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Securities Local Rule 45-508

Securities Act
R.S.P.E.I. 1988, Cap-S-3.1

Document Type:  Local Rule

Document No:  45-508

Subject:  Respecting Community Economic-Development Businesses

Effective Date:  July 4, 2011

 


LOCAL RULE 45-508

Respecting Community Economic-Development Businesses

Interpretation
1. (1)  In this rule,

“Act” means the Securities Act;

“affiliated” has the same meaning as in the Community Development Equity Tax Credit Act R.S.P.E.I. 1988, Cap-C-13.01;

“association” has the same meaning as in the Co-operative Associations Act R.S.P.E.I. 1988, Cap-C-23;

“CEDB” means a community economic-development business;

“community economic-development business” means a company or association that meets the criteria prescribed by the General Regulations and is registered as a community economic-development business by the Minister under section 2 of the Community Development Equity Tax Credit Act;

“community economic-development plan” means a community economic-development plan proposed by a CEDB that contains the information prescribed by the General Regulations;

“company” has the same meaning as in the Community Development Equity Tax Credit Act;

“eligible business entity” has the same meaning as in the General Regulations;

“General Regulations” means the Community Development Equity Tax Credit Act General Regulations made under the Community Development Equity Tax Credit Act;

“Minister” has the same meaning as in the Community Development Equity Tax Credit Act;

“offering” means an offering of shares by a CEDB under this rule;

“offering document” means an offering document prepared in the form approved by the Superintendent;

“promotional material” means information relating to an offering and includes advertising and sales literature;

“security holder” means a person who owns shares of a CEDB; and

“specified issue” has the same meaning as in the Community Development Equity Tax Credit Act.


(2)  
Words not defined in this rule have the meaning ascribed to them in the Act.


Scope of rules
2. (1)  This rule applies to a CEDB that engages in a distribution or a trade in a share of its own issue that is or is part of a specified issue in respect of which a tax-credit certificate has been issued.


(2)  
Section 94 of the Act does not apply to a distribution by a CEDB of shares of the CEDB made in accordance with this rule.


(3)  
This rule does not apply to a promoter of a CEDB who is not a promoter of the CEDB at the time its offering document is filed with the Superintendent.


(4)  
Distributions in shares of a CEDB may be made only by registrants registered under the Act that are authorized to trade in the shares or by the individuals listed as selling agents in the offering document.


(5)  
Each first trade and each subsequent trade of shares of a CEDB purchased under an offering is specified to be a distribution, unless
(a)  the conditions in subsection 2.5(2) of National Instrument 45-102 Resale of Securities are satisfied; or
(b)  the trade is made
(i)  to the CEDB in accordance with section 2.15 of National Instrument 45-106 Prospectus and Registration Exemptions,
(ii)  to a self-directed registered retirement savings plan of the security holder or the security holder’s spouse,
(iii)  to the spouse of the security holder,
(iv)  to a tax-free savings account of the security holder or the security holder’s spouse,
(v)  from a self-directed registered retirement savings plan of the security holder or the security holder’s spouse to the security holder,
(vi)  from a tax-free savings account of the security holder to the security holder or the security holder’s spouse,
(vii)  to a purchaser who owns shares of the CEDB and who is advised in writing by or on behalf of the vendor before entering into an agreement of purchase and sale that the purchaser will not accrue any advantage under the Community Development Equity Tax Credit Act as a result of the purchase, or
(viii)  to a purchaser who purchases by way of a trade made in compliance with the Act and any applicable rules.

Restrictions

3. (1)  Concurrent with the distribution of shares through a specified issue, a CEDB may distribute shares under other prospectus exemptions, but only if full details of the concurrent distribution of shares or proposed distribution of shares are disclosed in the offering document.


(2)  
Subject to section 7, a person must not distribute a security to which this rule applies unless an offering document has been filed and a letter of non-objection has been issued by the Superintendent.


(3)  
An offering document is deemed to be an offering memorandum as defined in the Act.


Certificate of registration

4.  A CEDB must file its certificate of registration as a CEDB issued under section 2 of the Community Development Equity Tax Credit Act with the Superintendent immediately upon receipt.


