Understanding Securities Law in Private Company Transactions

Securities Law Considerations in Private Company Transactions Barbara Hendrickson BAX SECURITIES LAW June 1, 2017 1 2025-05-27

Securities law in Canada is a provincial matter all 13 jurisdictions Each of the 13 provinces and territories have their own securities regulatory authority The most recent plans for a national securities commission the Cooperative Capital Market Regulator has been thrown into question by a recent decision of the Quebec Court of Appeal which found aspects of it to be unconstitutional BAX This follows a Supreme Court of Canada decision in 2011 that an earlier proposal for a national securities regulator was unconstitutional Introduction Currently there is considerable uniformity among the 13 jurisdictions and generally the information presented here for Ontario is the same across Canada 2 2025-05-27

Securities laws only apply to public companies Securities laws only apply to companies listed on exchanges BAX Securities laws only apply if you publicly market or advertise securities If you have fewer than 50 shareholders securities laws do not apply Common misconceptions If you only sell to your friends and family you don t need to worry about securities laws 3 2025-05-27

If you comply with Ontario securities laws you dont need to worry about the securities laws of another province BAX The take over bid rules don t apply to private companies Securities rules regarding forward looking information do not apply to private company s disclosure Common misconceptions Private company filings are not available to the public 4 2025-05-27

Securities laws dont apply to private M&A transactions (amalgamations, share purchases). BAX Securities laws don t apply to buy backs, redemptions and retractions by private companies. If you are a private company you cannot be sued for a misrepresentation in your marketing materials. Common misconceptions If you are involved in a private company you cannot be prosecuted for securities fraud 5 2025-05-27

You dont need to report trades / sales to the Ontario Securities Commission if you are not a public company BAX A private company s marketing materials don t need to be filed with the OSC and are not subject to securities laws You can pay referral fees without worrying about securities laws If you sell to shareholders outside of Canada, Canadian securities laws don t apply Common misconceptions Canadian securities laws do not apply to foreign companies 6 2025-05-27

The securities commissions do not investigate private companies Securities laws don t apply to mortgage brokers. BAX You don t have to disclose the names of insiders of a private company You don t have to disclosure referral and finders fees to the securities commissions if paid by or on behalf of a private company Common misconceptions If you sell or transfer the security of a private company securities rules don t apply 7 2025-05-27

BAX Anytime that a trade in a security occurs securities law apply This applies to companies and investment entities regardless of whether the company is a Canadian reporting issuer or listed on a Canadian stock exchange When do securities laws apply 8 2025-05-27

The Ontario Securities Act (OSA) defines security very broadly BAX What is a security Includes shares but also includes bonds, notes, debentures, options, profit sharing agreement, mortgages, trust units, limited partnership units, evidence of indebtedness, certain commodities, unit certificate, anything commonly know as a security and derivatives. Can include interests in condominiums and anything that fits into the definition of investment contract 9 2025-05-27

The definition of what can be a security is very broad and the securities commissions have a wide latitude to find that an activity falls under their jurisdiction if necessary to protect investors. BAX What is a security An investment contract exists where three factors are present: A person invests in money; In a common enterprise; The investor is led to expect profits solely from the efforts of others 10 2025-05-27

A trade in a security includes any sale or disposition of a security for valuable consideration. BAX What is a trade A trade also includes any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the foregoing 11 2025-05-27

Once you have a trade in a security four broad sets of rules apply: The registration rules which requires certain individuals/ firms to register with a securities commission The prospectus rules which require the filing and receipting of a prospectus as well as the filing of reports of trades respecting those sales and any marketing materials provided to investors in conjunction with sales. The advisor registration requirements which requires individuals and firms advising on securities to be registered BAX Securities regulation 12 2025-05-27

Once you have a trade in a security five broad sets of rules apply (con t): BAX Securities regulation Disclosure requirements which require issuers who have offered securities to file marketing materials and comply with securities rules respecting the content of the marketing material and which provide investors with rescission rights and rights to sue for misrepresentations in the disclosure Take over and issuer bid requirements 13 2025-05-27

BAX Section 25 of the Ontario Securities Act provides that: a person or company shall not engage in or hold himself, herself or itself out as engaging in the business of trading in securities unless the person or company is registered in accordance with securities laws or has an exemption from those laws Registration Requirements 14 2025-05-27

There are several categories of registration BAX Registration Requirements Exempt market dealers Investment dealers Mutual fund dealers Portfolio managers / advisors Investment fund managers 15 2025-05-27

Firms that are in the business in the trading of securities will need to be registered as either an investment dealer or exempt market dealer. BAX Registration Requirements The tests for when the registration requirements apply are complex and guidance can be found in the companion policy to National Instrument 45-106 https://www.bcsc.bc.ca/45-106CP_[CP]_10052016/ The exemptions from the registration requirements are limited 16 2025-05-27

BAX Prospectus Requirements Section 53(1) of the Ontario Securities Act provides: No 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 for them by the Director. 17 2025-05-27

