Publications

On April 7, 2022, Finance Minister Chrystia Freeland tabled the federal government’s new budget for 2022. This budget includes several tax measures relevant to the mining industry in Canada. The Canadian federal government intends to provide $3.8 billion over eight years to implement Canada’s first critical minerals strategy. One of the methods used to implement this new strategy and stimulate exploration is an investment vehicle well known to the mining industry: flow-through shares. The 2022 budget proposes to create a new 30% Critical Mineral Exploration Tax Credit (CMETC) for certain specified minerals. Specified minerals that would be eligible for the new CMETC are: copper, nickel, lithium, cobalt, graphite, rare earth elements, scandium, titanium, gallium, vanadium, tellurium, magnesium, zinc, platinum group metals and uranium. As for the regular mineral exploration tax credit, the exploration expenses must have been incurred in Canada. The renunciation of expenses must also have been made under flow-through share agreements entered into after budget day and before March 31, 2027. It is important to note that there will be no cumulation of tax credits. Eligible expenditures will not be eligible for both the proposed new CMETC and the 15% regular mineral exploration tax credit (METC). In order for exploration expenses to qualify for the CMETC, a qualified person (as defined in National Instrument 43–101 issued by the Canadian Securities Administrators) will further have to certify that the expenses renounced will be incurred in the course of an exploration project for specified minerals. On this point, the measure seems to insert a new legal test of “reasonable expectation” that the minerals targeted by the exploration are “primarily specified minerals”. No details have yet been issued on the mechanics of applying this test.  However, if the qualified person is unable to demonstrate that there is a reasonable expectation that the minerals targeted by the exploration project are predominantly specified minerals, the related exploration expenses would not be eligible for the CMETC and consequently, any credit granted for ineligible expenses would be recouped from the flow-through share holder who received the credit. Pending the tabling of a more detailed legislative version, careful attention and planning will therefore be required for new flow-through share financings to ensure that they meet the legal criteria for this new tax credit. Our team of professionals in securities, mining law and taxation is available to answer all your questions regarding this new measure and to assist you in the implementation of a successful flow-through financing: Josianne Beaudry René Branchaud Ali El Haskouri Charles-Hugo Gagné Éric Gélinas Sébastien Vézina

In 2020, the pandemic disrupted the Quebec economy and the trend continued in 2021. After a difficult year for local businesses, there is an opportunity for business owners to rethink their business model as they develop their recovery plan. In this context, an initial public offering and equity financing might be a good idea. While the process is relatively costly and time-consuming for senior management, not to mention that it results in a series of obligations for the company and its executives and major shareholders, the benefits far outweigh the disadvantages. Here are five good reasons to take your company public and use equity financing to ensure a successful future. 1. Equity financing: financing your company’s growth differently The moment your company goes public, you significantly expand and diversify your equity financing sources. You are no longer dependent on traditional bank loans. Your company can now raise capital much more easily and at a much lower cost, for example through the issuance of convertible securities, share capital, rights or warrants. In addition, your pool of funders expands considerably, going far beyond founding shareholders, your banker and your very close friends and relatives. All these equity financing tools make it possible to more aggressively manage the growth of your business and take advantage of new business opportunities. 2. Equity financing: facilitating mergers and acquisitions Having a company listed on the stock exchange means having a key advantage when it comes to your expansion plan. Once listed, you can acquire another business using your company’s shares as leverage. This added flexibility increases your chances of success in negotiations. You can thus be more bold in your growth management, as you will no longer be limited to conventional financing methods. 3. Equity financing: gaining notoriety By making the decision to take your business public and opting for equity ?nancing, you will give your business greater visibility. First, the initial public offering will be an opportunity to make your company known to investors through promotional events organized by the brokers participating in the issuance, among others. Second, public companies are often followed by ?nancial analysts, and such attention can be an asset when it comes to marketing products and services. In short, by having your company in the spotlight, it will inevitably gain notoriety, both with investors and economic partners. Finally, for many customers and suppliers, doing business with a publicly traded company is reassuring. They see it as a sign of a well-established business, and this perception can facilitate the conclusion of a sale or supply contract. 4. Equity financing: increasing the market value of your business Better ?nancing costs, greater liquidity for your company’s shares, improved growth potential and increased visibility will all make the market value of your company signi?cantly higher than it was before going public. Once listed, book value will no longer be the main indicator used to determine your company’s worth. It will be worth what investors recognize its value to be, based on its potential for growth and pro?tability and its performance relative to competitors. 5. Company succession made easier When the time comes, it will be much easier for you to retire from your business and bene?t from the fruits of your years-long effort. You will have a number of options, including disposing of your shares through a secondary offering. It will also be easier to attract talented people to take over your business because of the multiple bene?ts that come with the status of public company. The advantages of listing your company on the stock exchange and opting for equity ?nancing are many. In addition to the ?ve points presented here, we could add increased credibility with clients and suppliers, better compensation for key employees, less dilution during fundraising, and others. More companies entering the stock market will rebuild our economy. If you are thinking of transforming your company into a public one, opting for equity ?nancing and taking the plunge into the stock market, do not hesitate to call on one of our lawyers practicing in business law to guide and advise you in the process.

Anyone who wants to bring an action in damages relating to the secondary securities market must prove that the action is brought in good faith and has a reasonable chance of success (s. 225.4 QSA). In Quebec,1 as elsewhere in Canada,2 no prior disclosure of evidence may be obtained by plaintiff for the purpose of meeting this burden. The procedure prescribed by the QSA is complete and sufficient, so recourse to the rules Code of Civil Procedure is unwarranted. Where such an action is brought by way of class action, the court must furthermore be convinced that the criteria for authorizing a class action are also met. The Court of Appeal does not expressly rule on whether prior disclosure is available to the investor  to sustain the proposed class action. These specific rules have no impact on the general rules regarding insurance, such as a plaintiff's direct right of action against the insurer of the person who caused the damage (art. 2501 CCQ). Regardless of the subject matter (the secondary market) or the procedural vehicle (class action), a court may order a defendant to disclose such documents which are necessary for a meaningful exercise of this right, such as insurance policies. In its recent decision in Amaya Inc. v. Derome, 2018 QCCA 120, the Court of Appeal ruled on the interaction between the Securities Act, CQLR, c.V-1.1 (QSA) and the rules specific to class actions in relation to applications by investors for prior disclosure of documents by a public issuer. We summarize here a much-anticipated decision. The Specific Framework of the QSA The QSA governs actions relating to financial markets. Although such actions may be introduced on an individual basis, class actions are regarded as the preferred vehicle, “given that publicly-traded issuers generally have many investors in like circumstances and, if something goes wrong, they are likely to come together to avail themselves of the advantages of a class action.”3 Class actions are merely one of the available vehicles, and it is in no way a requirement to use this type of proceeding. With respect to actions relating to the secondary market, section 225.4 QSA requires that any investor, whether acting personally or as representative of a proposed group, be authorized by the court before bringing the proposed action. This restriction was enacted –and similarly so across