Letter of non-objection

5. (1)  The Superintendent must issue a letter of non-objection to an offering document unless, in the opinion of the Superintendent, any of the following apply:
(a)  it is not in the public interest to do so;
(b)  the offering document does not meet all of the requirements of this rule;
(c)  the offering is not or will not be made in compliance with this rule.


(2)  
On receipt of an offering document, the Superintendent may do any of the following:
(a)  inquire into any aspect of the offering and the offering document;
(b)  request delivery of supplemental information before or after determining whether to issue a letter of non-objection;
(c)  require the inclusion of supplemental information in the offering document before or after issuing a letter of non-objection.


(3)  
Before the Superintendent issues a letter of non-objection to an offering document, there must be no trading or activity directly or indirectly in furtherance of trading in the shares of the CEDB, except as provided in subsection 7(1) respecting a promoter’s activity.


Revocation of letter of non-objection

6. (1)  If, after issuing a letter of non-objection, it appears to the Superintendent that the continuation of the offering would not be in the public interest or that any requirement of this rule has not been or is not being complied with, the Superintendent may revoke the letter of non-objection.


(2)  
On receipt of notice of a revocation referred to in subsection (1), the CEDB and any other person trading on its behalf must immediately cease trading shares of the CEDB until the CEDB is notified by the Superintendent that the Superintendent has withdrawn the notice of revocation.


Promoter’s activity before issuance of letter of non-objection

7. (1)  Before the Superintendent issues a letter of non-objection to an offering document, a promoter may

(a)  talk individually or in group situations with potential security holders to give them a general overview of the offering, including all of the following information:

(i)  identification of the CEDB,

(ii)  an indication of the amount of money needed to be raised,

(iii)  a general description of what use will be made of the money raised,

(iv)  an outline of the tax incentives; and

(b)  gather the names of potential security holders who might be interested in the offering.


(2)  
A promoter must not use or distribute promotional material or expression of interest forms without the prior written non-objection of the Superintendent.

(3)  A promoter must not accept any binding commitments or binding expressions of interest, whether oral or written, or consideration in any form from potential security holders before the Superintendent issues a letter of non-objection to the offering document.


(4)  An expression of interest form must contain all of the following warnings to potential security holders:
(a)  that they should read and consider the offering document they will receive with respect to the offering, if the offering does in fact proceed;
(b)  that they should consult with a professional advisor before deciding to purchase shares under the offering;
(c)  that the expression of interest is not in any way a binding commitment to purchase shares under the offering.


Officers and Directors

8. (1)  The promoters, officers, directors and sales agents of a CEDB must be individuals who are suitable to act as promoters, officers, directors and sales agents and whose past conduct does not afford reasonable grounds to believe that the business of the CEDB will not be conducted with integrity and in the best interests of the CEDB.

(2)  
At least 2 directors of the CEDB must be independent.


Minimum offering amount
9. (1)  An offering document must state the minimum offering amount necessary to close the offering.


(2)  
A CEDB must also provide detailed reasons in its offering document explaining why the amount specified as the minimum offering amount is a reasonable amount when considered in the context of its community economic-development plan.

(3)  
An initial offering of a CEDB must obtain at least 25 purchasers.

(4)  
A subsequent offering of a CEDB that has closed an initial offering must obtain at least 3 purchasers.


Amounts subscribed held in trust
10. (1)  All amounts subscribed under an offering must be held in trust by a trustee that is dealing at arm’s length with the CEDB until after
(a)  the CEDB meets its minimum offering amount and certifies to the trustee that all conditions of closing have been met; and
(b)  the initial closing occurs.

(2)  
Any offering amounts received by a trustee under an offering after the initial closing must be held in trust until after
(a)  the CEDB certifies to the trustee that all conditions of the next closing have been met; and
(b) the next closing occurs.


(3)  The conditions in subsection (2) apply to each subsequent closing.


(4)  
All amounts subscribed must be paid by cheque or bank draft made payable only to the trustee (in 
trust).

Amount not to exceed $3 000 000
11.  The amount subscribed under an offering must not exceed $3 000 000.

Amounts to be used as indicated
12.  All amounts raised under an offering must be used as indicated in the offering document.

Potential security holders
13.  (1)  A CEDB must provide each potential security holder with all of the following:
(a)  all promotional material, the offering document and a subscription agreement;
(b)  any additional materials required by the Superintendent.

