A few years back, the National Instrument 31-103 ("NI
31-103") quietly became effective in its current form. We
often encounter individuals investing in private placements of
securities where the issuer (the company and its officers) with
whom they are investing is not registered as an exempt market
dealer ("EMD") under NI 31-103, and in many cases the
issuer is oblivious to the existence and requirements of NI
The basis of NI 31-103 is that in all provinces and territories
(other than Québec) a person or company is required to
become registered as a dealer if and when it trades a security,
unless it can conduct the trade in reliance upon an exemption under
NI 31- 103, of which there are few. This requirement is comparable
to the adviser registration requirement — common to all
provinces and territories — that imposes registration as an
adviser on a person or company that engages in, or holds itself out
as engaging in, the business of advising others on investing in or
buying or selling securities.
NI 31-103 adopts a "business" trigger for dealer
registration in lieu of the "trade" trigger that existed
in all provinces and territories other than Québec.
According to the Companion Policy to NI-31-103, there are two
components to consider when applying the "business"
trigger. The first component involves an assessment of whether the
particular activity involves dealing in securities or advising in
securities. If the activity does, the second component requires an
assessment of the extent to which the activity is being conducted
as a business.
Factors that are taken into account for the purpose of
determining whether any trading or advisory activity is being
conducted as a business include (without limitation):
intermediating a trade between a buyer and seller of
undertaking the activity, directly or indirectly, with
repetition, regularity or
being, or expecting to be, remunerated or otherwise compensated
for undertaking the
soliciting, directly or indirectly, others in connection with
the activity; and
holding oneself out, directly or indirectly, as being in the
business of the activity.
Any of the above factors contribute to the determination of
whether or not an individual or a firm are required to be
registered as an EMD. The subjectivity of the business trigger test
has led to situations where the issuer does not believe it needs to
be registered, but the local securities commission takes a
differing view. We find that the securities commissions view will
generally err on the side of caution, with registration being
Some issuers take the view that they are not required to be
registered due to "North West" exemptions from universal
registration requirements. The North West exemptions provide for
relief from the requirement to register as an EMD for a trade in a
security connected with a prospectus exempt distribution under the
following prospectus exemptions in National Instrument 45-106
(Prospectus and Registration Exemptions):
Section 2.3 – Accredited Investor Exemption;
Section 2.5 – Family, Friends and Business Associated
There are several problems with the North West exemption. First
of all, the North West exemption is being slowly revoked across
Western Canada. Second, in order to qualify for the North West
exemption, one of the requirements is that the person is not
"required to be registered" under the securities
legislation of any province, territory or foreign jurisdiction.
This second requirement invalidates many hopeful issuers from being
exempt, or at least puts the issuer back in the position of having
to evaluate whether it needs to be registered under NI 31-103.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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