On August 15, 2018 the Canadian Securities Administrators ("CSA") issued CSA Notice 32-302 (quietly, to date no news release from the BC Securities Commission) disclosing pending revocation of:
BC Instrument 32-513 - Registration Exemption for Trades in Connection with Certain Prospectus-Exempt Distributions (referred to as the "Northwest Exemption" ) in all participating jurisdictions other than Alberta and Saskatchewan; and
BC Instrument 32-517 - Exemption from Dealer Registration Requirement for Trades in Securities of Mortgage Investment Entities ("BCI 32-517").
Securities regulators in each of British Columbia, Manitoba, Nunavut, the Northwest Territories and Yukon have now given notice that they will revoke their respective versions of the Northwest Exemption effective April 30, 2019, subject to a transition period for certain qualifying applicants. Alberta and Saskatchewan are considering whether to revoke their own local versions of the Northwest Exemption and have advised they will announce their respective intentions in due course. The BC Securities Commission has also announced its intention to permanently revoke BCI 32-517 effective February 15, 2019, subject to a transition period for certain qualifying applicants.
Previous proposals (attempts) to revoke the Northwest Exemption in 2013 (when small-cap markets in Canada - particularly in mining - were suffering) resulted in significant backlash from the small-cap issuer community; which in turn resulted in regulators like the BC Securities Commission adopting a rolling extension of the Northwest Exemption while, shall we say, they considered the matter further. Similarly, previous attempts to revoke BCI 32-517 during British Columbia's robust real estate market of the past eight or so years resulted in a smaller, but still vocal, backlash from the mortgage investment community, particularly mortgage brokers and those administering mortgage investment corporations or "MICs" (a special corporate entity recognized under Section 130.1 of the Income Tax Act (Canada) that allow individuals to pool their funds and invest this capital in mortgage loans).
Both the Northwest Exemption and BCI 32-517 share their beginning as a result of the CSA adopting National Instrument 31-103 - Registration Requirements, Exemptions and Ongoing Registrant Obligations ("NI 31-213") in 2009. Among other things, NI 31-213 revoked a series of registration exemptions that had paralleled existing distribution exemptions and created a new category of registration for exempt market dealers ("EMDs"), adopting a model that had been in place at the time for years in Ontario. NI 31-213 also provided for a transition period for persons affected which expired in 2010. However, not soon after the adoption of NI 31-213 regulators (particularly in the small-cap, mining and oil & gas dependent jurisdictions of British Columbia, Alberta, Saskatchewan, Manitoba and the Canadian Territories) began to receive feedback expressing significant concerns from both persons who had historically provided unregistered financing services and persons (mostly small-cap mining and oil & gas issuers) who depended on unregistered financing services. Similarly, mortgage brokers and MICs, who had been operating in British Columbia for decades under the regulation of the Mortgage Brokers Act (British Columbia), objected to the possible imposition of further regulation by securities regulators - based generally on arguments of the unique nature or real estate, mortgages and the real estate business. The concerns express by these market participants did result in securities regulators in the "Northwest" jurisdictions in Canada adopting the Northwest Exemption on an interim basis and, similarly, British Columbia adopting BCI 32-517 on an interim basis while the concerns were considered further.
In 2013 the BC Securities Commission issued notices of its intention to revoke both the Northwest Exemption and BCI 32-517 citing three reasons, based on their stated three years of analysis, for doing so:
Revoking the exemptions would have a negligible impact on capital raising as private enterprises and mortgage investment entities do not rely significantly on this distribution channel for financing - noting that approximately 1% of capital (by dollar value) could be impacted.
The risk disclosure obligation set out in the exemptions was a fundamental protection to investors when buying from unregistered dealers and there was significant non-compliance with the exemptions, thereby putting investors at greater risk - noting that the BC Securities Commission had conducted sample compliance reviews of Northwest Exemption filers and learned that 74% failed to provide purchasers of private placement securities with the risk disclosure required under the exemptions (when they looked at the mortgage investment entity filers only, non-compliance increased to approximately 90%).
Investors are most vulnerable to high-risk investments sold in the private placement market and investors who are considering investing in private placement securities would be better protected if they purchase securities from a registered dealer as they would have the benefit of advice about whether a purchase is suitable for them before they invest.
It was, perhaps, bad timing on the part of the BC Securities Commission. The mining industry was in the midst of a financial collapse (to be followed soon thereafter by the oil & gas industry). The British Columbia real estate market was in a boom cycle with buyers seeking mortgage-backed loans from whoever could provide them. Interested parties from all affected industries expressed their concern as to the impact and timing of the proposed revocations and, again the BC Securities Commission relented and adopted further extensions to the announced revocations.
The small-cap equity market and the CSE and TSXV exchanges in particular, are arguably experiencing a renaissance - albeit some may argue not the small-cap mining and oil & gas finance market. The British Columbia real estate market has cooled, increasing potentially the risks associated with mortgage lending and mortgage type investing - albeit some may argue the cooling is, in part, due to restrictions on mortgage lenders. It is perhaps therefore not a surprise that regulators like the BC Securities Commission would announce, in late August and without any news release, that the Northwest Exemption and BCI 32-517 will soon be finally revoked.