The trigger for the prospectus requirement is a distribution of securities BAX Prospectus Requirements A distribution is a trade in a security of an issuer that has not been previously issued. There are a number of exemptions from the Prospectus Requirement. In Ontario these exemptions are found in NI 45-106 and in OSC Rule 45-501 18 2025-05-27

An issuer will not be required to prepare and provide a prospectus to issuers if an exemption from that requirement is available. These include: Accredited investors Offering memorandum Private issuer Friends, Family and Close Business Associates Minimum Amount Investment BAX Prospectus Requirements For a summary of the most common exemptions: http://www.osc.gov.on.ca/documents/en/Securities- Category4/ni_20160128_45-106_key-capital-prospectus- exemptions.pdf 19 2025-05-27

Certain of the prospectus exemptions require that a report of trade be filed with the securities commission in the jurisdiction where the issuer and the investor resides within 10 days of the trade. BAX Report of Trade Filing Requirements There is a uniform form 45-106F1 which in addition to information on the details of the distribution including attributes of the securities sold, all compensation paid in connection with the distribution and names and addresses of investors requires information on the business of the issuer, size of the issuer s assets, date of formation and financial year end, head office address, and names and addresses of directors, officers and promoters 20 2025-05-27

There are three methods in Canada for filings reports of trade: In British Columbia through BCSC eServices at http://www.bcsc.bc.ca. BAX Report of Trade Filing Requirements In Ontario through the online e-form available at http://www.osc.gov.on.ca. In all other jurisdictions through the SEDAR 21 2025-05-27

Ontario securities laws require that any marketing materials that fall within the definition of an offering memorandum be filed with the Ontario Securities Commission ( OSC ) within 10 days of the trade. BAX Filing Requirements for Marketing Materials An offering memorandum in the Ontario Securities Act is defined as: a document purporting to describe the business and affairs of an issuer that has been prepared primarily for delivery to and review by a prospective purchaser so as to assist the prospective purchaser to make an investment decision in respect of securities 22 2025-05-27

Any marketing material provided to investors in conjunction with the use of the following exemptions must be filed with the OSC within 10 days of the trade: BAX Filing Requirements for Marketing Materials Accredited investor Private issuer exemption Friends family and close business associates Offering memorandum Minimum Investment Amount 23 2025-05-27

BAX Disclosure Requirements for Marketing Materials Any marketing materials provided to investors in conjunction with an exempt distribution must set out certain statutory rights where there is a misrepresentation in the marketing materials (section 130.1 of the OSA): a right of action for damages against the issuer and a selling security holder on whose behalf the distribution is made. a right of rescission against the person or company. 24 2025-05-27

The OSA (s.38) provides that no person or company, with the intention of effecting a trade in a security, shall make any representation, written or oral, that he, she or it or any person or company, (a) will resell or repurchase; or (b) will refund all or any of the purchase price of, such security relating to the future value or price of the security that the security or derivative will be listed on an exchange or that application has been or will be made to list the security BAX Disclosure Requirements for Marketing Materials 25 2025-05-27

BAX Disclosure Requirements for Marketing Materials NI 45-106 (Form 45-106F2 Offering Memorandum for Non- Qualifying Issuers) requires that issuers comply with requirements relating to forward-looking information, with certain requirements in NI 51-102 which including the basis for the information, risks, assumptions and procedures for updating the forward looking information 26 2025-05-27

Resale rules (NI 45-102) require that where an investor acquires a security in reliance on a prospectus exemption that the resale of that security can only be made if there is another prospectus exemption available or they meet certain conditions. BAX Resale Rules These rules are quite complex but generally the shares will not be become freely tradable until the issuer becomes a reporting issuer 27 2025-05-27

Certain securities rules apply in the context of private M&A transactions including: the take over bid requirements which are triggered when there is an offer to acquire 20% or more of the securities of an issuer unless there is an exemption the issuer bid requirements where there is an offer to redeem the securities of an issuer unless there is an exemption BAX Mergers & Acquisitions These requirements include offer of identical consideration, public announcements; sending out circulars; timelines and obligations on directors. Exemptions include a private company exemption and private agreement exemptions 28 2025-05-27

Section 122 (1) of the OSA provides that: Every person or company that contravenes Ontario securities law is guilty of an offence and on conviction is liable to a fine of not more than $5 million or to imprisonment for a term of not more than five years less a day, or to both. BAX Enforcement Actions and Penalties 126.1 (1) of the OSA provides that: A person or company shall not, directly or indirectly, engage or participate in any act, practice or course of conduct relating to securities, that the person or company knows or reasonably ought to know, perpetrates a fraud on any person or company. 29 2025-05-27

The capital markets and their regulation have changed dramatically over the last 10 or so years. The reach of securities laws to private companies has expanded. BAX Summary The interest of securities commissions in the activities of private companies has also expanded. Old distinctions between private and public companies are falling away. Corporate lawyers need to at least be aware of the issues. 30 2025-05-27

Barbara Hendrickson Suite 2200 181 University Avenue BAX Contact Information Toronto Ontario M5H 3M7 Tel: 416.601.1004 Cell: 647.403.4606 Email: bhendrickson@baxsecuritieslaw.com www.baxsecuritieslaw.com 31 2025-05-27