The regulators are dropping the hammer and it’s about to get harder for juniors to raise money on Howe Street. Have I got your attention?
Let’s back up a bit. The current regulatory regime governing prospectus-exempt (private placement) securities offerings has remained largely unchanged since 2009. In that year, the Canadian Securities Administrators (CSA) adopted National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), which created a new category of registration for “exempt market dealers” (EMD) and created a “business trigger” for dealer registration (i.e., in the business of trading securities?).
Previously existing dealer registration exemptions that had been contained in a predecessor to National Instrument 45-106 – Prospectus Exemptions (NI 45-106) were concurrently revoked.
What this meant was that a person selling private placement securities under the prospectus exemptions in NI 45-106 (i.e., accredited investor; family, friends, and business associates; offering memorandum; and minimum investment amount) now had to be registered as a dealer or EMD.
However, the securities commissions in British Columbia, Alberta, Manitoba, Saskatchewan, Northwest Territories, Nunavut, and Yukon stepped in to override this requirement by adopting what has become known as the “Northwestern Exemption” or “Northwest Exemption”. In BC, the exemption is set out in BC Instrument 32-513 — Registration Exemption for Trades in Connection with Certain Prospectus-Exempt Distributions (BCI 32-513).
To rely on the exemption in connection with placing an exempt security with a purchaser, one generally had to: (i) not be registered in any jurisdiction; (ii) not have provided advice to the purchaser with respect to suitability; (iii) with the exception of British Columbia, not provide financial services to the purchaser; (iv) obtain from the purchaser a signed risk acknowledgement; (v) not hold or have access to the purchaser’s assets; and (vi) file an information report.
This opened up the door for unregistered persons to act as capital “finders” for companies raising money through a prospectus-exempt private placement.
On August 15, 2018, the securities regulatory authorities of British Columbia, Manitoba, Nunavut, the Northwest Territories, and Yukon announced that they will revoke the Northwest Exemption with effect as of April 30, 2019. Alberta and Saskatchewan are considering whether to revoke their local orders and will advise of their approach in due course.
The idea of revoking the Northwest Exemption is not a new one. Back in January 2013, the BCSC gave notice that it was considering revocation but ultimately scrapped the plan.
This time, it’s for real.
After April 30, 2019, those persons currently benefiting from the Northwest Exemption will generally be required to register as a dealer or EMD if they wish to continue placing exempt securities offerings to residents in the aforementioned provinces and territories. These persons will also presumably need to be capable of providing advice to their placees, including as to whether the investment is suitable for them in the circumstances, and, accordingly, will need to conduct due diligence on the security to determine if it is suitable.
The concern the regulators have with the Northwest Exemption is that investors do not receive advice from a registrant when their securities are placed through a non-registered finder. The revocation is, therefore, in the name of “investor protection”. It is also to harmonize the regime with that of Ontario et al.
Some argue that the use of non-registrants under the Northwest Exemption has been critical to the livelihood of swaths of junior companies, especially since the 2008 crash, as a path to access additional accredited investors willing to fund their ideas. Others, like the BCSC itself, have said that the impact will be minimal, based on their belief that only a tiny percentage of financings done in these jurisdictions is through non-registered finders.
But certain sectors are likely to be disproportionately affected -- namely, the junior mining and tech startup worlds, where sources of capital can be difficult to find. It might be time for some companies to say goodbye to their trusted “finders” and get cracking on finding another way to source capital from accredited investors.
Sources / Further Reading
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