What does this mean for those potentially affected by the pending revocations? Let's first be clear about some persistent themes, shall we say, over the past eight years.
The existing registered dealer industry, both the securities dealers and EMDs, are not fans of unregistered trading exemptions in the small-cap market. Over the past decade or so they have been subjected to increasing levels of regulatory scrutiny and compliance costs - while facing a shrinking small-cap capital market. They see these exemptions as an unwarranted, and unfair, loophole in the regulated securities trading market.
Ontario has never been a fan of unregistered trading exemptions in the small-cap market and had adopted a requirement similar to EMDs long before other jurisdictions. It is no surprise that NI 31-213 adopted, generally, the Ontario Securities Commission model in this regard and in a time when regulators are generally seeking a consistent approach to market regulation across Canada, if not eventually a national securities regulator, it should perhaps not be expected that a patchwork of unregistered trading exemptions would persist.
Other regulators and in particular the BC Securities Commission, perhaps in part influenced by the two previous items, have stated without reservation their view that investors who are considering investing in private placement securities would be better protected if they purchase securities from a registered dealer. This is consistent with the intention behind the original modifications to the exempt market in 2009 with the adoption of NI 31-213 and the long held position that registered dealers play an important gatekeeper role in the regulated markets which is undermined, in part, by unregistered trading exemptions.
The BC Securities Commission, since the at least the mid-1990s, has taken an increasing interest in real estate market products and participants, the intent behind them and the risk associated with them and has always asserted, sometimes to some participant's surprise, jurisdiction to regulate real estate market products as they do any security and real estate market participants as they do fund managers, dealers and advisers.
The BC Securities Commission has, perhaps at least since 2009, taken an ever increasingly expanded view of what constitutes a "security", a "distribution" and "trading" and a narrow view of what does not constitute "the business of trading in securities" - all of which is very consistent with a view that nearly all securities, all distributions of securities and all trading in securities should be subject to some sort of notice to, scrutiny of, and regulation by, the BC Securities Commission.
If you (a) distribute or raise money through a distribution of anything that could be a "security" (which is not restricted to what we commonly consider to be securities (like common shares) and can include almost anything including cryptocurrency tokens, promissory notes, currency exchange contracts and mortgages; and is not restricted to issuers that we commonly consider to be "publicly traded"); or (b) "trade" (which is not restricted to what we commonly consider to be "trading on a stock exchange" and can include almost anything including any "act in furtherance of a trade") you should consult experienced securities legal counsel in your jurisdiction and obtain specific, detailed legal advice as to whether your activity is subject to applicable securities laws and what you need to do to comply.
With respect to whether or not you, either as an entity or as an individual, are in the "business of trading in securities", you should perhaps first consider the broad guidelines in section 1.3 of Companion Policy 31-103CP - Registration Requirements and Exemptions (see here) but further realize that these guidelines are very broad and almost anything related to trading in securities can be alleged to constitute being in "the business of trading in securities". The fine provisos or broad cautions in what can and cannot be done in the context of a distribution of securities often suggested by those participating in the exempt market, or legal counsel attempting to assess the intentions and scope or regulators, are subject to the risk that they are eventually found to be inadequate or wrong and, beyond those provisos and cautions, there are very few exemptions now from the registration requirements and soon there will be fewer.
If what you do is, entirely or in part, dependent on trading in securities albeit you had the comfort of either the Northwest Exemption or BCI 32-517 you should consider (in consultation with experienced securities legal counsel in your jurisdiction) pursuing the registration process as either a securities dealer or, more likely, an EMD. Regulators expect a significant number of registration applications as a result of the announced revocations and significant processing delay ahead of the expiry dates for the Northwest Exemption or BCI 32-517 and have indicated that transition provisions will be in place to allow persons who have submitted applications to continue to rely on the exemption past the respective expiry dates as long as the proper securities regulatory authority has received a substantially complete registration application by the expiry date, and provided that the applicant is in compliance with the terms of the exemption on the expiry date and on an ongoing basis. Further, on a case-by-case basis, regulators will look at interim relief for individuals who may have difficulty meeting the proficiency requirements by the expiry date.
If what you do is, entirely or in part, dependent on the capital and investment you receive from investors (often through the effort of third parties), you may wish to consider (in consultation with experienced securities legal counsel in your jurisdiction) only engaging third parties registered as a dealer or EMD in the future.
Endeavor Law can assist issuers, finders, mortgage brokers, dealers and EMDs with Canadian securities law distribution, trading and registration compliance and regulatory matters. Endeavor Law will always seek to provide competitive pricing for any legal services requested and is pleased to discuss fee arrangements that suit any potential client.
Does not constitute legal or other advice and must not be used as a substitute for legal advice from a qualified legal professional in your jurisdiction who has been fully informed of your specific circumstances. Information may not be up-dated subsequent to its initial publication and may therefore be out of date at the time it is read or viewed. Always consult a qualified legal professional in your jurisdiction.