the issuer’s reporting obligation in relation to the Common Shares were suspended under section 15(d) of the Exchange Act, it will be prudent to limit holding of the new class of common shares by less than 300 holders of record.

This type of conversion can be effected in a typical tiered structure. Under the terms of the agreement of merger, at the effective time of the merger:

  • each share of Common Stock then held by a shareholder of record who as of the record date for the meeting of shareholders (the “Record Date”) held x or more shares of Common Stock will be cancelled and converted into the right to receive, at the election of the shareholder, either: (a) one share of the newly authorized restricted New Common Stock, or (b) the per share cash consideration of $P;
  • each share of Common Stock then held by a shareholder of record who as of the Record Date held more than y but less than xshares of Common Stock will be cancelled and converted into the right to receive, at the election of the shareholder, either: (a) one share of the newly authorized restricted Class A Preferred Stock, or (b) the per share cash consideration of $P;
  • each share of Common Stock then held by a shareholder of record who as of the Record Date held y or fewer shares of Common Stock will be cancelled and converted into the right to receive, at the election of the shareholder, either: (a) one share of the newly authorized restricted Class B Preferred Stock, or (b) the per share cash consideration of $P.

As a result, after the broker-dealers cease to hold the shares in street name, the following will reflect the distribution of shareholders of record per class of stock:

Table 1: Distribution of shareholders of record
Stock Class Stockholders of Record
New Common Stock less than 300
Class A Preferred Stock less than: 500 non-accredited or 2000 overall
Class B Preferred Stock less than: 500 non-accredited or 2000 overall

Conclusion

I have proposed above a simple and inexpensive way of de-quoting stock from Pink Sheets that can be used by some Canadian issuers to avoid becoming subject to MI 51-105. The merit of the method proposed lies entirely in the fact that no securities disclosures need to be made on either side of the border. On the U.S. side, the transaction can be shielded by the Exchange Exemption, and in this respect the issuer will be well advised to follow expert guidance from legal counsel on how to organize the logistics of the solicitation. On the Canadian side, the issuer is not a reporting issuer and thus the transaction is not subject to MI 61-101 Protection of Minority Security Holders in Special Transactions. The only formalities applicable to the transaction will derive from Delaware corporate law: the adoption of procedural protections likely to establish the entire fairness of the transaction; and the application of directors’ fiduciary duties to disclose all facts germane to the transaction in relation to the stockholder vote.

MI 51-105 – an Unorthodox Solution for Canadian Issuers Quoted in the U.S. OTC Markets

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MI 51-105 – an Unorthodox Solution for Canadian Issuers Quoted in the U.S. OTC Markets

The Canadian Securities Administrators (the “CSA”), except the Ontario Securities Commission[1], announced that Multilateral Instrument 51-105 respecting Issuers Quoted in the U.S. Over-the-Counter Markets (“MI 51-105” or the “Instrument”) will finally become effective on July 31, 2012[2]. The Instrument subjects to continuous disclosure and other regulatory obligations any issuer whose securities are quoted only on a US OTC market and that has a significant connection to a Canadian jurisdiction. Those companies that are OTC reporting issuers under MI 51-105 will have to quickly get up to speed in order to prepare and file any disclosure documents on SEDAR as required.

1. Application

MI 51-105 applies to any OTC Issuer with a significant jurisdictional nexus with Canada. An OTC Issuer is an issuer that has a class of securities which are quoted on any U.S. over-the-counter markets or are reported on the grey market, but is not an issuer that has a class of securities listed on a North-American stock exchange[3]. An OTC Issuer becomes subject to the requirements of MI 51-105 ( hence, an OTC Reporting Issuer) if it is directed or administered from a jurisdiction in Canada, promotional activities are conducted in or from a jurisdiction in Canada, or it distributed seed shares[4] in Canada prior to obtaining a ticker symbol. The Instrument also applies to an OTC Issuer that is already a reporting issuer in a Canadian jurisdiction at the time the regulation comes into force.

Conversely, an OTC Issuer ceases to be an OTC Reporting Issuer if: (a) its business has not been directed or administered, and promotional activities have not been carried on, from a Canadian jurisdiction for at least one year and more than one year has passed since the ticker-symbol date[5]; (b) a class of its securities has become listed on a North-American stock exchange[6]; or (c) the issuer receives an order from the securities regulatory authority in the jurisdiction that it is no longer a reporting issuer in that jurisdiction[7]. For some reason, the above criteria do not apply in Quebec and the OTC Reporting Issuer must apply to have its reporting issuer status revoked by to the Autorité des marchés financiers in a discretionary process.

