Canada: Finders And Referral Agents Beware! Proposed Changes For Unregistered Individuals In Canada

The Canadian Securities Administrators (the "CSA") have proposed amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Obligations ("NI 31-103") that seek, among other things, to clarify the use of the "trade through or to a registered dealer" exemption in section 8.5(a) of NI 31-103 (section 8.5(a)). The effect of this amendment, if adopted, would arguably be to broaden the exemption from the dealer registration requirement since it removes the word 'solely' and adds clarifying language. However, it may paradoxically be viewed as narrowing the exemption in light of existing market practices, since we understand some market participants may be reading the existing exemption very broadly.

Background

Registration is triggered under Canadian securities law if someone is "in the business" of trading or advising in securities (commonly referred to as the "business trigger"). Whether someone is in the business or not depends on what they are doing and how often they do it. If they are trading in securities (which includes "acts in furtherance of a trade" (see below)) with regularity and for a business purpose, they can trigger the requirement to be registered. The business trigger is imprecise since it is principles-based which can make it difficult to apply. In other words, there can be circumstances in which it is difficult to say whether the business trigger has been pulled. If the business trigger is not pulled, then a person can perform "an act in furtherance of a trade" without having to be registered.

However, if an individual's or firm's activities trigger registration under applicable Canadian securities law, then the individual and/or firm needs to be registered as a dealer or rely on an exemption from the dealer registration requirement. This raises the question, can they rely on the exemption in section 8.5(a).

Existing Section 8.5(a)

Currently, section 8.5(a) reads as follows:

"The dealer registration requirement does not apply to a person or company in respect of a trade by the person or company if one of the following applies:

(a) the trade is made solely through an agent who is a registered dealer, if the dealer is registered in a category that permits the trade;" [Emphasis added]

The Back-story

In Ontario, existing section 8.5(a) had its origins in former section 35(1)(10) of the Ontario Securities Act (the "OSA") going back to the days that pre-dated "universal registration". When former section 35(1)(10) of the OSA was introduced, universal registration did not exist and neither did the "business trigger' test for registration. So in Ontario, we needed a registration exemption in order to allow individuals, for example, to call their broker to sell securities without being required to be registered since technically, that sale was a trade. At the time universal registration was introduced in Ontario, registration was more easily triggered in circumstances involving trades, which included any "act in furtherance of a trade".

However, the previous 'trade trigger' was replaced in 2009 with a 'business trigger' test for dealer registration, which requires registration if someone is "in the business" of trading in securities. Accordingly, we do not really need existing section 8.5(a) in the circumstances described above since a person calling their broker is not "in the business of trading" and, therefore, does not trigger registration.

The Problem

It appears the CSA is concerned that unregisteredofficers and directors of an issuer and so-called "finders" and referral agents (collectively, unregistered persons) are inappropriately relying on existing section 8.5(a) to continue to engage in registerable selling activities with investors by:

  1. contacting prospective investors to solicit their interest in an offering;
  2. undertaking most of the selling activities;
  3. receiving most of the broker-type compensation for the sale (e.g., 6% commission); and
  4. ultimately effecting the sale through a registered dealer.

Persons who carry out these activities for a business purpose should be registered. However, it appears that some unregistered persons are using existing section 8.5(a) to continue to engage in registerable selling activities but, as a final step, running the trade though a registered dealer thereby, in their mind, 'sanitizing' the trade.

In other words, they are interpreting the requirement to have the trade made 'solely' through a registered dealer as being 'ultimately' made through a registered dealer. We understand this is not what was contemplated by the CSA and hence the proposed amendments to existing section 8.5(a).

We understand the CSA is of the view that the word 'solely' when used in existing section 8.5(a), was intended to be very limiting since it requires the trade (and all "acts in furtherance of the trade" to be made 'solely' through the registered dealer. It appears this does not necessarily reflect the practices of certain capital market participants.

So What is An "Act in Furtherance of a Trade"?

"Acts in furtherance of a trade" undertaken by unregistered persons include, but are not limited to, the following:

  1. distributing offering and marketing materials involving a potential investment;
  2. preparing and disseminating forms of agreements for signature by investors;
  3. conducting information sessions with groups of investors; and
  4. meeting and communicating with individual investors.

On its face, there is nothing wrong if an unregistered person engages in such activities occasionally, so long as they are not done with regularity, for compensation and for a business purpose. If they are, then the person arguably should be registered, or should be engaging in such activities or find an exemption. Consider the following examples:

Example #1 – MiningCo is raising capital and has engaged an exempt market dealer (EMD) to assist. Mr. A is actively involved in the offering process. Mr. A is not in the business of trading securities, so he does not trigger registration. MiningCo does not have to rely on existing section 8.5(a) so it does not matter whether Mr. A is engaging in registerable selling activities which includes contacting investors.

Example #2 – MiningCo is raising capital and has engaged an EMD to assist. Mrs. B is actively involved in the offering process and regularly engages in similar sales activities. Mrs. B needs to rely on a registration exemption because she has pulled the business trigger and thus needs to be registered. Mrs. B arguably cannot rely on existing section 8.5(a). However, proposed changes to existing section 8.5(a) provides an unregistered person, such as Mrs. B who needs to be registered, with some ability to engage in registerable selling activities provided they do not involve directly communicating with investors or potential investors.

