In Canada, securities regulation consists of three main components: prospectus requirements, registration requirements and (for reporting issuers such as publicly listed corporations) continuous disclosure requirements. The prospectus requirements and registration requirements apply to all trades of securities, whether the trade involves securities of a public entity or a private entity. (For more information on prospectus requirements, see the articles entitled “Selling Shares to Investors: Exemptions from the Prospectus Requirement).
Most of the registration rules apply to well-known categories such as brokers, dealers, mutual fund salespersons and investment fund managers. However, recent changes to the registration rules have resulted in the expanded application of these rules to private entities and private individuals who assist them in raising private capital. With the adoption of National Instrument 31-103 (“NI 31-103”) in all provinces and territories, most of the registration rules have been harmonized throughout the country. However, NI 31-103 brought in a new category of registration known as “Exempt Market Dealer”, along with a new test for determining when the registration rules will apply (the so-called “business trigger test”). What this means for the average BC private corporation is that raising capital in the exempt markets has become significantly more complicated.
All issuances of securities must be done pursuant to a prospectus or an exemption from the prospectus requirement. By definition, private entities always issue securities under a prospectus exemption (whether they know it or not!). Under the prior registration regime, all of the most commonly used prospectus exemptions included a corresponding registration exemption upon which all parties involved in the trade could rely. Under the current regime, all of the registration exemptions were separated from the corresponding prospectus exemptions and replaced with the registration rules in NI 31-103.
The result of this regulatory change is that in many instances when a private entity issues securities pursuant to a prospectus exemption, the parties involved in the trade cannot assume that there will be a registration exemption to go with it. Under the new rules, each trade and each party involved in the trade must be reviewed to determine if the party is “in the business of trading securities”. Generally speaking, if a party regularly engages in such trades and/or participates in a trade in expectation of a fee (such as a finders’ fee), the business trigger test will be met. In many jurisdictions, including Ontario, this will trigger the requirement to register with the local securities regulator as an “Exempt Market Dealer” and to meet certain proficiency requirements.
Each of the Western Provinces (B.C., Alb., Man., Sask.) and Territories has adopted a limited exemption from this requirement where the trade involves one of the following exemptions: accredited investor, friends and family, minimum amount or offering memorandum. Certain additional requirements must be met and the investor must sign a risk acknowledgement form. Most importantly, the person relying on the exemption must file an Information Report with each applicable securities regulator within 10 days of the trade. In addition, NI 31-103 contains certain limited exemptions from the Exempt Market Dealer registration requirement.
Issuing securities as a private entity is far more complicated than most people realize and we strongly recommend that all private corporations and other entities which are engaged in raising capital from investors seek qualified legal advice before doing so.
How Pushor Mitchell Can Help
E. Blair Forrest is a business and securities lawyer at Pushor Mitchell LLP. You can reach Blair at 250-869-1160. Our office offers a wide range of legal services to start-up and growth companies. For more information, please visit www.pushormitchell.com.