Canada–4 to preserve public confidence in stock markets,5 but also to protect public issuers against opportunistic actions brought in hopes of obtaining a settlement rather than to obtain compensation for actual damage.6 Accordingly, an investor who claims to have been defrauded will have to prove to the court from which authorization is requested that the proposed action is “in good faith and there is a reasonable possibility that it will be resolved in favour of the plaintiff” (s. 225.4 para. 3 QSA). Motions for authorization should be addressed as early as possible, so that judicial resources are allocated only to meritorious cases. Interaction With Class Actions If the action takes the form of a class action, the investor must also meet the criteria for authorization of a class action (art. 575 CCP), a burden which has been established to be a light one, since it simply involves proving that “the facts alleged appear to justify the conclusions sought” (art. 575(3) CCP).7 Not only do the QSA and the CCP impose different burdens, but the authorization they require arises at different moments in the course of the proceedings o: the authorization required by section 225.4 QSA must, necessarily, precede the authorization required by article 575 CCP. As the Court of Appeal points out: “This is eminently logical: where leave is required under the Act, there is no action upon which the class action, as a procedural vehicle, can rest until that leave is granted.”8 Of course, both issues can be disposed of in one judgment.9 With these distinctions made, it is clear that any application brought for the purpose of enabling an investor to meet the burden established by section 225.4 QSA must be analyzed pursuant to the rules set out in that provision and not the rules that generally apply to class actions.10 The judgment appealed from was therefore not a “pre-authorization class action judgment”; it was a “judgment prior to leave under the [QSA]”.11 Accordingly, it had to be reviewed in accordance with the requirements and the spirit of the QSA.12 The Judgment Under Appeal The trial judge had granted an application for documentary disclosure, relying on the parties’ general duty to cooperate set forth by article 20 of the CCP.13 He thus arrived at a solution that is unique in the Canadian legal landscape.14 Though rendered during a case management conference, the judgment under appeal  went significantly beyond the confines of case management. Accordingly, the application for leave should follow the rules applicable to judgments rendered in the course of proceedings, set out in article 31 para. 2 CCP.15 The trial judge's decision has addressed a point of law regarding to discovery, which impacted “the character of the proceedings themselves,” and which, if decided wrongly could cause irreparable harm to defendant, regardless of the expenses involved.16 Leave was granted and the Court of Appeal had to consider, on the merits, whether the trial judge was correct in applying the general principles of Quebec civil procedure to the applications for documentary disclosure that were before him. For the Code of Civil Procedure to “compensate[e] for the silence of the other laws if the context so admits,” as provided by its preliminary provision, such a silence must exist. In the opinion of the Court of Appeal, considering the purpose and history of section 225.4 QSA – in particular its goal of screening out opportunistic actions as soon as possible17 – and the uniformity of legislation on this subject in Canada,18 no such silence can be found to exist. On the contrary: in order to avoid short-circuiting the requirement for prior authorization and avoid fishing expeditions and mini-trials, judges who are responsible for authorizing actions of this nature must require that applicants meet their burden themselves.19 Neither the combination of articles 20 and 221 CCP or the specific context of class actions can sidestep that prohibition.20 Insofar as it was sought to allow the investor to meet the burden imposed by section 225.4 QSA, the application for documentary disclosure should have been dismissed. By contrast, the application to obtain disclosure of the insurance policies did not fall within the specific context of section 225.4 SA, and the trial judge's order was left undisturbed, Given the principle of cooperation (art. 20 CCP), but most importantly the long-settled principle that a third party seeking to exercise their right of action against the insurer of the person who caused the damage they suffered (art. 2501 CCQ) such applications can be justified in that they allow potential parties to the case to be identified.21 The Court of Appeal’s decision does not directly address whether class counsel may succeed in a request for “relevant evidence to be submitted” within the meaning of article 574 para. 3 CCP; such requests are traditionally considered to be properly made to contest  the application, that is, necessarily by defendant,  given that the allegations in the application for authorization to institute a class action must be assumed to be true at that stage.22 Summary Section 225.4 QSA is the expression, in Quebec law, of an intent common to all Canadian legislatures to create a screening mechanism for actions relating to the secondary market, in order to preserve investor confidence and deter frivolous suits. Accordingly, where an applicant seeks prior disclosure in order to meet the criterion for authorization set out in section 225.4 QSA, his or her application should be dismissed, including in a class action context. Where the objective of the application for prior disclosure is not one germane to the QSA, for instance, where an applicant seeks information to join an insurer to the proceedings, such application needs to be considered under the ordinary rules of Quebec law.   Theratechnologies Inc. v. 121851 Canada inc., [2015] 2 SCR 106, 2015 SCC 18 Canadian Imperial Bank of Commerce v. Green, [2015] 3 SCR 801, 2015 SCC 60 Par. 52 Par. 97 Par. 84 Paras. 49 and 84; following, inter alia, Theratechnologies Inc. v. 121851 Canada inc., [2015] 2 SCR 106, 2015 SCC 18 or Canadian Imperial Bank of Commerce v. Green, [2015] 3 SCR 801, 2015 SCC 60 Para. 50 Para. 46. Paras. 20, 46 and 54 Para. 45 Paras. 42, 45 and 55 Para. 55 Derome v. Amaya inc., 2017 QCCS 44, paras. 79 et seq. Para. 36; compare: Mask v. Silvercorp Metals Inc., 2016 ONCA 641 and Mask v. Silvercorp Metals Inc., 2014 ONSC 4161 – leave to appeal ref’d: Mask v. Silvercorp Metals, Inc., 2014 ONSC 464 (Ont. Div. Ct); Bayens v. Kinross Gold Corp., 2013 ONSC 6864; Silver v. Imax, (2009) 66 B.L.R. (4th) 222, leave to appeal ref'd, Silver v. Imax,2011 ONSC 1035 (Ont. Div. Ct) Paras. 73 to 79 Paras. 66 et seq.; leave to appeal had been referred to a panel of the Court: Amaya inc. v. Derome, 2017 QCCA 335. Paras. 49 and 84 Paras. 9 and 97 Paras. 9 and 93 Paras. 106 and 107 Collège d'enseignement général et professionnel de Jonquière (CÉGEP) v. Champagne, 1996 CanLII 4413 (CA) Benizri v. Canada Post Corporation, 2016 QCCS 454, para. 6

On October 5, 2017, Québec's Minister of Finance, Carlos J. Leitão, has tabled Bill 141 in Québec's National Assembly. The Bill, which is 470 pages long and includes some 750 sections, is entitled An Act mainly to improve the regulation of the financial sector, the protection of deposits of money and the operation of financial institutions. It proposes a major overhaul of the rules governing the operation of deposit-taking institutions and insurance companies, as well as the distribution of financial products and services (“FPS”) in the province. The Bill proposes amendments to the following laws: Act respecting insurance (repealed) Professional Code Act respecting trust companies and savings companies (replaced) Act respecting financial services cooperatives Act respecting the Mouvement Desjardins (repealed) Deposit Insurance Act (renamed Deposit Institutions and Deposit Protection Act) Derivatives Act Money-Services Businesses Act Automobile Insurance Act Act respecting the Autorité des marchés financiers (renamed Act respecting the regulation of the financial sector) Act respecting the distribution of financial products and services Real Estate Brokerage Act Insurers Act (enacted) Securities Act Based on the Minister's speech unveiling the Bill, the following is a summary of the 13 main categories of measures provided for in that draft legislation: Insurance — The Insurers Act is proposed as a replacement for the Act respecting insurance. It contains provisions governing the supervision and control of insurance business and of the activities of authorized (former permit holding) Québec insurers, as well asprovisions governing the constitution, operation and dissolution of Québec-incorporated insurers. The new Insurers Act also updates the rules applicable to the insurance activities of self-regulatory organizations (“SROs”), including professional orders. Financial services cooperatives — The Bill amends the Act respecting financial services cooperatives (essentially, credit unions which are members of the Groupe Coopératif Desjardins) to specify, among other things, rules relating to the organization and functioning of such cooperatives. The Bill adds a chapter concerning the Groupe coopératif Desjardins in replacement of the Act respecting the Mouvement Desjardins, which will be repealed. Deposit insurance — The Bill amends the Deposit