On June 20, 2024, Canadian securities regulators from Ontario, Québec, British Columbia, Saskatchewan, Alberta and Nova Scotia announced an initiative to support capital-raising by early-stage businesses by allowing exempt market dealers (EMDs) to participate as selling group members in prospectus offerings. 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 describes the local blanket orders providing the temporary exemption from the restrictions set out in subsection 7.1(2)(d) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103). Unless extended, the blanket orders will remain in effect until December 20, 2025.
Under NI 31-103, EMDs are not typically allowed to participate in prospectus offerings as they are restricted to only participate in trades under an exemption from the prospectus requirement. However, EMDs often play an important role in the growth of smaller issuers in the pre-IPO stage, by raising capital for them under prospectus exemptions. When these smaller to medium-sized issuers begin to raise additional capital through prospectus offerings, under the current regime, those same EMDs who may have been assisting those issuers since the start-up stage would be prohibited from assisting further in those public offerings. In many cases, this would either severely limit or effectively end their relationships with those issuers.
In recognition of the role and relationships EMDs build in assisting and growing small to medium-sized issuers by raising capital under prospectus exemptions, this initiative seeks to enable EMDs to maintain their relationships with those issuers. The exemption is intended to open additional capital-raising opportunities, by providing a time-limited exemption for EMDs to act as selling group members in prospectus offerings, allowing them to market the securities subject to the public offering. Investment dealers will continue to be involved in such offerings, including by acting as underwriter and signing the underwriter certificate in the prospectus.
The exemption is subject to several conditions, including the following:
- The EMD must act in accordance with the terms of the selling group agreement;
- The EMD may only act as a dealer for a person/company where an exemption from the prospectus requirement would otherwise be available;
- The EMD can not act as an underwriter, and must limit its interest to receiving the usual and customary seller's commission; and
- The total compensation to the EMD cannot exceed 50% of the lowest total compensation payable to any selling group member that is an investment dealer.
Notably, prior to December 2017, EMDs were permitted to participate as selling group members in prospectus offerings, and the Ontario Capital Markets Modernization Taskforce 2021 Report had recommended that the Ontario Securities Commission revert to this position. The Taskforce Report discussed the important role of smaller intermediaries for early-stage capital raising activities, given the higher risk profile that smaller companies may exhibit.
The Financial and Consumer Services Commission (New Brunswick) is also expected to publish a similar local blanket order in the coming weeks.
EMDs that wish to rely on the blanket orders must report a change in business activity using Form 33-109F5 Change of Registration Information under National Instrument 33-109 Registration Information within 30 days of the change.
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