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securities laws are often called "Blue Sky" laws. It is not enough to
comply with US Federal securities laws in Canada or the US. All applicable
Blue Sky and provincial securities laws must also be complied with when
issuing or reselling securities. In order to purchase or sell securities
you must either register those securities or transactions with each
applicable securities regulator or be able to rely on an exemption from
registration. This requirement includes all secondary trades of securities
acquired under a private placement or a registered offering. This article
will discuss the resale or secondary trades of securities and the
significance of being registered with Standard & Poor if you are a Pink
Sheet or OTCBB. Lets start with a fairly straight forward example. Let us assume an issuer registered a securities offering with the SEC and the state of Washington and New York. The issuer would be able to freely sell the securities registered to residents of the state of Washington and New York. The issuer would not be able to sell these securities to anyone outside of those two states. The individuals or entities purchasing the securities would be able to resell the securities they acquired to other residents of New York and Washington for one year from the date of clearance of the registered offering. They would not be able to sell these securities to residents of other jurisdictions unless they were able to rely on an exemption from the securities laws of that other jurisdiction. What happens after one year? Secondary trades or resales after that initial year must be made on reliance of an exemption from the registration requirements on a state by state, province by province basis. Individual sellers would need to ensure that there is a registration and distribution exemption where they reside as seller and where the purchaser resides. This requirement is easily accommodated if the securities are listed or quoted on a recognized exchange. The securities laws in every state and province exempt secondary trades of securities listed on a recognized exchange from registration requirements. US and Canadian securities regulators recognize the following exchanges for this purpose:
Canadian securities regulators also recognize the:
It should be noted that the state exemption of secondary trades of securities listed on recognized exchanges is driven by the preemption of state registration requirements under section 18(b)(4)(A) of the Securities Act of 1933. Section 18(b)(4)(A), however, does not eliminate the need for broker-dealers to submit notice filings and fees when selling securities that are not otherwise exempt under state law. In April of 2002, the National Association of Securities Dealers recommended that state securities regulators add the TSX as a recognized exchange for the purpose of this exemption. In August of 2004, they sought public comment on expanding this recommendation to include the TSX Venture Exchange. The effect of the adoption by individual States of the exemption would be to enable residents of that State to trade securities listed on the TSX and TSX Venture Exchange without restrictions or in reliance on other exemptions. Although both efforts are a step forward, the original recommendation has yet to be implemented by individual state regulators. Until that time, trades of TSX and TSX Venture Exchange companies will be subject to the same limitations as OTCBB and Pink Sheet listed companies in the US. |
 The OTCBB and Pink Sheets are not considered recognized exchanges for secondary trading in Canada or the US and it is doubtful that they will be added in the future.
In the US, non-issuer exemptions that could be relied on include the following: The foregoing exemptions are the same exemptions which would be relied on if the securities had been acquired in a private placement and the securities had been held for the required federal seasoning period (Rule 144) and the stockholder was now were looking to sell those securities. It is our opinion that the manual exemption offers the best coverage for secondary trades. As stated above, the manual exemption services, offered by both Standard & Poors and Mergent, currently "Blue Sky" securities up to 38 states. An issuer with securities quoted on the OTCBB or Pink Sheets would be well advised to engage one of the manual services in order to offer its stockholders a clear secondary trading exemption. Arguably, it is the stockholder who bears the legal responsibility for ensuring an available exemption exists for his secondary trading activity. The issuer, however, could find the company embroiled in a regulatory matter it could have easily avoided if it provided a clear harbour from the registration requirements for the secondary trades of its stockholders. A chart of the various state manual exemptions is attached below. We have included for informational purposes the actual blue sky rules on a separate web page entitled Blue Sky Manual Exemptions. If you are interested in the Canadian resale rules
click here. |
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 Alixe B. Cormick Venture Law Corporation 618 - 688 West Hastings St. Vancouver, B.C. V6B 1P1 Phone: 604-659-9188 Fax: 604-659-9178 E-mail Us |
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