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 31-103.

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 securities;
  • undertaking the activity, directly or indirectly, with repetition, regularity or
  • continuity;
  • being, or expecting to be, remunerated or otherwise compensated for undertaking the
  • activity;
  • 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 required.

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 Exemption;
  • Section 2.9 – Offering Memorandum Exemption; and
  • Section 2.10 – $150,000 Minimum Investment Amount Exemption.

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.