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Canada

The Canadian Securities Administrators have adopted National Policy 46-201 (Escrow for Initial Public Offerings) setting out uniform terms of escrow applicable to IPOs when an issuer files its first prospectus in: (i) an initial distribution; (ii) a secondary offering (eg a corporate spin-off); or (iii) a distribution where no escrow has been previously imposed in connection with its existing business.

The policy provides for the escrow of equity securities owned or controlled by "principals". Generally, a principal is: (i) a director or senior officer; (ii) a promoter during the two years preceding the IPO; (iii) a 10% shareholder who has the right to elect or appoint a director or senior officer of the issuer or a material subsidiary; (iv) a 20% shareholder; and (v) an affiliate of a principal and the spouse of a principal and their relatives that live at the same address. A principal holding securities carrying less than 1% of the votes attaching to an issuer's outstanding securities post-IPO is exempt from escrow.

The policy classifies issuers into three categories: exempt, established or emerging. Exempt issuers, being those that post-IPO will be listed on the Toronto Stock Exchange (TSE) in its "exempt" category or will have a market capitalization of C$100 million ($64 million), are exempt from escrow.

Established issuers are those that will be listed on the TSE as a "non-exempt issuer" or on Tier 1 of Canadian Venture Exchange. Here, 25% of the securities held by principals will be exempt from escrow and the balance released in three equal tranches at six month intervals.

Emerging issuers are those that will not be either exempt or established. Here, 10% of the securities held by principals will be exempt from escrow and the balance released in six equal tranches at six month intervals. If an emerging issuer qualifies as established while securities are escrowed, releases will be accelerated as if it had originally been so classified.

Leslie Gord

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