The securities regulators in Alberta, British Columbia, New Brunswick, Nova Scotia, Ontario, Québec and Saskatchewan have published a temporary exemption that allows exempt market dealers (“EMDs”) to participate in prospectus offerings as members of selling groups in order to support capital-raising by early-stage businesses. The relief has been implemented through substantially harmonized blanket orders (“Blanket Orders”) that are effective for 18 months.
Background
As we discussed in a previous post, in 2017 the Canadian Securities Administrators (“CSA”) published amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”) that banned EMDs from participating in prospectus offerings in any capacity, including as underwriters and selling group members. Subsection 7.1(2)(d) of NI 31-103 only permits an EMD to act as a dealer or underwriter in a distribution that is being made under an exemption from the prospectus requirement (such as the accredited investor exemption). The CSA indicated that the appropriate dealer registration category for participating in a prospectus offering is generally the investment dealer category.
EMDs play an important role in assisting start-up and small and medium-sized businesses raise capital. The Ontario government’s Capital Markets Modernization Taskforce made a recommendation in its final report that was published in January 2021 that securities regulators consider allowing EMDs to act as selling group members in prospectus offerings, subject to reasonable conditions, to support capital-raising.
Blanket Orders
The securities regulators in the participating jurisdictions believe that allowing EMDs to participate as members of a selling group in prospectus offerings may: (i) make additional sources of capital available to issuers; (ii) provide investors with more investment opportunities; and (iii) allow EMDs to participate in an issuer’s entire lifecycle. As a result, the Blanket Orders provide that an EMD is exempt from the restrictions set out in subsection 7.1(2)(d) of NI 31-103 and may act as a dealer in a distribution of securities made under a prospectus if all of the following conditions are met:
- the EMD acts as a dealer only in accordance with the terms of a selling group agreement with the issuer or an investment dealer acting as the lead underwriter in the distribution of the securities made under the prospectus;
- the EMD acts as a dealer only to a person or company in respect of whom an exemption from the prospectus requirement would have been available if the distribution of securities had been made under an exemption from the prospectus requirement (i.e. accredited investors);
- the EMD does not act as an underwriter in connection with the distribution of the securities under the prospectus and limits its interest in the transaction to receiving the usual and customary distributor’s or seller’s commission payable by an underwriter or issuer such that it comes within the exemption for selling group members in the definition of “underwriter” under applicable securities legislation; and
- the total compensation paid or payable to the exempt market dealer does not exceed 50% of the lowest total amount of compensation paid or payable in connection with the distribution of the securities under the prospectus to any selling group member that is an investment dealer.
While the Blanket Orders will allow EMDs to maintain their relationships with issuers as they grow and mature, the cap on compensation may be administratively difficult to manage and limit an EMD’s involvement in a prospectus offering.
EMDs must file a Form 33-109F5 Change of Registration Information indicating that they will be participating as a member of selling groups in prospectus offerings if they intend to rely on the Blanket Orders.
For more information, see CSA Notice Regarding Coordinated Blanket Order 31-930 Exemption to Allow Exempt Market Dealer Participation in Selling Groups in Offerings of Securities Under a Prospectus.
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