Presentation on theme: "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 Corporation November."— Presentation transcript:
BCI Issuers Quoted in the U.S. Over-the-Counter Markets You are About to be Thrown into BC Waters – Are You Ready? Venture Law Corporation November 27, 2007
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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 Our background and experience with OTC Issuers –First OTCBB company contact was in –Over 100 OTCBB reverse mergers closed. –Over 20: F-1; SB-1; SB-2; S 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 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. – submissions are preferred and comments submitted by mail should include a disk containing your submission. –All comment letters and s 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 –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 provinces 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 ; 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.
Who will the regulations affect if they are implemented? 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 issuers 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).
Who will the regulations affect if they are implemented? 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 ; 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.
How Will These Regulations Affect OTCBB And PinkSheet Quoted Companies? 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 issuers fiscal year end.
How Will These Regulations Affect OTCBB And PinkSheet Quoted Companies? 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 The Multi-Jurisdictional Disclosure System which other SEC issuers can rely on to avoid duplicate filings in US and Canada.
How Will These Regulations Affect OTCBB And PinkSheet Quoted Companies? 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.
How Will These Regulations Affect OTCBB And PinkSheet Quoted Companies? 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.
How Will These Regulations Affect OTCBB And PinkSheet Quoted Companies? Removal of private placement exemptions –OTC issuers will not be able to rely on the following exemptions provided in 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.
How Will These Regulations Affect OTCBB And PinkSheet Quoted Companies? 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;
How Will These Regulations Affect OTCBB And PinkSheet Quoted Companies? 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.
How Will These Regulations Affect OTCBB And PinkSheet Quoted Companies? Removal of take-over bid exemptions –OTC issuers subject to BCI 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.
How Will These Regulations Affect OTCBB And PinkSheet Quoted Companies? 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.
How Will These Regulations Affect OTCBB And PinkSheet Quoted Companies? 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 BCs economy.