Insurance Act and puts in place a new framework to supervise and control the deposit-taking business and authorized deposit-taking institutions in Québec. It includes provisions allowing for the resolution of problems arising from the failure of such an institution when affiliated to a cooperative group. The title of that Act is also changed to reflect the amendments made to it. Trust companies — The Act respecting trust companies and savings companies is replaced by a new legislation bearing the same title, but which redefines the regulatory framework governing those kinds of companies and their business. This framework is consistent with the new legislation to be applied to insurance companies and deposit-taking institutions. Real estate brokerage — The Act respecting real estate brokerage is to be amended to, among other things, define the concept of real estate brokerage contract, and to transfer to the Autorité des marches financiers (“AMF”) the supervision and control of mortgage brokers in the province. Financial products and services — The Bill amends The Act respecting the distribution of financial products and services to transfer to the AMF and the Financial Markets Administrative Tribunal ("FMAT") the SRO responsibilities currently entrusted to the Chambre de la sécurité financière and the Chambre de l’assurance de dommages. It also proposes a set of amendments aimed at facilitating the online offering and distribution of FPS. Act respecting the AMF — The Bill amends the Act respecting the Autorité des marchés financiers by introducing provisions to protect whistleblowers who denounce regulatory breaches of third parties to the AMF, to establish a committee tasked with taking submissions from consumers of FPS, and to structure the FMAT in a way similar to other provincial administrative tribunals, such as the Administrative Tribunal of Québec. The Act respecting the AMF is to be renamed an Act respecting the regulation of the financial sector. Funeral expenses insurance — The Bill amends the Civil Code of Québec to permit funeral expense insurance contracts to be entered into. It also modifies the Act respecting prearranged funeral services and sepultures, to provide for a more proper regulation of such contracts. Automobile insurance — The Bill amends the Automobile Insurance Act to specify how information relating to the acquisition or renewal of automobile insurance is to be filed. Money services — The Bill amends the Money-Services Businesses Act to provide for periodic checks (every three years) to be conducted on money-services businesses by the competent local police. Derivatives — The Bill adds derivatives trading platforms to the entities regulated under the Derivatives Act. Securities — The Bill amends the Securities Act to, among other things, replace the definition of "non-redeemable investment fund", prescribe restrictions on sharing commissions for certain dealers, and provide for the suspension of prescription when an application for authorization of an action for damages is filed under that Act. Legislation administered by the AMF — Finally, the Bill amends the laws administered by the AMF (listed in Schedule I to the Act respecting the Autorité des marchés financiers) to prescribe the duration of freeze orders obtainable under those laws and to prescribe the terms of administration and distribution of amounts remitted to the AMF pursuant to a disgorgement order issued thereunder. Bill 141 thus proposes wide-ranging reforms. It embodies measures which: amount to a major overhaul of certain financial laws (Desjardins’ financial services cooperatives, trust companies, deposit insurance); aim at providing a legal basis for operations that are either currently unregulated or unauthorized by law (e.g., the offering or distribution of FPS online); incorporate certain supranational standards into Québec's regulatory framework (e.g., resolution / orderly winding up of unstable systemically important financial institutions); redeploy the exercise of regulatory, supervisory and enforcement / disciplinary functions in the financial sector; and enact numerous new specific rules, particularly in the field of insurance (reciprocal insurance unions; exemption from authorization (permits) respecting suppliers of insurance-like extended warranty products; commercial practices; etc.). The scope is far-reaching for our clients operating in the Québec financial sector, and those who wish to efficiently seize the opportunities offered by the new rules that will govern the Québec's financial marketplace. They would now want: to learn more about the measures of the Bill and the way they may affect them, to position themselves competitively or adjust their ongoing projects in preparation for what is to come; to consult to knowledgeably define new strategies and be able to effectively implement them, in compliance with the new rules; to participate, separately or jointly with others stakeholders, to the consultations that the Minister of Finance has announced would be held on the Bill by a parliamentary committee, to present their views and propose enhancements to its provisions.

The high level of information asymmetry between investment fund managers and their investors1 can give rise to significant conflicts of interest which must be adequately managed. This article discusses the main conflicts of interest encountered in standard private equity, venture capital and hedge fund structures and how to mitigate or prevent them. The idea that conflicts of interest must be adequately managed is not a novel one. However, since 2015, this concern has come to the forefront of regulatory reviews by the United States Securities and Exchange Commission (the “SEC”)2 and has been an important focus in many investors’ operational due diligence in Canada and the U.S.3 The concerns arise mainly from inherent deficiencies in private equity, venture capital and hedge fund structures which entail an asymmetry of information between managers and investors and involve inherent conflicts of interest, including those resulting from the compensation of the managers in most of these funds as more fully described below. Common conflict of interest situations Fee structure Compensation arrangements in investment funds can lead to numerous inherent conflicts of interest. While most private equity, venture capital and hedge funds provide for a carried interest or performance fee, it remains that a significant portion of managers’ compensation comes from management fees charged to the fund. Those management fees are intended to compensate the manager for internal overhead costs incurred in its day-to-day operations and are not meant to be a source of profit. However, when a manager plays an active role in managing the assets of the funds (as is often the case with private equity and venture capital funds), those management fees typically do not cover all the overhead incurred in connection with the active management of those assets (for example, as a result of the need to hire additional staff to monitor a portfolio company). In this type of situation, the manager will often seek alternative forms of compensation by charging additional fees or expenses to the investment funds or the portfolio companies in which the funds invest. These fees can be in the form of an asset management fee or a negotiation fee charged in connection with securing a portfolio investment or for the day-to-day management of a portfolio investment. It can also be in the form of compensation paid directly to the principals of the manager acting as officers or directors of such portfolio companies. Although these types of compensation are not problematic in and of themselves, they create an inherent conflict of interest since the additional fees are an expense assumed directly or indirectly by the fund and at the same time constitute a source of revenue for the manager or its principals. As a result, and since any such fees or expenses decrease the overall asset value of the funds, it is imperative that these fees and situations be adequately disclosed to investors (the disclosure must describe not only the type or nature of the fee but also how it will be calculatedand has been an important focus in many investors’ operational due diligence in Canada and the U.S.4). The timing of such disclosure is important; investors must be aware at the time of their commitment to the fund, that this type of fee could be charged to the fund or its portfolio investments by the manager or its affiliates or principals and has been an important focus in many investors’ operational due diligence in Canada and the U.S.5. Disclosure made during the life of the fund (for example, when the fee is actually paid) would not be considered sufficient or adequate. An example of the foregoing is the situation that resulted in Blackstone Management Partners (“Blackstone”) being forced to pay a civil monetary penalty in 2015 for failing to disclose that it was entitled to accelerate the payment of future monitoring fees charged to the portfolio companies of its funds upon termination of the monitoring agreements it had signed with those portfolio companies6. Blackstone effectively terminated the monitoring agreements upon the private sale or initial public offering of the portfolio companies and then accelerated the payment of the future monitoring fees in accordance with the terms of the