Securities Law & Instruments

Headnote

Application for partial revocation of cease trade order -- variation of cease trade order to permit certain trades for the purpose of debt settlement and private placement financing with accredited investors -- issuer may have inadvertently breached cease trade order -- partial revocation granted subject to conditions.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 127, 144.

IN THE MATTER OF
THE SECURITIES ACT
R.S.O. 1990, c. S.5, AS AMENDED
(the Act)

AND

IN THE MATTER OF
DIADEM RESOURCES LTD.

ORDER
(Section 144 of the Act)

WHEREAS the securities of Diadem Resources Ltd. (the Applicant) are subject to a temporary cease trade order issued by the Director on October 9, 2012 pursuant to paragraph 2 of subsection 127(1) and subsection 127(5) of the Act, as extended by a further cease trade order issued by the Director on October 22, 2012 pursuant to paragraph 2 of subsection 127(1) of the Act (the Ontario Cease Trade Order), directing that all trading in the securities of the Applicant, whether direct or indirect, cease until the order is revoked by the Director;

AND WHEREAS the Applicant has applied to the Ontario Securities Commission (the Commission) for an order pursuant to section 144 of the Act to partially revoke the Ontario Cease Trade Order (the Order);

AND WHEREAS the Applicant has represented to the Commission that:

1. The Applicant is an Ontario incorporated company. The Applicant's registered office is located at Suite 800, 150 York Street, Toronto, Ontario, M5H 3S5 and its head office is located at Suite 400, 485 McGill Street, Montréal, Québec H2Y 2H4.

2. As at the date hereof, the authorized capital of the Applicant consists of an unlimited number of common shares (the Common Shares) of which 50,008,848 are issued and outstanding and an unlimited number of special shares of which none are issued and outstanding. Other than the Common Shares, the Applicant has no securities (including debt securities) issued and outstanding.

3. The Applicant is a reporting issuer in the provinces of Alberta, British Columbia, Ontario and Quebec. The Applicant is not a reporting issuer or the equivalent in any other jurisdiction in Canada.

4. On October 3, 2012, trading in the Common Shares on the TSX Venture Exchange (the Exchange) was suspended. Effective January 2, 2013, the Exchange advised the Applicant that it did not meet Tier 2 Continued Listing Requirements of the Exchange and effective January 7, 2013 transferred the Common Shares to the NEX, a separate board of the Exchange, on which the trading in the Common Shares remain suspended.

5. The Ontario Cease Trade Order was issued as a result of the Applicant's failure to file, in accordance with the requirements of Ontario securities law, audited annual financial statements and the related management's discussion and analysis for the year ended May 31, 2012 and certification of the foregoing filings as required by National Instrument 52-109, Certification of Disclosures in Issuers' Annual and Interim Filings.

6. In addition to the Ontario Cease Trade Order, the Applicant is subject to the following cease trade orders, each of which was issued due to, in part, the failure to file the 2012 Annual Statements:

(a) an order issued by the Alberta Securities Commission on January 17, 2013;

(b) an order issued by the British Columbia Securities Commission on October 5, 2012; and

(c) an order issued by the Quebec L'Autorité des Marchés Financiers on October 18, 2012,

(collectively, the Other Cease Trade Orders).

7. The Applicant's failure to file the audited annual financial statements, related management's discussion and analysis for the year ended May 31, 2012 and certification of the foregoing filings as required by National Instrument 52-109, Certification of Disclosures in Issuers' Annual and Interim Filings and subsequent continuous disclosure documents is a result of financial distress. If the Applicant cannot proceed with the Financing (as defined below), it is likely that the Applicant will not be able to continue its operations.

8. The Applicant intends to complete a non-brokered private placement of securities (the Financing) to raise up to $200,000 to allow the Applicant to bring itself back into compliance with its continuous disclosure obligations by filing the Required Documents (as defined below) and to satisfy certain outstanding debts, filing fees and other expenses of the Applicant as described more fully in paragraph 10 below. The Financing will be conducted on a prospectus exempt basis with subscribers who are accredited investors (as such term is defined in National Instrument 45-106 Prospectus and Registration Exemptions) resident in the provinces of Alberta, British Columbia, Ontario and Quebec (each a Potential Investor).

9. To the knowledge of the Applicant none of the Potential Investors will be insiders or related parties of the Applicant.

10. The proceeds of the Financing are estimated to be applied as follows:

 

 

$

 

a.

Legal fees:

62,000

 

b.

Accounting and audit fees

88,000

 

c.

Management fees and expenses

13,000

 

d.

Filings of materials, including penalties for both partial and full revocation orders

37,000

 

 

_____

 

 

Total Expenses

200,000

11. The Applicant believes that the proceeds of the Financing will be sufficient to bring its continuous disclosure obligations up to date and pay all related outstanding fees. In the event that the amount of the Financing is not raised, any funds raised would be returned to the Potential Investors and management would continue its search for an alternative financing.

