New OSC Rule Restricts Trading During Distributions, Formal Bids and Share Exchange Transactions

Rule 48-501 replaces OSC Policy 5.1 paragraph 26 and OSC Policy 62-601

Ontario Securities Commission Rule 48-501 – Trading during Distributions, Formal Bids and Share Exchange Transactions (Rule 48-501) was approved by the OSC on February 15, 2005 and came into force on May 9, 2005. Rule 48-501 replaces OSC Policy 5.1 paragraph 26 and OSC Policy 62-601.

Rule 48-501, which has been harmonized with the Universal Market Integrity Rules amendments of Market Regulations Services Inc., imposes trading restrictions on dealers, issuers and certain related parties involved in the distribution of securities, take-over bids, amalgamations and issuer bids. The objective of Rule 48-501 is to reduce the possibility of price manipulation by those with an interest in the outcome of a distribution of securities or other transaction. Rule 48-501 also attempts, to the extent possible, to impose trading restrictions that are consistent with those imposed by the United States Securities and Exchange Commission’s Regulation M.

Subject to the exemptions outlined below, "dealer restricted persons" cannot bid for or purchase "restricted securities" during the "dealer restricted period" for their own account, an account over which they exercise control or direction, or an account that they know or reasonably ought to know is an account of an issuer of a restricted security (or selling security holder of the issuer, insider of the issuer with material information concerning the issuer, or any person acting jointly or in concert with such persons) or attempt to induce or cause any person to purchase any restricted security.

Rule 48-501 defines a "dealer restricted person" as:

• an underwriter (i.e. a person or company who, as principal, agrees to purchase securities with a view to distribution or who, as agent, offers for sale or sells securities in connection with a distribution) in a prospectus offering or a private placement made in reliance on a prospectus exemption to an accredited investor;
• agents participating in a private placement where the number of securities issued under the private placement would constitute more than 10% of the issued and outstanding securities and the dealer has been allotted to sell more than 25% of the securities issued under the private placement;
• the dealer-manager, manager, soliciting dealer or adviser appointed by an offeror in respect of a securities exchange take-over bid or issuer bid;
• dealers who are soliciting dealers or advisers in connection with amalgamations, arrangements, or capital re-organizations or similar transactions;
• related entities of any person or company referred to above, unless there are written, annually reviewed "ethical wall" policies in place designed to prevent information flow between related entities, the dealer has no officers or employees that solicit orders or recommend transactions in securities in common with the related entity and the related entity does not act as a market maker for the restricted security, solicit orders or engage in proprietary trading;
• partners, directors, officers and employees of dealers and related entities; or
• any person or company acting jointly or in concert with a dealer or related entity for a particular transaction.

A "restricted security" means, generally, any security being offered by way of a prospectus or private placement, or by an offeror in a take-over bid, or issuable to security holders pursuant to an amalgamation, arrangement, capital re-organization or similar transaction. A restricted security also includes a security into which any of the foregoing securities is convertible or that may be convertible into a restricted security.

The "dealer restricted period" for a dealer restricted person in respect of a prospectus distribution or private placement of a restricted security means the period commencing on the later of:

• the date that is two days prior to the day the offering price of the restricted security is determined; and
• the date of an agreement or understanding with the dealer to participate in the prospectus distribution or private placement of restricted securities, whether or not the terms and conditions of such participation have been agreed upon,

and ending on the date that the selling process ends and all stabilization arrangements are terminated.

In the bought deal context, the "dealer restricted period" would therefore typically commence on the date on which a bid letter is signed whereas in the marketed deal the dealer restricted period would typically commence two days prior to the pricing of the restricted securities.

The "dealer restricted period" in the context of a take-over bid or issuer bid commences on the date of dissemination of the take-over bid circular, issuer bid circular or similar document and ends with the termination of the period during which securities may be deposited under the bid (including any extension of the bid). Similarly, in the context of an amalgamation, arrangement, capital re-organization or similar transaction the "dealer restricted period" commences on the date of dissemination of the information circular for such transaction and ends on the date of approval of the transaction by security holders.

The dealer restrictions do not apply in connection with market stabilization or market balancing activities that occur at or below the distribution price or last independent sale price for the restricted security for the purpose of maintaining a fair and orderly market by reducing price volatility.

Also, the dealer restrictions do not apply to a "highly-liquid security", which is defined as a listed security with an average of at least 100 trades per trading day during a 60-day period and with an average trading value of at least $1 million per trading day, or a security that is subject to the SEC’s Regulation M as an "actively-traded security."

Other exemptions for the purchase of restricted securities include (i) units or shares of exchange-traded funds, (ii) "connected securities" (i.e. a security into which an offered security is immediately convertible, exchangeable or exercisable) of "highly-liquid securities" or exchange-traded funds, (iii) short positions entered into prior to the dealer restricted period, (iv) exercises of convertible securities held prior to the dealer restricted period, (v) purchases through a marketplace in accordance with marketplace rules, (vi) subscriptions of an offered security under a prospectus or restricted private placement (i.e. the offering itself is excluded), and (vii) unsolicited client orders.

It is important to note that while certain trading activities are permitted by Rule 48-501, these activities continue to be subject to the general provisions relating to manipulation and fraud found in securities legislation.

A dealer may, during the "dealer restricted period", publish or disseminate any information, opinion or recommendation relating to the issuer of a restricted security provided that such information, opinion or recommendation is contained in a publication that is disseminated with reasonable regularity in the normal course of business of the dealer restricted person, includes similar information with respect to a substantial number of companies or a comprehensive list of securities recommended by the dealer and the information is given no greater space or prominence than that given to other securities or issuers.

An outright exemption is provided for research in respect of a "highly-liquid security", so long as it is contained in a publication that is disseminated with reasonable regularity in the normal course of business of the dealer restricted person.

A prohibition against bidding for or purchasing "restricted securities" during the restricted period also applies to the issuer of the restricted security, selling security holders of the restricted security, affiliates, associates or insiders of the issuer (except those insiders who have not had in the previous 12 months any board or management representation and do not have any undisclosed material information regarding the issuer) and any person or company acting jointly or in concert with any such persons.