The CSA's Proposal

The CSA proposes to amend existing section 8.5(a) by

  • removing the "solely" qualifier for trades through a registered dealer, but
  • explicitly stating that the registration exemption cannot be relied upon if the person or company seeking to rely on the exemption directly solicits or contacts any purchaser or prospective purchaser in relation to the trade.

(Proposed Section 8.5(a))

The CSA has proposed corresponding changes to section 8.5 in the Companion Policy to NI 31-103, which would provide, among other things, that such persons may work with issuers and appropriately registered dealers provided that they do not contact or solicit purchasers.

Commentary

Our comments and concerns about Proposed section 8.5(a) are discussed below.

(a) The business trigger has not changed

Proposed section 8.5(a) would not change the application of the business trigger. It is still necessary to determine, as a first step, whether an individual requires registration. This involves a principles-based analysis that depends on the facts. However, if an unregistered person does (or may) require registration, then Proposed section 8.5(a) provides an important limited exemption.

If an unregistered person does engage in registerable activities, they may do so provided that the sale is made through a registered dealer and they do not contact or solicit investors directly.

(b) Addresses concern that unregistered persons are engaging in 'client-facing' activities

Proposed section 8.5(a) clearly prohibits unregistered persons from engaging in 'client-facing' activities. However, it does not necessarily preclude an unregistered person from engaging in 'dealer-facing' activities, which arguably are not permitted under existing section 8.5(a) since the trade must be made 'solely' through a registered dealer. To this extent, some may view Proposed section 8.5(a) as 'loosening' existing section 8.5(a) by at least permitting a role for unregistered persons that does not involve the direct contact or solicitation of investors.

It may also create greater scope for unregistered persons to act as, and receive compensation for, so called finder or referral agent activities, provided they do not themselves contact investors.

(c) Need for CSA guidance on what unregistered persons who trigger registration trigger can do when relying on Proposed section 8.5(a)

We believe the CSA should provide additional guidance in the Companion Policy to NI 31-103 of what unregistered persons who trigger registration can do whey relying on Proposed section 8.5(a). Although we are not suggesting that this is common practice for unregistered persons who trigger registration to engage in registerable activities, we believe additional CSA guidance should be provided for unregistered persons who may be in such circumstances.

For example, although an officer or director who regularly participates in selling activities could be considered to have triggered registration, in our view, such individuals should be able to engage in incidental "acts in furtherance of a trade" in the normal course of their duties while relying on Proposed section 8.5(a). Consider the following...

  • Family and friends and close business associates - A brokered private placement that involves contacting and soliciting family members and close personal friends and business associates can be important sources of capital for an issuer. Officers and directors of issuers would typically be closely involved in communicating with these individuals. If the relevant individuals have pulled the business trigger, issuers would now need to coordinate communications through a registered dealer. This could lead to a reduction in the amount of capital that is raised through these channels. The same could be said when it comes to soliciting individual's on a 'President's List' of potential investors.
  • Soliciting strategic investors - Many issuers have strategic investors who have been granted some form of participation right on future financings. If the relevant individuals at the issuer have pulled the business trigger, in a brokered private placement, communications with such investors could be required to be made exclusively through a registered dealer. Therefore, issuers could have to turn over part of their relationship with the strategic investor to a registered dealer and must accept that compliance with the issuer's contractual obligations to the strategic investor is in the hands of the registered dealer.
  • Distributions to existing securityholders - The proposed restricted rights offering prospectus exemption for distributions to current securityholders (i.e., Multilateral CSA Notice 45-312 – Proposed Prospectus Exemption for Distributions to Existing Security Holders) may have to be run in its entirety through a registered dealer if the relevant individual officers or directors have pulled the business trigger.
  • Road shows - Lastly, it is not unusual for officers and other representatives of an issuer from participating in road shows along with its registered dealer to raise capital from investors. A "road show" under Canadian securities law, in the context of a public offering of securities, means "a presentation to potential investors regarding a distribution under prospectus conducted by one or more investment dealers on behalf of an issuer in which one more executive officers or other representatives of the issuer participate." [Emphasis added] Although road shows for public offerings, by definition, permit and involve officers and other representatives of the issuer participating in an investor presentation, Proposed section 8.5(a), on its face, prohibits such participation for private placements for persons who have pulled the business trigger.

Simply, we believe the CSA should permit such incidental activities by directors and officers even if their activities have triggered registration if they are done in a bona fide manner with, and under the direction and presence of, a registered dealer. We would hope the CSA provides such additional guidance when it finalizes these amendments.

Conclusion

In conclusion, we believe Proposed section 8.5(a) represents an important clarifying change for capital market participants; however, it arguably has cast too wide a net by unduly prohibiting incidental trading activities of officers and directors of an issuer who have triggered registration in connection with their capital raising activities.

The comment period for Proposed section 8.5(a) and other amendments to NI 31-103 ended on March 5, 2014.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.