agreements. It must be highlighted that Blackstone had disclosed to investors at the time of their investment that it could receive monitoring fees from portfolio companies held by the funds it advised and disclosed the amount of the accelerated monitoring fees during the life of the funds. However, the SEC held that Blackstone had breached the U.S. Investment Advisers Act of 1940 by failing to disclose to the funds’ limited partners prior to their capital commitment that it could accelerate future monitoring fees once the monitoring agreements ended. This decision highlights the importance of not only disclosing the potential fees and expenses to be borne by investors and the funds, but also any circumstances which might lead to an increase or decrease in their amount. The Blackstone case clearly shows the importance of having sufficiently detailed disclosure in the private placement or offering memorandum (“PPM”) (or other disclosure document) provided to investors when they subscribe to the fund7. Such disclosure should include, for example, a statement that the principals of a venture capital fund could receive shares or fees to sit on the board of directors of start-ups in which the fund invests. Hedge fund managers should carefully disclose any side arrangement with a portfolio or sub-portfolio adviser, broker-dealer8 or custodian (including, in particular, referral or soft dollar arrangements). Managers that use a master-feeder investment fund structure should ensure that the disclosure clearly indicates how the fees and expenses incurred for the benefit of different funds in the structure will be allocated among these funds. These are only a few examples of the types of disclosure that should be provided to investors as part of their pre-investment due diligence. In addition to such disclosure made at the time of subscription, managers should also ensure that the quarterly and annual reports provided to investors are transparent regarding the compensation compensation directly or indirectly received by the manager, its affiliates and principals. The Institutional Limited Partners Association (the “ILPA”) provides a template of the disclosure to be included in quarterly reports as part of its “Reporting Best Practices”9, which managers can use to ensure an adequate level of reporting. Investment funds subject to Regulation 81-106 respecting Investment Fund Continuous Disclosure10 (“NI 81-106”)11 should also refer to the rules in that Regulation and in particular section 2.5 of Form 81-106F1, Contents of Annual and Interim Management Report of Fund Performance (MRFP), which states that any commission, spread or other fee paid by the investment fund to any related party12 in connection with a portfolio transaction must be discussed under the heading “Related Party Transactions”. Regardless the level of disclosure provided in the PPM or in quarterly reporting, managers should also always ensure that the funds’ organizational documents explicitly authorize them to charge the fees (or other forms of compensation) that are being charged directly or indirectly to the funds. Furthermore, notwithstanding the existing disclosure requirements, the Canadian Securities Administrators also provide that registered managers should consider whether any particular benefits, compensation or remuneration practices are inconsistent with their obligations to clients13. Transactions involving multiple funds managed by a single manager Another typical conflict of interest is the transfer, as part of the liquidation process of a private equity or venture capital fund, of the interest the fund held in certain portfolio companies to a follow-on fund. Such transfers occur when the manager was unable to find a successful exit for a portfolio company but considers that the investment is performing sufficiently well to justify transferring it to a follow-on fund. These situations lead to an inherent conflict of interests since the fund manager will effectively be negotiating on both sides of the table with respect to the sale of such investment between the funds as it manages both the selling fund that controls the portfolio company and the follow-on fund purchasing the investment in the portfolio company. The manager can be incentivized to benefit the selling fund to maximize its carried interest or, depending on how the selling fund has been performing, might be tempted instead to use the portfolio company as an attractive seed asset for its follow-on fund. Since the manager is negotiating with itself, investors could be concerned that the transaction will not occur at a fair market value. This can adversely impact either the investors of the selling fund or those of the follow-on fund as some limited partners of a previous fund will often invest in the follow-on fund, but typically not all of them. The favored way to manage such conflicts of interest is by stating in the funds’ organizational documents that if a transaction occurs among funds managed by the fund manager, the manager will seek a formal valuation of the portfolio companies being transferred from an independent third party appraiser or will submit the pricing terms and conditions of the transaction for approval to the investors or to the fund’s advisory committee. The organizational documents could also provide that the investors or the fund’s advisory committee can be entitled to require an independent third party valuation if they so wish. Funds with overlapping investment periods and investment policies create another situation in which a manager can be incentivized to favour one or more funds it manages over others. A manager finding itself in this situation will have to choose which funds will invest in a specific opportunity and in what proportion. Again, the manager could be tempted to favour certain funds over others depending on how they have been performing or according to their compensation structure. The rules set forth in the organizational documents of private equity and venture capital funds typically prohibit their managers from managing simultaneous competing14. funds in order to avoid such conflicts of interest, often with an exception allowing the manager to create a follow-on fund (with a similar or overlapping investment policy) once a certain percentage of the undrawn capital commitments of the previous fund have been invested (or reserved for follow-on investments and expenses). The best way for investors to protect themselves against the inherent conflict of interest arising from such a situation is to provide in the fund’s organizational documents or in side letters that the manager is required to cause both funds to make parallel investments during any such period based on the amount of each fund’s respective undrawn capital commitment. Contrary to private equity and venture capital fund managers, hedge fund managers typically are not prevented from managing competing funds and often simultaneously manage various funds with investment policies that overlap in certain situations (and may also manage other clients’ accounts under a discretionary mandate). These managers should adopt a clear policy to determine how they will allocate investment opportunities among their funds. The policy should be sufficiently detailed to allow an investor to determine whether the terms of the policy have been met with respect to a given investment. Preferably, the policy should not simply state that the manager will allocate trades in a fair and equitable manner in light of the investment objectives and strategies of the funds and other factors. The content of the policy should be adequately described to investors in the PPM given to them when they subscribe. The PPM should also clearly describe that such a conflict of interest could arise and how the manager will deal with it. Conclusion While the above describes some of the more commonly encountered conflicts of interests, the diversity of such situations should not be underestimated. For example, different “related-party” transactions “Not all conflicts of interests are problematic and need to be addressed.” can occur during the life of a fund. Both the manager and investors have an incentive to ensure that the organizational and disclosure documents of the funds clearly define what types of transactions they will consider to be “related-party transactions” and how these transactions will be handled and reviewed by the managers and/or the advisory committee15. Adequate and detailed disclosure will make clear to the manager which situations fall within the scope of “relatedparty transactions” and are thus subject to the conflict of interest rules established by the manager. In its reporting template, the ILPA proposes a definition of “related party”16 which can be used by managers and investors as a guideline to determine which situations should be covered. On the other hand, investors must understand that not all conflicts of interests are problematic and need to be addressed. There is a certain level of misalignment between the manager’s and the investors’ respective interests in a fund17 and not all of it can be managed in a cost-efficient manner; meaning that it is preferable for investors to accept that managerial actions may conflict with their best interests rather than seeking a perfect alignment of the manager’s interests with their own or trying to give to the advisory committee a power of oversight over any type of misalignment. Hence, all parties involved should take a balanced approach in negotiating the conflict of interest provisions of a fund’s limited partnership agreement or a side letter between the manager and an investor and pinpoint specific situations in which the advisory committee should be consulted or approve a related-party transaction.   