This past summer, the British Columbia Securities Commission (the "Commission") announced several initiatives designed to curb abusive practices involving companies that have a significant connection to British Columbia and that trade on over-the-counter markets in the United States ("BC OTC Issuers").The initiatives are primarily aimed at BC OTC Issuers (excluding those also listed on a more senior market, such as the New York Stock Exchange, Toronto Stock Exchange or the TSX Venture Exchange). Certain initiatives have already been implemented.

On October 29, 2007, the Com­mission published a request for comments for its proposed instrument to implement the remainder of the initiatives. This article discusses the initiatives, and highlights some of the principal provisions of the proposed instrument.

Although the over-the-counter ("OTC") markets, which consist of the OTC Bulletin Board and Pink Sheets quotation systems, are legal and are home to many legitimate businesses, they are vulnerable to abusive practices because of weak continuous disclosure requirements and a low level of regulatory scrutiny of manipu­lative activities by quoted companies.

The Commission is targeting stock promoters who gain control of a public company, promote it by making misleading disclosure and then, after the stock price has risen significantly, sell their shares to unsuspecting investors who are left with shares that soon becomes worthless. The Commission believes that a number of these promoters operate from B.C.

BC OTC issuers are issuers that have a significant connection to B.C. A significant connection will constitute, among other things, the direction or administration of the company's business from B.C., investor relations activities being carried out in or from B.C., a B.C. resident control person, or a concentration of either shareholders resident in B.C. or of shares held by B.C. residents. A narrow exemption will be available for companies that have had a Bulletin Board or Pink Sheet ticker symbol for more than one year and that do not have certain other connections to B.C.

Disclosure Requirements

The Commission has stated that weak continuous disclosure requirements in OTC markets facilitate the use of ag­gres­sive news releases, spam and direct mail campaigns in the promotion of the shares. To address this, the proposed instrument will require BC OTC Issuers to comply with Canadian timely disclosure requirements (news releases and material change reports when required) and continuous disclosure requirements (annual information forms, management's discussion and analysis and audited financial statements, among others). For continuous disclosure matters other than the requirement to prepare an annual information form, the Commission proposes to treat BC OTC issuers as venture issuers.

In addition, directors, officers, promoters and control persons of BC OTC Issuers will be required to file personal information forms, which will require a consent to a criminal record search. Insiders will be required to file insider reports on SEDI.

The Commission will carry out compliance reviews of BC OTC Issuers and their continuous disclosure. If significant non-compliance is found (for example, failure to disclose the regulatory history of management and investor relations personnel), the Commission has stated it will likely cease-trade the issuer's securities. The Com­mission has begun a review of all BC OTC mining issuers and will cease-trade the securities of any who have announced mineral resources or mineral reserves and have failed to file the required technical report.

Dealing in the BC OTC Issuer's Shares

U.S. issuers that issue shares outside the U.S. in reliance on an exemption from U.S. registration requirements file a Form SB-2 Registration Statement in the U.S. Where that issuer is a BC OTC Issuer, the Commission will investigate to determine if the issuer complied with B.C. securities law when those shares were issued. In cases of non-compliance, the Com­mission may cease-trade the issuer until it files a prospectus and may take enforcement action against the issuer and its principals for conducting an illegal distribution.

The proposed instrument will impose resale restrictions on B.C. resi­dents who acquire shares of a BC OTC Issuer before it acquires its ticker symbol. Those shareholders will be permitted to sell their shares only through a dealer, from accounts in their own name, and into the public market (that is, over the Bulletin Board or other quoting system). Private transactions (which are available to investors in certain circumstances) will be prohibited. A BC OTC Issuer will be required to place legends on its share certificates issued before the issuer obtains its ticker symbol to the effect that the securities may not be sold in B.C. except through a registered dealer and over a public market outside Canada.

The proposed instrument will also restrict the use of take-over bid exemptions for BC OTC Issuers. An acquirer would be required to comply with the formal take-over bid procedures.

Investor Relations Activities

Under the proposed instrument, BC OTC Issuers will be required to file a notice disclosing any investor relations agreement within 60 days after the instrument comes into force.

Targeting Abusive Promotions

The Commission has implemented SpamWatch (which gives the public access to information about potentially inappropriate stock promotions) and imposes three-day trading halts on securities of BC OTC Issuers that are the subject of a spam campaign. A list of issuers that are the subject of known spam campaigns is published on the Commission's investor education website. Since the end of May 2007, 15 three-day trading halts have been ordered for 11 issuers.

Implications

Although the initiatives are targeted at abusive market activities, they will affect all BC OTC Issuers. The benefits for investors and the B.C. marketplace are expected to include improved information about issuers and their businesses, as well as the culling of unscrupulous promoters from the B.C. market.

BC OTC Issuers will face additional effort and cost in preparing and filing the required continuous disclosure docu­ments. Those BC OTC Issuers that report under the U.S. Securities Exchange Act of 1934 can satisfy this requirement by filing the same documents as they file in the U.S. For BC OTC Issuers that are quoted on Pink Sheets, however, the effort and cost may be significant, since they currently do not have auditor or reporting obligations.

BC OTC Issuers may be put to extra expense and effort as well in connection with addressing matters that may come up during compliance reviews undertaken by the Commission.