Section 74(1) relief for first trades of shares acquired by Canadian employees(excluding formal officers (with the exception of 1 officer) and directors), consultant andservice providers of a reporting issuer upon the exercise of options outstanding at thetime of the reporting issuer's initial public offering and of certain shares acquired uponthe exercise of options prior to the reporting issuer's initial public offering. Because ofthe unusual circumstances of this case based on a detrimental reliance argument, theruling was granted. The ruling is not however to be used as a precedent for abridgingthe seasoning requirements for new reporting issuers under the Act.
Applicable Ontario Statutory Provisions
Securities Act, R.S.O. 1990, c.S.5, as am. s. 53, 72(5), 74(1)
Regulation made under the Securities Act, R.R.O. 1990, Reg. 1015, as am.,
Ontario Securities Commission Rule 14-501 - Definitions.
R.S.O. 1990, CHAPTER S.5, AS AMENDED (the "Act")
IN THE MATTER OF
724 SOLUTIONS INC.
UPON the application of 724 Solutions Inc. (the "Corporation") to the OntarioSecurities Commission (the "Commission") for a decision pursuant to subsection 74(1) ofthe Act that the first trades of common shares of the Corporation by certain of theCorporation's Canadian employees, consultants and service providers not be subject tosection 53 of the Act:
AND UPON considering the application and the recommendation of the staff of theCommission:
AND UPON the Corporation having represented to the Commission that:
1. The Corporation designs, develops and markets software that enables the deliveryof secure and personalized on-line services over a variety of wired and wirelessInternet access devices.
2. The Corporation was incorporated under the Business Corporations Act (Ontario)and became a reporting issuer under the Act on January 27, 2000.
3. The authorized share capital of the Corporation consists of an unlimited number ofcommon shares (the "Shares") and an unlimited number of preference shares,issuable in series, of which approximately 37,500,000 Shares and no preferenceshares were issued and outstanding as at July 19, 2000. The Corporation also hasoutstanding options (the "Options") to purchase Shares which were issued on orprior to January 27, 2000. The Options, together with issued and outstandingShares acquired pursuant to the exercise of options issued on or prior to January27, 2000 (the "Exercised Options"), represent an aggregate of approximately3,200,000 Shares (the "Option Shares").
4. The Option Shares include, as at July 19, 2000, approximately 249,000 Sharespreviously issued pursuant to Exercised Options and Options to acquire anaggregate of approximately 1,253,282 Shares (representing less than 5% of thecurrent issued and outstanding Shares) which will have vested prior to July 26,2000, being the anticipated expiry date of the Lock-Up Period (as defined inparagraph 8 below).
5. The Corporation completed an initial public offering of Shares (the "Offering") onFebruary 2, 2000, which consisted of concurrent offerings of Shares to the publicin Canada and the United States. 6,900,000 Shares (5,175,000 in the UnitedStates and 1,725,000 in Canada) were sold in the Offering for gross proceeds ofapproximately Cdn. $257,400,000. In respect of the Offering the Corporation fileda (final) prospectus with the Commission on January 27, 2000 and a supplementedPREP prospectus on January 28, 2000.
6. The Shares were listed on The Toronto Stock Exchange ("TSE") on February 2,2000 and were quoted on the if, as and when market of the TSE and the NASDAQNational Market as of January 28, 2000.
7. At the time of the Offering, approximately 38.9% of the Shares were owned bypersons resident in Canada and approximately 96% of the Options (and sharesacquired pursuant to the exercise of Options) were held by current or formeremployees, consultants and service providers of the Corporation resident in Ontario(the "Canadian Plan Participants"). The remainder of the Shares and the Optionswere held by residents of the United States, Finland, the United Kingdom or Asiancountries.
8. The directors and formal corporate officers (collectively, the "Senior Management")of the Corporation, all holders of Shares and holders of substantially all of theOptions entered into lock-up agreements with the lead underwriter of the Offeringprior to the completion of the Offering pursuant to which each agreed not to sell oroffer to sell any Shares, including Shares acquired upon the exercise of Options,for a period of 180 days from the date of the (final) prospectus for the Offering (the"Lock-Up Period") without the lead underwriter's prior written consent.
9. The Corporation has been advised by its U.S. counsel that a substantial number ofthe Shares held by non-Canadian Shareholders will become available for resaleinto the public market in the United States upon expiry of the Lock-Up Period orshortly thereafter; specifically, the Corporation has been advised that Rule 144 tothe U.S. Securities Act of 1933 (the "1933 Act") will generally permit non-CanadianShareholders (subject to specific limits on timing and amounts) to sell their Sharesif the Shares have been held for a period of not less than one year from the dateof such securities' original issue. In addition, the Corporation's proposed filing of aRegistration Statement on Form S-8 will permit the sale of Shares underlying theOptions held by U.S. resident employees.
10. Approximately 5% of the Shares outstanding prior to the Offering will be eligible forpublic resale by non-Canadian Shareholders pursuant to Rule 144 to the 1933 Acton the expiry of the Lock-Up Period and approximately 54% of the Sharesoutstanding prior to the Offering will be eligible for public resale by non-CanadianShareholders pursuant to Rule 144 to the 1933 Act in the six months following theLock-Up Period.
11. Unless the relief requested is granted, Canadian Plan Participants will not be ableto effect a trade of the Option Shares held by them until the Corporation has beena reporting issuer in Ontario for at least 12 months.
12. One member of Senior Management (the "Exempted Senior Officer") entered intoa transaction that required a portion of his Shares to be traded prior to the expiryof the one year hold period.
AND UPON the Commission being satisfied that to do so would not be prejudicialto the public interest;
IT IS RULED pursuant to subsection 74(1) of the Act that the first trade in OptionShares by the Canadian Plan Participants, excluding Canadian Plan Participants who areSenior Management but including the Exempted Senior Officer, (each an "OffereeShareholder") will not be subject to section 53 of the Act provided:
(i) that at least one year has lapsed from the date the corresponding Optionwas granted;
(ii) that such first trades are made in compliance with subsection 72(5) of theAct, except that with respect to such first trades it shall not be necessary tosatisfy the requirements in clause 72(5)(a) that the Corporation be areporting issuer for 12 months but only for 180 days, and it shall not benecessary to satisfy the requirement in clause 72(5)(a) that the Corporationnot be in default of any provisions of the Act, the regulations madethereunder, or Commission Rules if the Offeree Shareholder who is tradingsuch Shares is not in a special relationship with the Corporation or, if suchOfferee Shareholder is in a special relationship with the Corporation, theOfferee Shareholder has reasonable grounds for believing that theCorporation is not in default of the Act, the regulations made thereunder, orCommission Rules, where, for these purposes, "special relationship" shallhave the same meaning as in Commission Rule 14-501 - Definitions; and
(iii) that with respect to the Exempted Senior Officer, the number of Shareswhich may be traded by him in reliance on this Order is limited to 15% of theaggregate number of Options and Shares acquired pursuant to theExercised Options held by him at the time of the Offering.
July 25th, 2000.
"J. A. Geller" "J. F. Howard"