See SAHLMAN, William A. (1990). The Structure and Governance of Venture-Capital Organizations. Journal of Financial Economics, Vol 27, pp. 473-521 regarding the issue of information asymmetry in investment funds. Securities and Exchange Commission speech – Julie M. Riewe, Co-Chief, Asset Management Unit, Division of Enforcement, “Conflicts, conflicts everywhere”, February 26, 2015. This article cites certain regulations and policy statements of the Canadian Securities Administrators(« CSA ») and certain cases litigated by the SEC in the United States. Although many Canadian private equity or venture capital funds and their managers are not subject to regulatory oversight by the CSA and are therefore not governed by these regulations or case law, the guidelines developed by the CSA and the extensive jurisprudence developed by the SEC could potentially support a lawsuit brought by investors in Canada against unregistered managers for breach of fiduciary duty based on the Civil Code of Québec, , in Québec, the organizational documents of the funds, or the securities legislation of certain provinces providing for a statutory right of rescission or damages for misrepresentations in PPMs. The standards discussed in this article should therefore be relevant and should also be used as guidance for Canadian managers not registered with a Canadian securities regulator. In the case of a fee based on an amount of assets under management, for example, the disclosure should clarify how those assets are valuated See Section 13.4 of the Policy Statement to Regulation 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant Obligations (“Policy Statement 31-103”) which states: “Registered firms and their representatives should disclose conflicts of interest to their clients before or at the time they recommend the transaction or provide the service that gives rise to the conflict.” SEC, Litigation, Release No. 4219, 2015. Policy Statement 31-103 states that the disclosure must “be prominent, specific, clear and meaningful to the client, and explain the conflict of interest and how it could affect the service the client is being offered”. See in particular the requirements set forth in Regulation 23-102 respecting Use of Client Brokerage Commissions and the related policy statement. Reminder: A registered manager has a “best execution” obligation, i.e. it must find the most advantageous trading execution terms reasonably available under the circumstances when selecting a broker-dealer for trades effected on behalf of the fund, as prescribed by Regulation 23-101 respecting Trading Rules. ILPA Best Pracices. See more particularly footnotes 4 and 5 of the sample report attached to the Quarterly Reporting Standards, Version 1.1 of the ILPA (originally released in October 2011 and revised in September 2016). Regulation 81-106 respecting Investment Fund Continuous Disclosure in Québec. NI 81-106 applies to investment funds (as defined in the Securities Act (Québec)) that are reporting issuers. For more information on the definition of “investment funds” in the Securities Act (Québec), see our article entitled “Registration Requirements of Venture Capital and Private Equity Fund Managers in Canada: A Favourable Regulatory Framework” published in May 2014 in the Lavery Capital newsletter. NI 81-106 refers to the Canadian Institute of Chartered Accountants Handbook with respect to the notion of “related party”. See Section 13.4 of Policy Statement 31-103 under the “Compensation Practices” section. See also the “Compensation-related conflicts of interest” section in the Investment Industry Regulatory Organization of Canada (IIROC) Notice 12-0108. In this article, the term “competing funds” simply refers to funds that are authorized to invest in the same opportunities and can therefore be considered to be competing with each other with respect to certain types of investment opportunities. The requirement to submit a related party transaction to the advisory committee is typically found in investment funds raising capital from institutional investors, not in retail-type funds See the “Related Party Definition” tab of the ILPA Reporting Template (Version 1.1 published in January 2016). For example, the carried interest compensation structure typically found in many funds can give the manager an incentive to make riskier or more speculative investments than what would normally be in the best interests of the fund’s investors in order to generate greater compensation.

CRS entry into force: July 1st, 2017 The Common Reporting Standard (“CRS”) will impose new obligations on financial institutions, including investment funds, as of July 1st, 2017. These rules are an addition to the existing Foreign Account Tax Compliance Act (“FATCA”), which applies to Canadian investment funds. The entry into force of the CRS means that, as of 2018, at the time of reporting, any investment fund that does not comply with its due diligence and reporting obligations regarding a reportable account it maintains might be subject to penalties. New guides from the Canada Revenue Agency Guidance on the CRS Guidance on the FATCA Self-certification forms - for entities: English and French - for individuals: English and French The Canada Revenue Agency (“CRA”) recently published new guidance that aims to assist financial institutions in complying with the obligations under the FATCA and the CRS. Here is an overview of the new measures that will be put in place and of recent publications by the CRA. CRS Canada signed the Multilateral Competent Authority Agreement (“MCAA”) on automatic exchange of information on June 2nd, 2015. Through this agreement, Canada committed to implement the CRS. The purpose of the CRS is to make tax avoidance more complex for taxpayers. It advocates for international cooperation through the establishment of a system for the automatic transmission of tax information among the countries which adhere to it. In Canada, the implementation of this standard will be accomplished by way of an amendment to the Income Tax Act.1 This amendment will come into force on July 1st, 2017. In general terms, the CRS requires financial institutions to disclose certain information to the CRA regarding account holders or beneficial owners who are residents of foreign countries. The CRA will in turn transmit this information to the countries concerned and ensure that the taxes owed to these countries are paid. The CRS defines the due diligence procedures that must be put in place, the financial institutions that have to report, the different types of accounts to report, the taxpayers concerned, and the financial account information to be exchanged. The CRS draws significantly from the FATCA.2 Due diligence The due diligence procedure requires financial institutions, including investment funds, to identify reportable accounts by collecting information about account holders. The main objective of this procedure is to determine the tax residency of the account holders and their beneficial owners. Financial institutions are required to collect indicia linked to account holders and request account holders to self-certify their residence status. Any entity or individual who wishes to open an account after June 30th, 2017, and even before, will have to give this information to the investment fund in order to proceed with the opening of the account and the investment. Reporting Every financial institution, including every investment fund, will have to report to the CRA the required information on reportable accounts collected during the due diligence procedure. The reporting is done electronically. General information such as the name, address, foreign taxpayer identification number, jurisdiction, and birth date of the holder will be reported to the CRA if the account is classified as a reportable one. Institutions will also have to communicate the account balance, at the end of the year, and the payments made during the year. This information will be sent directly by the CRA to the tax authorities in the country of residence of the account holder or of the beneficial owners. New publications from the CRA On March 22nd, 2017, along with the presentation of the 2017 federal budget, the CRA released two new guidance documents, one on the CRS and one on the FATCA, intended for financial institutions. In addition to the guidance documents, the CRA also introduced new online self-certification form templates that can be used by financial institutions in order to ensure that they have obtained all the necessary information to comply with the standards. The use of these forms is not mandatory, but it is recommended by the CRA. Institutions that make the decision to continue using their own forms or the American W8 forms will need to ensure that they meet all their obligations and that their forms allow the collection of all necessary information and attestations from account holders. Income Tax Act, R.S.C. (1985), c. 1 (5th Supp.), section XIX. www.lavery.ca/en/publications, see our newsletter Lavery Capital, No. 4, April 2015.