(2)  A potential security holder is entitled to provide a CEDB with written notice evidencing the intention of the potential security holder not to be bound by their completed subscription agreement no later than midnight on the 2nd day, exclusive of Saturdays and holidays, after the day the CEDB receives the completed subscription agreement.

(3)  A CEDB must maintain a record of the names and addresses of all persons to whom an offering document and subscription agreement have been provided.

Promotional material
14. (1)  Any promotional material that is used in connection with an offering is incorporated by reference into the offering document.

(2) Any promotional material must include a disclaimer as required by the Superintendent.

(3) All promotional material must be submitted to the Superintendent and receive the written non-objection of the Superintendent before its use.

Amendments to offering document
15. (1)  Except as required in this section, no amendments may be made to an offering document after the Superintendent issues a letter of non-objection to the offering document.

(2)  After the Superintendent issues a letter of non-objection to an offering document, the CEDB must file an amendment to the offering document with the Superintendent if
(a)  the CEDB has not yet met its minimum offering amount, the initial closing has not yet occurred, and any of the following apply:
(i)  there is a material change in the affairs of the CEDB,
(ii)  the terms or conditions of the offering are being altered,
(iii)  additional shares of the same class are to be distributed in addition to the securities previously described in the offering document; or
(b) the CEDB is still distributing its shares under the offering document after having met its minimum offering amount and having had the initial closing take place, and there is a material change in the affairs of the CEDB.

(3)  A CEDB that files an amendment under clause (2)(b) must also comply with Part 7 of National Instrument 51-102 Continuous Disclosure Obligations.

(4)
An amendment to an offering document must describe the change that resulted in the amendment and receive the written non-objection of the Superintendent.

(5)  An amendment to an offering document must be sent to all subscribers of the specified issue after the Superintendent has issued a non-objection to the amendment.

(6)  A subscriber whose subscription for the purchase of shares has not closed has 10 days from the date of receiving an amendment to an offering document to withdraw from their agreement to purchase shares.

(7)  No later than 10 days after the date that a subscriber withdraws from their agreement to purchase shares under subsection (6), the trustee must return the subscriber’s funds to the subscriber.

Financial forecasts
16.  
Any use of financial forecasts or projections must be in accordance with Part 4B of National Instrument 51-102 Continuous Disclosure Obligations.

Time limitation on offering
17.  (1)  
An offering initially closes on the date specified in the offering document.

(2)  Unless the Superintendent grants an extension under subsection (3), the initial closing date specified in an offering document must be a date no later than 90 days after the date of the letter of non-objection issued by the Superintendent for the offering document.

(3)  The Superintendent may grant an extension of the 90-day period on application by the CEDB.

(4)  After the initial closing date, a CEDB may continue to offer shares under the offering document, but only if the initial closing has occurred and the Superintendent has issued a letter of non-objection for the subsequent sales.

Report after closing
18.  
No later than 30 days after the date of each closing of an offering, the CEDB must file a report of trade with the Superintendent in the form approved by the Superintendent showing the names, addresses and telephone numbers of the security holders and the number and purchase price of the shares each has purchased, and certifying compliance with this rule.

CEDB with restrictive constitution
19.  (1)  If the proceeds of an offering are to be used by a CEDB with a constitution that restricts it to making specified investments in eligible local business entities in accordance with its community economic-development plan, the CEDB must
(a)  outline its investment strategy, objectives and restrictions in the offering document; and
(b)  meet the requirements of subsection (2) if it proposes to
(i)  invest more than 40% of the total proceeds of the current offering or more than 40% of the total proceeds of the current offering combined with all previous offerings in an eligible investment that was not disclosed in the offering document, and the eligible investment is in an eligible business entity or in eligible business entities that are affiliated, or
(ii)  use the proceeds from the offering for an eligible investment that was not disclosed in the offering document, and the proposed use of the proceeds is an additional investment to an investment that meets the conditions of subclause (i).

(2)  Before entering into binding arrangements for an investment described in subclause (1)(b)(i) or (ii), a CEDB to which subsection (1) applies must
(a)  provide security holders with an information circular that describes the investment to be made with the proceeds in sufficient detail to permit security holders to form a reasoned judgment concerning the investment; and
(b)  have the approval of at least 50% plus 1 vote of the votes cast by security holders who vote at a meeting of security holders called to consider the making of the eligible investment, excluding the shares voted by officers, directors and promoters and parties related to the officers, directors and promoters.