2. An Alternative Road for Ending the OTC Reporting Issuer Status

The Instrument fails to contemplate that a class of securities may cease altogether to be quoted on the U.S. over-the-counter market and hence that the issuer may cease to be qualified as an OTC Issuer (being generally assumed that it is at the very least impractical to remove a class of securities from quotation on OTC Markets). Yet as I have explained in a previous post, this result can be attained by reclassifying the outstanding common stock of a non-reporting Delaware issuer into two or more classes of restricted shares of stock.

In order to comply with the rule against the retroactive application of transfer restrictions at § 202(b) of the Delaware General Corporation Law , the issuer can submit a proposal to the stockholders that they adopt the merger of a wholly-owned subsidiary into the parent corporation (the surviving corporation), in the course of which each share of common stock then held by a shareholder of record will be cancelled and converted into the right to receive, at the election of the shareholder, either (i) the newly restricted stock or (ii) cash. At the same time, the conclusion of the transaction is made conditional on a relatively high percentage of shareholders accepting the stock consideration or, conversely, on the company not being required to acquire more than a defined number of shares for cash either pursuant to the terms of the merger or pursuant to dissenters’ rights of appraisal. The shareholders that vote in favor of the restrictions receive the new restricted stock; those that do not are cashed out.

In the course of the merger, the issuer’s stock is also reclassified into one or more classes of preferred stock of less than 2000 overall shareholders and 500 non-accredited shareholders each in order not to trigger Exchange Act registration requirements. Furthermore, in the event that the issuer’s reporting obligation in relation to its class of common stock were suspended under section 15(d) of the Exchange Act, it will be prudent to limit holding of the new class of common stock by less than 300 holders of record. At the end of the operation, the formerly free trading class of common stock of the issuer is restructured into one new class of restricted common stock and one or more distinct classes of restricted preferred stock. Hence, the issuer’s securities are no longer quoted on the OTC markets. Thereafter, the issuer would need to obtain an order from the securities regulatory authority in the relevant Canadian jurisdiction that it is no longer an OTC reporting issuer in that jurisdiction.

Finally it is important to note the following. As we shall see, from July 31, 2012 any OTC Issuer subject to MI 51-105 will be ipso facto a reporting issuer under applicable Canadian securities legislation. Whereas before the entry into force of MI 51-105, a non-reporting issuer would have been able to complete the above reclassification without any securities disclosures on either side of the border; after the Instrument will become effective, the transaction will at a minimum be subject in Canada to MI 61-101 Protection of Minority Security Holders in Special Transactions.

3. Disclosure Requirements

The first objective of MI 51-105 is to introduce continuous disclosure requirements for OTC Reporting Issuers and by the same token reduce these markets’ traditional exposure to illicit promotional campaigns[8]. OTC Issuers that are not SEC filers must meet the same periodic disclosure requirements that apply to other domestic reporting issuers, notably under National Instrument 51-102 Continuous Disclosure Obligations and, for oil and gas issuers, under National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities. OTC Issuers that are SEC filers can comply with the disclosure requirements by using the reports they already file with the SEC. Insiders of OTC Reporting Issuers must file insider reports on SEDI and directors, officers, promoters or control persons must file personal information forms (PIF). In addition to normal disclosure requirements, OTC Issuers are required to disclose information about their promoters, their engagement and compensation in the form of Form 51-105F2 Notice of Promotional Activities. Issuers should note that, in British Columbia, the introduction of new disclosure requirements for OTC Reporting Issuers had been followed by substantial disclosure compliance reviews which in many cases resulted in the issuance of cease trade orders against nonconforming issuers.

4. Resale Restrictions

Another important objective of the Instrument is to introduce restrictions to resales to prevent the occurrence of illicit activities and manipulative practices. These requirements are in addition to existing resale limitations provided by United States securities laws. Seed shares acquired after MI 51-105 has become effective can only be traded within a reorganization or merger transaction, or if: the security is properly legended; the trade is effected by a person through a registered investment dealer from an account registered in the name of that person; and the trade is executed in a OTC market in the United States. The legend must state the following: “Unless permitted under section 11 of Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets, the holder of this security must not trade the security in or from a jurisdiction of Canada unless (a) the security holder trades the security through an investment dealer registered in a jurisdiction of Canada from an account at that dealer in the name of that security holder, and (b) the dealer executes the trade through any of the over-the-counter markets in the United States of America.”