The March 22, 2017 Budget of the Government of Canada, through its “Innovation and Skills Plan” (http://www.budget.gc.ca/2017/docs/plan/budget-2017-en.pdf) mentions that Canadian academic and research leadership in artificial intelligence will be translated into a more innovative economy and increased economic growth. The 2017 Budget proposes to provide renewed and enhanced funding of $35 million over five years, beginning in 2017–2018 to the Canadian Institute for Advanced Research (CIFAR) which connects Canadian researchers with collaborative research networks led by eminent Canadian and international researchers on topics including artificial intelligence and deep learning. These measures are in addition to a number of interesting tax measures that support the artificial intelligence sector at both the federal and provincial levels. In Canada and in Québec, the Scientific Research and Experimental Development (SR&ED) Program provides a twofold benefit: SR&ED expenses are deductible from income for tax purposes and a SR&ED investment tax credit (ITC) for SR&ED is available to reduce income tax. In some cases, the remaining ITC can be refunded. In Québec, a refundable tax credit is also available for the development of e-business, where a corporation mainly operates in the field of computer system design or that of software edition and its activities are carried out in an establishment located in Québec. This 2017 Budget aims to improve the competitive and strategic advantage of Canada in the field of artificial intelligence, and, therefore, that of Montréal, a city already enjoying an international reputation in this field. It recognises that artificial intelligence, despite the debates over ethical issues that currently stir up passions within the international community, could help generate strong economic growth, by improving the way in which we produce goods, deliver services and tackle all kinds of social challenges. The Budget also adds that artificial intelligence “opens up possibilities across many sectors, from agriculture to financial services, creating opportunities for companies of all sizes, whether technology start-ups or Canada’s largest financial institutions”. This influence of Canada on the international scene cannot be achieved without government supporting research programs and our universities contributing their expertise. This Budget is therefore a step in the right direction to ensure that all the activities related to artificial intelligence, from R&D to marketing, as well as design and distributions, remain here in Canada. The 2017 budget provides $125 million to launch a Pan-Canadian Artificial Intelligence Strategy for research and talent to promote collaboration between Canada’s main centres of expertise and reinforce Canada’s position as a leading destination for companies seeking to invest in artificial intelligence and innovation. Lavery Legal Lab on Artificial Intelligence (L3AI) We anticipate that within a few years, all companies, businesses and organizations, in every sector and industry, will use some form of artificial intelligence in their day-to-day operations to improve productivity or efficiency, ensure better quality control, conquer new markets and customers, implement new marketing strategies, as well as improve processes, automation and marketing or the profitability of operations. For this reason, Lavery created the Lavery Legal Lab on Artificial Intelligence (L3AI) to analyze and monitor recent and anticipated developments in artificial intelligence from a legal perspective. Our Lab is interested in all projects pertaining to artificial intelligence (AI) and their legal peculiarities, particularly the various branches and applications of artificial intelligence which will rapidly appear in companies and industries. The development of artificial intelligence, through a broad spectrum of branches and applications, will also have an impact on many legal sectors and practices, from intellectual property to protection of personal information, including corporate and business integrity and all fields of business law. In our following publications, the members of our Lavery Legal Lab on Artificial Intelligence (L3AI) will more specifically analyze certain applications of artificial intelligence in various sectors and industries.

Martine Samuelian and Virginia Barat, JEANTET On July 18, 2016, the European Securities and Markets Authority (ESMA) issued a favourable advice for a future extension of the European passport concerning Alternative Investment Fund Managers (AIFMs)1 in Canada. This advice, which is based on objective criteria of cooperation and guarantee of overall protection level equal to that in force in European State members, constitutes the last stage prior to the effective extension of the European regime to Canada. 1. Assessment criteria The ESMA reviewed the individual situation of twelve non-European countries2, including Canada, to assess the guarantees offered by their respective local legislation against the requirements of the AIFM Directive (AIFMD). With respect to cooperation, the assessment criteria relate to: the possibilities for the exchange of information, on site visits, between the competent monitoring authorities respectively in Canada and those of the European State member; the fact that the non-European third country in which the Alternative Investment Fund (AIF) is established is not listed as a Non-Cooperative Country and Territory of the Financial Action Task Force (FATF); the existence of agreements for exchange of information in tax matters. Furthermore, sufficient guarantees (as defined by the AIFMD) must exist in respect of: investor protection, particularly in relation to complaint management, the safeguarding of assets, the prudential soundness of the depositary, the separation and management of conflicts of interests between the depositary function and that of alternative investment fund manager, the scope of monitoring by local regulatory authorities, compliance with the requirements of the AIFM Directive; market disruption as a result of a potential extension of the AIFM passport to a non-European country; competition, by the assessment of the level of reciprocity in respect of the marketing of European AIFs in a non-European third country; systemic risk management, particularly the mechanism for monitoring existing markets. 2. Final result of the assessment of Canada by ESMA The ESMA notes that the Canadian financial system had been assessed by the International Monetary Fund (IMF) in 2014, the IMF concluding that the international principles on securities regulations were “fully implemented” in Canada. In its advice dated July 18, 2016 respecting a possible extension of the AIFM passport to Canada, the ESMA thus confirms that there is no significant obstacle which may hinder the application of the passport to Canada with respect to the systemic risk, market disruption and obstacles to competition. Nevertheless, it notes differences between the Canadian regulations and the AIFMD. These differences particularly relate to the supervisory function that are imposed on the European AIF depositary (contrarily to the Canadian custodian which, pursuant to National Instrument 81-102 – Investment Funds (Regulation 81-102 respecting Investment Funds in the province of Quebec) (“NI 81-102”), is not subject to supervisory functions but rather only subject to obligations of custodianship of the portfolio assets). The ESMA also mentions the rules pertaining to the compensation of the manager (notably to align the interests of the manager and of the investors). There are various rules regarding compensation in Europe while NI 81-102 provides for very few rules in that regard (further, many investment funds in Canada are not subject to NI 81-102). However, the ESMA concludes that these differences between the Canadian regulatory framework and that of the AIFMD do not constitute a significant obstacle to the application of the European passport to Canada. Conclusion Where ESMA3 considers that “there are no significant obstacles regarding investor protection, market disruption, competition and the monitoring of systemic risk, impeding the application of the passport to the marketing of non-EU AIFs by EU AIFMs in the Member States and the management and/or marketing of AIFs by non-EU AIFMs in the Member States in accordance with the rules set out in Article 35 and Articles 37 to 41, it shall issue positive advice in this regard.” It is this positive recommendation that the ESMA sent on July 18, 2016 to the European Commission (EC), to the European Parliament and Council, which should allow the EC, within three months, to define by delegated act the date of coming into force and the terms for the extension of the European passport to Canadian Alternative Investment Fund Managers to market these funds in EU countries. Includes notably private equity funds, venture capital funds and hedge funds. See our article entitled “Impact of the possible extension of the European passport regime on Canadian fund managers” published in the Lavery Capital newsletter, May 25, 2016. Australia, Bermuda, Canada, United States, Guernsey, Hong Kong, Cayman Islands, Isle of Man, Japan, Jersey, Singapore, Switzerland. See article 67(4) of the Directive 2011/61/UE on Alternative Investment Fund Managers.