Changes to investment strategy, objectives or restrictions
20.  
Changes to a CEDB’s investment strategy, objectives or restrictions as referred to in clause 19(1)(a) must be approved by at least 50% plus 1 vote of the votes cast by security holders who vote at a meeting of security holders called to consider an amendment to the strategy, objectives or restrictions, excluding the shares voted by officers, directors and promoters and parties related to the officers, directors and promoters.

Special relationship with the CEDB
21. (1)  
Except as provided in subsections (2), (3) and (4), if a CEDB that is not a reporting issuer has met its minimum offering amount and has certified to the trustee that all conditions of closing have been met, and if the initial closing has occurred, the CEDB and every person who would be an insider of the CEDB if the CEDB were a reporting issuer, and every person who would be in a special relationship with the CEDB within the meaning of section 12 of the Act if the CEDB were a reporting issuer, is subject to sections 102 and 155 of the Act and the related provisions of the rules to the same extent as if the CEDB were a reporting issuer and the person were an insider of the CEDB or in a special relationship with the CEDB.

(2)  A CEDB’s annual financial statements need not be accompanied by a report of an auditor if all of the following apply:
(a)  the security holders are not required by law to appoint an auditor;
(b)  a general review has been carried out by an independent accountant in compliance with the general review standards as set out in the Canadian Institute of Chartered Accountants Handbook;
(c)  the financial statements are accompanied by a review engagement report as set out in the Canadian Institute of Chartered Accountants Handbook.

(3)  For the purposes of this rule, effective for all fiscal years beginning on and after January 1, 2011, the financial statements for a CEDB may be prepared in accordance with Canadian Generally Accepted Accounting Principles using International Financial Reporting Standards for Publicly Accountable Enterprises or Canadian Generally Accepted Accounting Principles for Private Enterprises as set out in the Canadian Institute of Chartered Accountants Handbook.

(4)  If a CEDB files financial statements prepared in accordance with Canadian Generally Accepted Accounting Principles using International Financial Reporting Standards for Publicly Accountable Enterprises, it must continue to file financial statements prepared in accordance with Canadian Generally Accepted Accounting Principles using International Financial Reporting Standards for Publicly Accountable Enterprises.

When CEDB no longer required to comply with Section 21
22.  
A CEDB is no longer required to comply with Section 21 if
(a)  the CEDB files with the Superintendent a notification from the Minister that the CEDB has surrendered its registration; or
(b)  the CEDB files with the Superintendent a statement from the officers of the CEDB certifying all of the following:
(i)  that the CEDB has fewer than 5 shareholders,
(ii)  that the hold period required by the Community Development Equity Tax Credit Act has expired on all shares,
(iii)  that financial statements on which a general review has been carried out by an independent accountant in compliance with the general review standards as set out in the Canadian Institute of Chartered Accountants Handbook and that are dated within 90 days of the filing have been filed with the Superintendent,
(iv)  that no shares are held in self-directed registered retirement savings plans or tax-free savings accounts,
(v)  that the CEDB has complied with all the requirements of this rule,
(vi)  that a certified vote has been obtained indicating that 66.6% or more of shares eligible to be voted have been voted in favour of not being required to comply with section 21.

Bona fide attempt to comply
23.  If a trade is made by a CEDB in the bona fide and reasonable belief that there has been full compliance with this rule, the failure of 1 or more security holders to purchase as principal, to receive an offering document or amendments to an offering document in a timely manner, or to receive any other materials required by the Superintendent does not affect the application of the remaining provisions of this rule, but only if
(a)  the CEDB exercised due diligence to ensure that the failure would not occur; and
(b)  the CEDB delivers the offering document or amendments to the offering document or other material required by the Superintendent to the security holders on request.

Report of a trade
24.  
No later than 30 days after the date a trade is made under this rule, other than a distribution made by a CEDB, the vendor must file a report of trade with the Superintendent in a form approved by the Superintendent.

General power to exempt
25.  
The Superintendent may grant an exemption from any provision in this rule subject to any conditions or restrictions that the Superintendent imposes in the exemption.

Effective Date
26.  
This Rule comes into force on July 4, 2011.
                            

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