12. As the Financing will involve trades of securities and acts in furtherance of trades, the Financing cannot be completed without a partial revocation of the Ontario Cease Trade Order.

13. The Financing will be completed in accordance with all applicable laws.

14. Prior to completion of the Financing, each Potential Investor resident in Ontario will:

(a) receive a copy of the Ontario Cease Trade Order,

(b) receive a copy of this Order, and

(c) receive a written notice from the Applicant, and will provide a written acknowledgement to the Applicant, that all of the Applicant's securities, including the Common Shares issued in connection with the Financing, will remain subject to the Ontario Cease Trade Order and the Other Cease Trade Orders until they are each revoked, and that the granting of this Order does not guarantee the issuance of any such full revocation orders in the future.

15. Upon issuance of this Order, the Applicant will issue a news release and file a material change report announcing the Financing and this Order.

16. Upon completion of the Financing and within the reasonable period of time, the Applicant will apply to the Commission for a full revocation of the Ontario Cease Trade Order and will also apply to the securities regulatory authorities where the Other Cease Trade Orders are in effect for a full revocation of those orders.

17. The Applicant has not been previously subject to a cease trade order by the Commission.

18. The Applicant is not in default of any requirements of the Act or the rules and regulations made pursuant thereto, other than:

(a) the Applicant's failure to file the following documents (collectively, the Required Documents):

i. audited annual financial statements for the year ended May 31, 2012, related management's discussion and analysis and certification of the foregoing filings by the Chief Executive Officer and the Chief Financial Officer of the Applicant as required by National Instrument 52-109 Certification of Disclosures in Issuers' Annual and Interim Filings.

ii. interim financial statements for the three, six and nine month periods ended August 31, 2012, November 30, 2012 and February 28, 2013 respectively, related management's discussion and analyses for the three, six and nine month periods ended August 31, 2012, November 30, 2012 and February 28, 2013 respectively, and all certifications of the foregoing filings by the Chief Executive Officer and the Chief Financial Officer of the Applicant as required by National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings.

(b) the possible contravention of the Ontario Cease Trade Order described in paragraph 22 below.

19. The Applicant is not considering, nor is it involved in any discussion relating to, a reverse take-over, merger, amalgamation or other form of combination or transaction similar to any of the foregoing.

20. The Applicant entered into a definitive agreement dated May 6, 2013 with Darnley Bay Resources Limited (DBR) to acquire DBR's 50% interest in the Franklin Property in the Parry Peninsula of the Northwest Territories (the DBR Agreement) as more fully described in the DBR Agreement. The DBR Agreement was entered into further to a Memorandum of Understanding executed by the Applicant and DBR on September 28, 2011. The consideration payable by the Applicant to DBR pursuant to the DBR Agreement includes: (i) the issuance of 11,700,000 Common Shares; the issuance of 11,700,000 warrants to buy an equivalent number of Common Shares at $0.10 per share for a period of 30 months subsequent to the closing date, originally anticipated to be June 30, 2013 (the Closing Date); and (iii) the grant of a right to purchase up to $40,000 of securities of the Applicant at the lowest price per security offered to third party investors, in connection with the Applicant's first equity financing after the Closing Date.

21. Although completion of the DBR Agreement is conditional upon the Applicant receiving all regulatory and shareholder approvals, including the TSX Venture Exchange, by entering into the DBR Agreement the Applicant may have contravened the Ontario Cease Trade Order and the Other Cease Trade Orders since the DBR Agreement contemplates the issuance of the Applicant's securities to DBR.

22. To the knowledge of the Applicant, none of the potential investors in the Financing are related to DBR, its officers and directors.

AND WHEREAS considering the Application and the recommendation of the staff of the Commission;

AND WHEREAS the Director being satisfied that to do so would not be prejudicial to the public interest;

IT IS ORDERED, pursuant to section 144 of the Act, that the Ontario Cease Trade Order is partially revoked solely to permit trades in securities of the Applicant (including, for greater certainty, acts in furtherance of trades in securities of the Applicant) that are necessary for and are in connection with the Financing, provided that:

(a) prior to completion of the Financing, each Potential Investor resident in Ontario will:

(i) receive a copy of the Ontario Cease Trade Orders,

(ii) receive a copy of this Order, and

(iii) receive a written notice from the Applicant, and will provide a written acknowledgement to the Applicant, that all of the Applicant's securities, including the Common Shares issued in connection with the Financing, will remain subject to the Ontario Cease Trade Order and the Other Cease Trade Orders until they are each revoked, and that the granting of this Order does not guarantee the issuance of any such full revocation orders in the future, and

(b) the Applicant will provide signed and dated written acknowledgements referred to in paragraph (a)(iii) above to staff of the Commission on request; and

(c) this Order will terminate on the earlier of:

(i) the closing of the Financing; and

(ii) 120 days from the date hereof.

DATED at Toronto this 19th day of July, 2013.

"Kathryn Daniels"
Deputy Director, Corporate Finance Branch
Ontario Securities Commission