Under the BC Securities Act, a person must not trade in a security unless they are registered as a dealer or act as an adviser unless they are registered as an adviser. A trade in a security is a disposition of security for valuable consideration. However, the definition of trade in the Securities Act also includes any act in furtherance of a trade, such as an advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of a trade. An individual who introduces potential investors to corporations for a fee (a “finder”) may be trading in the securities purchased by those investors, as they are committing acts in furtherance of that trade. Hence, unless the finder can take advantage of an exemption to registration, they would need to register as a dealer. Also, depending on the actions of the finder, they could be required to register as an adviser
National Instrument 31-103 Registration Requirements and Exemptions (“NI 31-103”) came into force September 28, 2009. NI 31-103 creates different categories of dealers. Finders in BC typically operate in what is referred to as the exempt market and they would be registered as an exempt market dealer (an “EMD”). The activities an EMD is permitted to do include the following:
- act as a dealer by trading a security that is distributed under an exemption from the prospectus requirement, whether or not a prospectus was filed in respect of the distribution; and
- act as a dealer by trading a security that, if the trade were a distribution, would be exempt from the prospectus requirement.
The requirements to register as an EMD are not easily satisfied. Hence, it is very advantageous for a finder to find an exemption to registration. Currently, most of the dealer registration exemptions are located in National Instrument 45-106 Prospectus and Registration Exemptions (“NI 45-106”). As of March 28, 2010, the registration exemptions in NI 45-106 will no longer be available. All registration exemptions will be set out in Part 8 of NI 31-103, or in local rules or blanket orders.
The BC Securities Commission has announced that a forthcoming policy, Registration exemption for trades in connection with certain prospectus-exempt distributions, will come into force just before the exemptions in NI 45-106 are repealed. Under the proposed policy, an individual will be exempt from registration if the securities being traded are pursuant to one or more of the following prospectus exemptions in NI 45-106:
- accredited investor (section 2.3);
- family, friends, and business associates (section 2.5);
- offering memorandum (section 2.9), and
- minimum $150,000 purchase of a security in one transaction (section 2.10).
(collectively, the “Exemptions”)
In order to take advantage of this exemption to registration, a finder must:
- not be registered in any category of registration in any jurisdiction;
- not provide suitability advice about the trade to the purchaser;
- except in British Columbia, not otherwise provide financial services to the purchaser;
- provide risk disclosure in the prescribed form to the purchaser; and
- file an information report with the securities regulatory authority.
Overall, the impact of the dealer registration requirements will be minimal, as long as the securities that are traded are under one or more of the Exemptions. The only additional requirements on the finder or issuer is the need to provide a risk disclosure statement and file an information report. However, if the securities are not traded under any of the Exemptions, a finder will need to registration as an EMD. This is not practical for the vast majority of finders in BC and the true impact of these changes will be to limit finders to deals where the securities are being traded pursuant to one or more of the Exemptions.
If you have questions about acting as a finder, contact any member of Clark Wilson LLP’s Corporate Finance & Securities Group.