A recent decision of the Tax Court of Canada in the case of Line Durocher c. Sa Majesté La Reine1 illustrates the dangers of granting a simple option for acquiring shares in the specific context of the implementation of a shareholder agreement in respect of the Canadian-controlled private corporation status (CCPC) for the purposes of the Income Tax Act (Canada) (ITA) and the possibility of being eligible to the capital gain exemption upon the disposition of “qualified small business corporation shares” (QSBCS). BACKGROUND Aviva Canada Inc. (“Aviva”), a financial institution and a wholly-owned Canadian subsidiary of Aviva International Holdings Limited (“Aviva International”), a corporation which does not reside in Canada, acquired, in the context of a shareholder agreement entered into during fiscal year 2002, an option allowing it to acquire the shares of the financial holding corporation (“Holdco”), which indirectly controlled the Dale Parizeau corporation, which operated an insurance firm. This option, if exercised, gave control of Holdco and, indirectly, of Dale Parizeau. Beginning in 2002, due to the grant of the option for the Holdco shares to Aviva, Holdco’s shares and, accordingly, those of Dale Parizeau, could no longer qualify as QSBCS under the ITA since Aviva was controlled by Aviva International. Accordingly, these shares no longer met the conditions to be considered as QSBCS, with the result that the related capital gain exemption was lost. Holco’s shares were sold to Aviva during fiscal year 2008. The taxpayers unsuccessfully tried to claim the capital gain exemption from the disposition of the Holdco shares. Holdco’s shareholders, 15 in total, were denied the exemption by the Canada Revenue Agency, a decision which was upheld by the Tax Court of Canada. The ITA provides for an exception whereby granting an option or other right to acquire shares has no impact on the CCPC status for the purpose of the capital gain exemption. However, this exemption is only applicable if the rights are granted in the context of a purchase-sale agreement respecting a share of the share capital of a corporation2. The exception does not apply in the context of a shareholder agreement. It is to be noted that pursuant to section 148 of the Act respecting the distribution of financial products and services, not more than 20% of the shares of an insurance firm or the related voting rights may be held directly or indirectly by financial institutions, financial groups or legal persons related thereto. However, this prohibition does not apply to an option for acquiring shares. COMMENTS It is important to mention that the grant to Aviva of the option for acquiring Holdco’s shares in the context of entering into a shareholder agreement has had serious consequences for the 15 Holdco shareholders, that is, the loss of the capital gain exemption for each of them. Everything had been put into place to allow them, through family trusts, to multiply the exemption for the beneficiaries of the trusts. This obviously highlights the importance of retaining the services of tax experts in the context of conducting business transactions and establishing corporate structures, particularly with respect to the impact of entering into a shareholder agreement. It is to be noted that the above decision has been appealed before the Federal Court of Appeal.   2011-1393 (IT) G, dated December 9, 2015. 110.6(14)(b) ITA.

On November 25, 2015, the Investment Industry Regulatory Organization of Canada (IIROC) published a White Paper for consultation. It is seeking comment on two proposals which, if approved and implemented, would change the current structure for distributing mutual funds in Canada. A “restricted practice” policy and a policy involving directed commissions are being proposed. RESTRICTED PRACTICE POLICY The proposal would allow an IIROC dealer member to use representatives who would not advise and would only offer mutual funds and exchange-traded funds (restricted dealing representatives). To do so, they would not have to be trained and qualified to advise or trade the other categories of securities normally offered by the dealer. An IIROC dealer member who wishes to hire restricted dealing representatives currently must ask IIROC for an exemption from the proficiency upgrade requirement for a mutual fund representative who will work for it. The considerations described in the White Paper stem from such an exemption request. According to a survey of around forty brokerage firms, the conclusions of which are described in the White Paper, this proposal raises the issue once again of a possible merger between the Mutual Fund Dealers Association of Canada (MFDA) and IIROC. It would also harmonize the respective missions of these self-regulatory organizations (SROs) regarding the regulation of mutual fund representatives, at least those who are registered as restricted dealing representatives by IIROC. DIRECTED COMMISSION POLICY The proposed directed commission policy would allow an IIROC dealer member to pay commissions directly to an unregistered personal corporation controlled by a representative. This proposal is being put forward to support the restricted practice proposal since the survey mentioned above showed that “for many registered firms and individuals, eliminating the proficiency upgrade requirement on the IIROC platform is of limited interest unless directed commissions are also allowed”. The MFDA already allows commissions to be directed to unregistered corporations provided a written agreement is signed by the mutual fund dealer, the representative and the representative’s personal corporation stating that the dealer and the representative must comply with MFDA requirements and the representative and the personal corporation must both provide the mutual fund dealer full access to their books and records. ISSUES SPECIFIC TO QUEBEC In Quebec, the Chambre de la sécurité financière has exclusive responsibility for self-regulating mutual fund representatives under An Act respecting the distribution of financial products and services (Distribution Act). This means that a new IIROC category of restricted dealing representatives would require legislative changes in Quebec to allow a mutual fund representative to only be a member of IIROC through a dealer member of that organi- zation. Such changes to the Distribution Act are unlikely in the foreseeable future, at least until the Department of Finance has completed its review of the enforcement of the Distribution Act. We would also add to this list of conditions the approval of changes to the orders recognizing IIROC as a securities self- regulatory organization and the possible re-examination of exemptions from certain requirements of Regulation 31-103 which are granted to IIROC and MFDA dealer members. Such a re- examination would be required since such orders and exemptions are not issued based on an overlapping of the regulation of mutual fund representatives attached to these respective categories of dealers. MFDA CONSULTATION Further to the publication of the White Paper, the MFDA recently released the results of a consultation held with 79% of its members on the potential impacts of the application of IIROC’s proposed policies. If the restricted practice policy is adopted, most MFDA member firms believe that they would either go out of business or be forced to merge with firms registered with IIROC. Such a step would only benefit MFDA member corporations that are also affiliated with an IIROC member corporation, which would allow them to reduce their operational costs, increase efficiency and be more competitive. MFDA members generally agree that the current SRO structure adequately protects investors and that the inevitable restructuring of this system that would result from the adoption of the restricted practice policy should be aimed at protecting investors, not reducing costs. MFDA members are therefore leaning in favour of the status quo with respect to the new policies discussed in the IIROC White Paper. The White Paper consultation will end on March 31, 2016.

Equity crowdfunding will soon have a new framework in which to operate in Canada and this is excellent news for investors and startups alike. On November 5, 2015, the Canadian Securities Administrators announced that regulatory authorities in Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia published the final version of Multilateral Instrument 45-108 - Crowdfunding (the “Equity Crowdfunding Prospectus Exemption”), which is expected to come into force on January 25, 2016. Crowdfunding will no longer be limited to advance purchases of goods and services in Canada, as the new Equity Crowdfunding Prospectus Exemption will allow startups to raise capital by issuing and selling securities to the public, using online funding portals, without having to file a prospectus. An offering document that meets regulatory requirements will nonetheless have to be prepared and published on the electronic funding portal. The document must contain certain particular information on the corporation, its officers, and the terms of the offering. ISSUER ELIGIBILITY CRITERIA Under the Equity Crowdfunding Prospectus Exemption, eligible issuers may raise a maximum of $1,500,000 per 12-month period. The main eligibility criteria for an issuer are namely that it be incorporated under Canadian laws and headquartered in Canada, that a majority of its directors reside in Canada, and that the issuer is not an investment fund. SUBSCRIPTION LIMITS FOR EACH INVESTOR Subscription limits for investors will vary depending on whether an investor is an accredited investor (as defined in the securities regulations) or not. In Ontario only, another category of investors, “permitted clients” (as defined in the securities regulations), is subject to its own specific investment limits. Investments by non-accredited investors will be limited to $2,500 per private placement (up to an annual maximum of $10,000, only in Ontario). Investments by accredited investors will also be limited, albeit to a greater amount of $25,000 per investment (up to an annual maximum of $50,000, only in Ontario). In Ontario, investors who are classified as permitted clients will not be limited in the amount of capital that they can invest. LEAD INVESTOR INCENTIVES It is no coincidence that accredited investors qualify for higher investment limits. The intention is to encourage them to act as lead investors who can set the pace for less experienced, non-accredited investors, by providing skills and expertise in management for the benefit of all investors. The emergence of lead investors is also encouraged by the fact that issuers will be able to distribute their securities under other prospectus exemptions during the crowdfunding distribution period with different prices, terms and conditions from those being distributed under the Equity Crowdfunding Prospectus Exemption. This type of model has already proven advantageous in the United States, where equity crowdfunding syndicates have been developed. Such syndicates, which are made up of angel investors and venture capital funds, allow small investors to invest their money in tandem with more experienced investors. CONTINUOUS DISCLOSURE Issuers who issue securities pursuant to the Equity Crowdfunding Prospectus Exemption will also be subject to certain continuous disclosure obligations, including the obligation provide the relevant securities commissions with financial statements and to make such financial statements available to investors within 120 days of their financial year end. The extent of such continuous disclosure obligations will vary in accordance with the total amount of funds raised by the issuer pursuant to one or more prospectus exemptions, from its date of formation to the end of its last financial year, based on the following thresholds: $249,999 or less: no requirement Between $250,000 and $749,999: financial statements accompanied by an examiner’s report or an auditor’s report $750,000 or more: financial statements accompanied by an auditor’s report In all cases, if the issuer is already a reporting issuer as defined by securities regulations, it will still be subject to any continuous disclosure obligations that already applied. CONCLUSION The Equity Crowdfunding Prospectus Exemption will open up markets to investors big and small, and allow them to build valuable relationships with startups early on. It will be interesting to see if the Equity Crowdfunding Prospectus Exemption will generate sufficient lead investors for equity crowdfunding syndicates to be put into place, as they have been in the United States.

