Dan is a partner at the firm of Kornfeld LLP. He helps resolve commercial disputes for clients including investors, brokerage houses and financial institutions in the realization of claims by creditors and over disputed investments; entrepreneurs in claims over business assets, shareholder and partnership interests and commercial property; estates, trusts and beneficiaries over disputed wills, trusts and related claims; clients of realtors, lawyers, accountants, brokers and investment advisors; and businesses in the telecom, oil & gas and high-tech industries.
On June 10, 2010 the Canadian Securities Administrators issued new guidelines to assist insiders in reporting certain derivative-based transactions, including transactions which are commonly referred to as “equity monetization” transactions.
An investor is said to monetize the equity in securities when she or he transfers the risk and/or return of those securities for cash, without actually transferring ownership or control. It is a way for investors to lock in a market gain without concurrently transferring ownership of the underlying security.
The guidelines consider a number of common derivative transactions giving rise to the duty to file an insider report through the System for Electronic Disclosure by Insiders (SEDI):
- Entering into a forward contract to sell the securities for a fixed amount on a specific date
- Entering into a swap transaction which has similar effect to such a forward contract
- Buying a put option which allows, but does not obligate, the insider to sell the securities on a specific date for an amount which is either fixed or formula-based
- Simultaneously buying a put option allowing the insider to sell to another party at a certain price, and selling a call option allowing the same party to buy the same securities from the insider at a higher price. The sale of the call option exercisable at a higher price is a way of financing the purchase of the put option. The combination of a put option and call option is sometimes referred to as a “collar”
- Borrowing an amount close to the current fair market value of the securities under a limited-recourse secured loan for which the lender cannot look beyond the securities for repayment on its due date
Such transactions are most commonly entered into with investment banks who hedge their risk by entering into a series of short sales in the secondary market.
Step-by-step details of the recommended filing methods can be found here.
The guidelines are not mandatory but do serve to give comfort to the investor that disclosure will be acceptable; and they also serve to enhance uniformity of insider reporting requirements throughout Canada.