BCSC Moves To Ban Unlicensed “Finders”

New regulation complicates Canadian companies’ ability to raise capital at home and abroad.

Source: British Columbia Securities Commission.  See also: BCSC to End Finder’s Fees for Capital Raising Except by Registered Dealer (Clark Wilson).

BCN 2013/01 Notice and Request for Comment – Proposed Revocation of BC Instrument 32-513 Registration Exemption for Trades in Connection with Certain Prospectus-Exempt Distributions and BC Instrument 32-517 Exemption from Dealer Registration Requirement for Trades in Securities of Mortgage Investment Entities [BCN]

Published January 3, 2012
View PDF of BCN 2013/01   PDF

The BCSC proposes to revoke:

  • BC Instrument 32-513 Registration Exemption for Trades in Connection with Certain Prospectus-Exempt Distributions  (the NW exemption)
  • BC Instrument 32-517  Exemption from Dealer Registration Requirement for Trades in Securities of Mortgage Investment Entities (the MIE exemption) (together, the exemptions)

In 2009, the Canadian Securities Administrators (CSA) adopted National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. The rule created a new category of registration for exempt market dealers (EMDs). The CSA also revoked parallel registration exemptions for the section 2.3 (accredited investor), section 2.5 (family, friends and business associates), section 2.9 (offering memorandum) and section 2.10 (minimum investment amount) prospectus exemptions (together, the capital raising exemptions) in National Instrument 45-106 Prospectus and Registration Exemptions.

NW and MIE exemptions
British Columbia, Alberta, Manitoba, Saskatchewan, Northwest Territories, Nunavut, and Yukon provided an exemption from the requirement to register as EMDs for persons selling only private placement securities under the capital raising exemptions. The BCSC also issued comparable relief specifically for mortgage investment entities (MIEs).

The BCSC adopted the exemptions because at the time, it did not have the information to understand what impact the EMD registration requirement would have on private enterprise financing or investors.

With the benefit of having the rule in place for almost three years, our analysis shows that:

1. Revoking the exemptions would have a negligible impact on capital raising
Private enterprises and mortgage investment entities do not rely significantly on this distribution channel for financing. Approximately 1% of capital (by dollar value) could be impacted.

2. Non-Compliance with the exemptions
There is significant non-compliance with the exemptions, thereby putting investors at greater risk. We conducted sample compliance reviews of NW filers and learned that 74% failed to provide purchasers of private placement securities with the risk disclosure required under the exemptions. When we looked at the MIE filers only in the sample, non-compliance with this requirement increased to approximately 90%. The risk disclosure obligation is fundamental to investor protection when buying from unregistered dealers.

3. Investors are most vulnerable to high-risk investments sold in the private placement market
Investors who are considering investing in private placement securities would be better protected if they purchase securities from a registered dealer. In particular, they would have the benefit of advice about whether a purchase is suitable for them before they invest.

The Commission proposes to revoke the exemptions because:
(a) the impact on capital raising will be negligible
(b) those relying on the exemptions are not complying with its investor protection conditions
(c) private placement market investors will be better protected if they purchase securities through registrants

Request for comment
We welcome your comments about this proposal in writing on or before February 4, 2013. Deliver your comments and refer your questions to:
Mark Wang
Manager, Legal Services
Capital Markets Regulation
British Columbia Securities Commission
P.O. Box 10142, Pacific Centre
701 West Georgia Street
Vancouver, British Columbia V7Y 1L2
Email: mwang@bcsc.bc.ca

We will not keep submissions confidential.

January 3, 2013


Brenda M. Leong

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About Tommy Humphreys

Tommy Humphreys is a writer, consultant, investor and speaker focused on early stage mining, oil and gas, and technology companies. He founded the Pacific Website Co. in 2006 and CEO.CA in 2012.

  • Stock Broker

    This is excellent news.

  • http://twitter.com/shaunajpollard Shaun Pollard

    Thanks Tommy for affording this some coverage. I don’t think
    enough people are aware of this proposed change. I’d ask that anybody that has
    ever had a good OR bad experience with a “finder”, please inform the appropriate
    party (point of contact at bottom of comment).

    I’m somewhat biased on this topic. I’ve acted as a “finder” and benefited from the services of “finders” several times over the years.

    I’m also the CFO/Director of an exploration company.
    Although we’ve not used a “finder” to assist us in raising capital, I’d like to
    have the ability to do so if the need presents itself.

    Several of my counterparts within other publicly traded
    resource companies have used “finders” to put together road shows for the
    purpose of raising funds. These “finders” typically charge a success fee for
    arranging these meetings. In my experience, when it comes to knowledge-based
    work, some form of performance-based compensation is necessary. It provides people with the incentive to
    provide the best possible service. Some firms offering similar services charge
    a “per meeting” or daily fee for arranging introductions. From my conversations
    with a few of these service providers, I’ve been quoted rates of $8k USD per
    day or $2k per meeting depending on the location. It’s not difficult to see why
    a flat fee service provider may be incentivized to arrange meetings/introductions
    based on quantity vs quality.

    I’ve spoken with a few “finders” to gage how this will
    influence their business. The gist being that it will increase the cost to the
    end client; namely us.

    I understand that investor protection is critical. Confidence
    in the market is the key to a healthy market. I just hope that the confidence
    gained as a result of this proposed ruling far outweighs the potential cost
    increases and service downgrades we’re likely to experience as a result.


    Comments on how this change
    may affect your business should be addressed to:

    Mark Wang

    Manager, Legal Services

    Capital Markets Regulation

    British Columbia Securities Commission

    P.O. Box 10142, Pacific Centre

    701 West Georgia Street

    Vancouver, British Columbia V7Y 1L2

    Email: mwang@bcsc.bc.ca