Private placement securities acquired after the OTC Reporting Issuer has received a ticker-symbol can only be resold after a 4-month period has passed either from the date of the original distribution or the date a control person distributed the security. Additional restrictions apply: a person can only trade up to 5% of the OTC reporting issuer’s outstanding securities of the same class in any given 12-month period; the person must trade the security through a Canadian-registered investment dealer, who executes the trade through an OTC market in the US; there is no unusual promotional effort; no extraordinary commissions are paid for the trade; and the security bears a legend stating: “The holder of this security must not trade the security in or from a jurisdiction of Canada unless the conditions in section 13 of Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets are met.” Finally, MI 51-105 also creates additional restrictions to the issuance of securities for services to the issuer’s directors, officers, or consultants.

5. Transition

On the day that MI 51-105 comes into force, on July 31, 2012, an OTC Issuer that satisfies the conditions set forth in s. 3 of MI 51-105 will be ipso facto a reporting issuer under applicable securities legislation and will immediately become subject to disclosure obligations. However, the Instrument provides a transition period for OTC reporting issuers that are not SEC filers. The obligation to file annual financial statements, related MD&A and annual certificates applies only to financial years beginning on or after January 1, 2012, and the filing deadline expires 120 days after the end of the financial period. A company with a December 31 year-end would have until April 30, 2013 to file. The obligation to file interim reports applies to interim periods that begin on or after January 1, 2012 and end after July 31, 2012. For a company with a December 31 year-end, the first interim period after July 31 would fall on September 30, and the filing deadline would expire 60 days later. As announced in response to comments to the proposed regulations, “Canadian securities regulatory authorities will generally not grant exemptive relief to a reporting issuer to extend a continuous disclosure filing deadline to enable an issuer to avoid a default [9].”

6. Planning the future

Clearly, the Instrument’s disclosure requirements will impose a significant new burden on currently non-reporting OTC Markets issuers, and a decision on whether to continue to be a reporting company will undoubtedly be a high priority issue for these issuers and their advisers. I have provided above an unorthodox course of action precisely to this end. In the immediacy, however, the first item on the agenda should be to start preparing the interim reports and laying the groundwork for the first annual audited financial statements. Audited financial statements will be required in any event, whether the Issuer resolves to remain a reporting company or whether it attempts instead to cease to qualify as an OTC Reporting Issuer.

[1] The province of Ontario did not participate in proposed MI 51-105, having decided that it could not evidence abusive activity being conducted in Ontario in relation to OTC issuers. Of course one could only come to this conclusion by ignoring what is arguably one of the single largest fraudulent use of shell corporations in Canadian history. See: Ontario Securities Commission Amended Statement of Allegations, In the Matter of Irwin Book et al., (January 4, 2012) at http://www.osc.gov.on.ca/en/Proceedings_soa_20120104_boocki.htm (last visited on July 25, 2012).
[3] The instrument enumerates seven organized stock exchanges, namely (i) TSX Venture Exchange Inc.; (ii) TSX Inc.; (iii) Canadian National Stock Exchange; (iv) Alpha Exchange Inc.; (v) The New York Stock Exchange LLC; (vi) NYSE Amex LLC; and (vii) The NASDAQ Stock Market LLC. However, as the CSA pointed out following the comment period, an issuer will be able to obtain relief by demonstrating that a specific exchange has similar oversight and governance requirements as the listed exchanges. This should cover the situation of issuers dually quoted on a US OTC market and on AIM or Frankfurt.
[4] A seed share being a security issued before the issuer is first assigned a ticker-symbol.
[5] The change of status does not occur automatically upon the change of circumstances. The issuer is required to notify its regulator by filing Form 51-105F1 Notice – OTC Issuer Ceases to be an OTC Reporting Issuer.
[6] In which case the issuer must file Form 51-105F4 Notice – Issuer Ceases to be an OTC Reporting Issuer. In Quebec, the issuer must apply to the securities regulatory authority to have its status as an OTC reporting issuer revoked in order to cease to be an OTC issuer.
[8] See: BC Notice 2007/24, BCSC Response to Abusive Practices in British Columbia Involving US Over-the-Counter Markets (June 25, 2007). This document is still to this day the most complete public policy statement about MI 51-105 and its predecessor, BC Instrument 51-509.