A due diligence analysis of intellectual property rights is an important step when acquiring or making a significant investment in a business. It is particularly important in the case of a technology business, where IP rights are assets that account for almost all the value in a business. A due diligence analysis provides a more accurate picture of those assets and of any potential problems associated with them. Various types of intellectual property can be the object of a due diligence analysis. Most often it is trademarks, patents and trade secrets that are assessed, although copyrights can be involved as well, such as when a business has rights to the source codes of a computer program. However, it should be kept in mind that all forms of intellectual property require careful consideration. In Canada, trademarks can be assigned under the Trade-marks Act1, whether they are registered or not. It is therefore important to trace the trademark’s chain of title back to when it was first used. If the trademark is registered, it will also be important to determine whether the goods and services declared at the time of registration adequately match the operational reality of the business as well as whether the reported date of first use is correct. In fact, a registration can be invalidated if the actual date of first use is found to be later than the date that was declared. With respect to patents, a distinction must be made between pending applications and patents actually granted. If a patent application is pending, it is important to review any correspondence received from the patent offices, notably for any indication that the patent will not be granted or that its scope will be restricted. If the application was filed under the Patent Cooperation Treaty (PCT), it is advisable to analyse any preliminary opinions issued under the framework of this treaty. Since a patent application is predominately a technical document, it might be necessary to ask an expert in the field for his or her opinion concerning the scope of the invention. While a patent that has been issued is presumed valid, it remains essential to assess its scope in relation to the invention the business is exploiting commercially. Patent rights generally belong to the inventors, unless a written agreement provides otherwise. In consequence, any agreements signed with the inventors should be examined.2 In this regard, there are two situations that should be avoided. The first one is the situation where various inventors have assigned their rights to more than one business, thereby putting those businesses in a co-ownership situation that is difficult to manage. The second one is the situation where the inventors declared to governmental authorities that they are not, in fact, the true inventors. A patent obtained without designating the correct inventors could be impossible to enforce or perhaps even invalid altogether.3Lastly, if the patent or patent application is the subject of successive assignments, one must make sure that each assignment has been made in writing in accordance with the requirements of the Patent Act.4. The Copyright Act5 contains a presumption that any work (including source codes for computer programs) made in the course of employment are the property of the employer. However, there is no such presumption if the work was made by a subcontractor or a consultant, so more extensive verification is needed in such cases. In a noteworthy decision, the Ontario Court of Appeal recognized that an arrangement of computer program elements can be copyrighted even if the elements themselves cannot be protected individually.6 Furthermore, although it is not mandatory to register a copyright, any assignment of copyright or any licence granting an interest in a copyright will only be valid if made in writing by the copyright owner, which should also be subject to verification. As for trade secrets, a business cannot derive any economic benefit from the information unless it is truly secret. Hence the importance of verifying any confidentiality and non-competition agreements as part of the due diligence process. It could also be essential to verify which measures are in place to protect the secrets. Such measures can include IT restrictions that prevent employees who are not involved in a project from accessing certain files, or “need to know” restrictions that partition knowledge between various divisions or business units. Lastly, the purchaser or investor will need to verify that there are no administrative or judicial proceedings which could affect any intellectual property rights and that there are no third party infringement claims that have been made either verbally or in writing. At times the due diligence analysis might lead to the abandonment of the investment project altogether. In other cases, the due diligence allows for corrective measures which the vendor of the business will need to implement in order for the sale to proceed, or which the buyer of the business will want to put in place in order to protect its investment in the long term. 1 R.S.C. 1985, c. T-13. 2 For example, see Élomari c. Agence spatiale canadienne, 2004 CanLII 39806 (QC CS). 3 For example, see Ethicon, Inc. v. United States Surgical Corp. 135 F.3d 1456 (U.S. Fed. Cir. 1998) and Pannu v. Iolab Corp., 155 F.3d 1344, 1351 (U.S. Fed. Cir. 1998). 4 R.S.C. 1985, c. P-4. 5 R.S.C. 1985, c. C-42. 6 Delrina Corp. v. Triolet Systems Inc., 2002 CanLII 11389 (ON CA).

The federal budget presented on April 21, 2015 (the “Budget”) contains important measures enabling registered charitable organizations and private and public foundations (hereinafter collectively referred to as “Registered Organizations”) to invest their funds in units of a limited partnership. Prior to announcing these measures, the Income Tax Act (Canada) (“ITA”) prohibited such investments by Registered Organizations because, by investing in a limited partnership, they were considered to be operating the limited partnership’s business. The consequence of making such a prohibited investment was that the Registered Organization’s registration could be revoked and, thus, that they could lose their income tax exemption and their ability to issue receipts for donations. According to the measures announced in the Budget, the ITA will be amended to provide that Registered Organizations are not considered to be operating the business of a limited partnership because they have invested in the units of such an entity. These changes will apply to any investment made by a Registered Organization in a limited partnership on or after April 21, 2015. It is important to note that the proposed changes only apply when a Registered Organization becomes a member of a limited partnership if the following conditions are met: The enabling legislation governing the limited partnership provides that the liability of members of the partnership is limited; The member deals at arm’s length with the general partner; and The total fair market value of the interests held by the member and by any persons or partnerships with whom it is not dealing at arm’s length, does not exceed 20% of the fair market value of all the interests held by all of the members of the partnership. --> 1. The enabling legislation governing the limited partnership provides that the liability of members of the partnership is limited; 2. The member deals at arm’s length with the general partner; and 3. The total fair market value of the interests held by the member and by any persons or partnerships with whom it is not dealing at arm’s length, does not exceed 20% of the fair market value of all the interests held by all of the members of the partnership. These changes will give Registered Organizations greater flexibility in the range of investments they can make.