There is good news for exempt market dealers! The Canadian Securities Administrators (the CSA) have maintained the status quo for exempt market dealers participating as selling group members in prospectus offerings. The CSA has clearly proven that it is listening to registrants and is sensitive to the impact any prohibition would have on capital raising in Canada. The CSA is still considering such matters, which may change in the future, and the mechanics of how this can be done, in a legally compliant manner, are yet to be clearly articulated.
On October 16, 2014, the CSA published the final amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and related instruments (the Amendments). A copy of the Amendments can be found here.
The CSA originally published its request for comments to proposed amendments to NI 31-103 and related instruments in December 2013. The proposed changes are expected to become effective on January 11, 2015.
EMDs and prospectus offerings
One of the issues considered by the CSA involved the participation of exempt market dealers in prospectus offerings. Under NI 31-103, an exempt market dealer cannot act as a underwriter in connection with a prospectus offering, however, it can act as an underwriter in a distribution of securities under a prospectus exemption.
Some exempt market dealers who have participated in prospectus offerings have taken the view that they are permitted to do so based on:
– a broad interpretation of the words "whether or not a prospectus was filed in respect of the distribution" in subparagraph 7.1(2)(d)(i) of NI 31-103 and language in its related Companion Policy; and
– a carve-out for selling group members under the definition of "underwriter" in securities legislation. For example, in Ontario, the definition of "underwriter" excludes a person or company whose interest in the transaction is limited to receiving the usual and customary" distributor's or seller's commission payable by an underwriter or issuer (the Underwriter Carve-Out).
CSA taking no action at this time
The recently published Amendments state that the CSA is taking no action at this time, but will continue to monitor the issue of an exempt market dealer participating in a prospectus offering. Accordingly, the CSA is not making any changes to subparagraph 7.1(2)(d)(i) of NI 31-103. However, the CSA stated in its commentary to the Amendments that:
– it believes the appropriate dealer registration category for participating in prospectus offerings is the investment dealer category; and
– that it does not makes sense to allow exempt market dealers to develop further into a competing platform for issuers that wish to make prospectus offerings.
However, the CSA stated that any further amendments may make a distinction between firms registered as both portfolio managers and exempt market dealers that may want to participate in prospectus offerings of investment funds relative to a registrant that is solely registered as an exempt market dealer.
PCMA comment letter was helpful
The Private Capital Markets Association of Canada (the PCMA) submitted a detailed comment letter arguing for the continued involvement of exempt market dealers in prospectus offerings. As Chair of the PCMA, I am extremely pleased that the CSA listened to industry and preserved an important channel for issuers, particularly venture issuers, to raise capital in a cost-effective manner.
The reversion to the status quo shows that the CSA listens to capital markets participants, such as the PCMA, and is sensitive to the capital raising implications of its proposed changes. This is to be commended.
EMDs provide an important capital raising function as selling group members in prospectus offerings
It is important to note that exempt market dealers serve an important capital raising function in the exempt market and also contribute as selling group members in prospectus offerings. In fact, certain prospectus offering would not happen in the first place but for the work of an exempt market dealer financing a company's growth in its early stages, especially in the mining, oil and gas and technology sectors, prior to going public. Exempt market dealers should not be denied the ability to participate, in some manner, in the issuer's eventual prospectus offering. In particular, companies with small market capitalizations are heavily reliant on continued access to capital markets through the services provided by exempt market dealers. These issuers, and other stakeholders, also benefit from having more dealers participating in the underwriting syndicate, particularly at the co-manager and selling group level. Moreover, certain prospectus offerings would not be completed but for the involvement of an exempt market dealer providing a certain amount of sales, otherwise, certain public offerings would fail.
The CSA should be reminded that exempt market dealers are not looking to compete with investment dealers in prospectus offerings, rather work with them, since the priority should not be in creating artificial divides between registration categories but instead on fostering fair and efficient capital markets by focussing on the needs of issuers in raising capital. This is especially important today since raising capital in connection with public offerings by smaller issuers is extremely difficult.
Future questions to be considered
Despite the reversion to the status quote, there remains significant debate on what the phrase "usual and customary" commissions means and how much of a prospectus offering can be sold by an exempt market dealer as a selling group member, before the exempt market dealer is viewed as acting as an underwriter in connection with a prospectus offering.
Moreover, it is not clear what prospectus exemption requirements are expected to be followed by an exempt market dealer as a selling group member in connection with a prospectus offering. For example, does it make sense that an issuer would have to file a report of trade and pay the requisite filing fees when completing sales to accredited investors? Should an issuer have to file a prospectus as an "offering memorandum" within 10 days of an initial trade as required, for example, under Ontario securities law, when it is already filed by the issuer on SEDAR?
Such matters need to be discussed and considered further and the PCMA looks forward to its continued dialogue with the CSA to resolve these questions.
The bottom line is that that maintenance of the status quo is a good thing and how exempt market dealers can participate as selling group members in prospectus offerings will be the subject of a future blog post.
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