Note: The rules and law may have changed since this article was first published. It is provided for archival purposes but you should consult with your lawyer for the current state of the law
In Part 1, we explored one change in the regulatory climate in BC as it pertains to the exempt securities market; the introduction of a new, more involved disclosure document for reporting exempt distributions.
The topic of this post is the proposed revocation of the Northwest Exemption by the BC Securities Commission (the “BCSC”). For a bit of background, in 2009 the Canadian Securities Administrators introduced National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”). This instrument revoked dealer registration exemptions available to persons in the business of trading prospectus-exempt securities and replaced them with a new category of registration called an exempt market dealer (“EMD”). This category placed new, more onerous requirements on registrants in terms of education, capital requirements, insurance, financial reporting and “know your client” rules, to name a few.
The practical result of the new EMD category was that finders who previously relied on the now-defunct dealer registration exemption could not be paid a fee or commission for finding investors on behalf of an issuer unless they went through the process of becoming an EMD.
In response to NI 31-103, BC, Alberta, Manitoba, Saskatchewan, Northwest Territories, Nunavut and Yukon created an exemption called the “Northwest Exemption”. This allows finders to sell private placement securities under certain prospectus exemptions without registering as an EMD as long as they are not otherwise registered and they, among other things, do not provide suitability advice, answer questions about investment needs/objectives/risk tolerance or provide financial services. Those relying on the Northwest Exemption must also obtain a risk acknowledgement form from the subscriber and file an information report.
The main benefit of the Northwest Exemption is that a non-registered finder can once again receive a finder’s fee from an issuer as long as the investor resides in the above-referenced provinces, assuming all conditions of the exemption are met.
However, in January 2013 the BCSC gave notice and sought comments on a proposed revocation of the Northwest Exemption in BC. It based this proposal on:
- Revoking the exemption would have a negligible impact on capital raising
- There is significant non-compliance with the risk disclosure requirements of the exemption such as obtaining a risk acknowledgement
- Investors would be better protected if they purchased securities from an EMD
One of the curious aspects of this proposed revocation is that the BCSC was a driving force behind the creation of the Northwest Exemption in the first place. It even provided its website as the database where all persons relying on this exemption file their information reports. The BCSC has essentially done a 360 in three short years.
The proposed revocation of the Northwest Exemption could have a potentially significant effect on capital-raising in BC. If the revocation proceeds a person dealing in exempt securities in BC will need to register as an EMD (if not already registered under another category). This may result in fewer investments being made in BC as non-registered finders may focus on other western provinces or territories instead of going through the process of becoming an EMD. If issuers cannot pay finders a fee for placing a BC resident into a financing, issuers may start to avoid BC residents altogether. Even if, as suggested by the BCSC, this revocation has a negligible effect on investment in BC it is another factor in the changing exempt market climate in BC.
The deadline for comments was February 28, 2013, but as of the date of this post, a final decision regarding the Northwest Exemption has yet to be posted by the BCSC.