Coordinated Blanket Order 31-930: Expansion Of EMD Capabilities In Prospectus Offerings

On June 20, 2024, the securities authorities in Alberta, British Columbia, Nova Scotia, Ontario, Québec and Saskatchewan (the participating jurisdictions¹) published Coordinated Blanket Order 31-930 (the Blanket Order) which provides a temporary exemption from National Instrument 31-103 (NI 31-103) to allow exempt market dealers (EMDs) to participate in prospectus offerings as members of selling groups.

What you need to know

• Temporary exemption for EMDs. EMDs in certain provinces have been provided a temporary exemption which allows them to participate in prospectus offerings as part of selling groups.
• EMD role remains limited to exemption-eligible investors. EMDs will only be able to act as dealer to a person or company that would have qualified for an exemption had the offering been made on a prospectus-exempt basis.
• Investment dealers will still play the predominant role. EMD compensation cannot exceed 50% of the lowest total compensation paid to any investment dealer included in the selling group.
• Reporting requirements. Participating EMDs will need to report a change in business activity to their principal regulator if they intend to make use of the new exemption.

Background

NI 31-103 was amended in December 2017 to remove an EMD's ability to act as a dealer with respect to trades in securities for which a prospectus had been filed. The Companion Policy to NI 31-103 was similarly amended to explicitly state that EMDs are not permitted to "participate in a distribution of securities offered under a prospectus in any capacity, including as a dealer". As a result, where an offering of securities was qualified by a prospectus in Canada, EMDs could not facilitate the sale of securities qualified by that prospectus, including to investors who would have otherwise qualified for a prospectus exemption.

The new Blanket Order largely reverses the effect of the 2017 amendment, permitting EMDs in participating jurisdictions to once again act as a dealer as part of a "selling group" in a distribution of securities qualified by a prospectus, provided the following four conditions are satisfied:

1. The EMD acts in accordance with the terms of the selling group agreement, with the issuer or investment dealer acting as lead underwriter.
2. The EMD only acts as dealer to a person or company for whom an exemption from the prospectus requirement would be available had the distribution been made on a prospectus-exempt basis.
3. The EMD cannot act as an underwriter in connection with the distribution and must limit their 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 exception for selling group members in the definition of "underwriter" under securities legislation².
4. The EMD's total compensation cannot exceed 50% of the lowest total compensation paid or payable to any selling group member that is an investment dealer³.

"Selling group" is a defined term in the Blanket Order, denoting a group of investment dealers and EMDs that is formed in connection with an offering of securities under a prospectus. All members of the selling group must have entered into an agreement with either the issuer or the investment dealer acting as the lead underwriter in connection with the offering, and at least one member of the group must be (i) registered as an investment dealer, (ii) act as an underwriter in connection with the distribution, and (iii) sign an underwriter's certificate in connection with the distribution.

Although the Blanket Order will permit EMDs to participate in prospectus qualified distributions as part of selling groups, it does not otherwise impact the restrictions on acting as an underwriter set out in, for example, sections 25(2) and 26(4) of the Securities Act (Ontario). These provisions prohibit a person or company from acting as an underwriter unless the person or company is registered and authorized to act as such under the circumstances which, for EMDs, remain limited to distributions made under a prospectus exemption.

Key takeaways

EMDs have traditionally played an important role in helping smaller to medium-sized issuers raise the capital they need in the pre-IPO stage; however, the relationship between EMDs and issuers is typically subject to a growth ceiling. As issuers grow and mature, their increasing capital requirements usually result in the need to access the broader capital markets through a prospectus-qualified offering. As a result of the Blanket Order, EMDs in participating jurisdictions will now be able to continue to play a part in satisfying the financing needs of more established issuers, while issuers will be able to access additional sources of capital through familiar and well-established EMD distribution channels. That said, it remains to be seen whether many issuers and their underwriter(s) will see a need to expand their selling groups by taking advantage of the Blanket Order.

EMDs that intend to rely on the Blanket Order are required to report a change in business activity by filing a Form 33-109F5 Change of Registration Information, indicating that they will be participating as a member of selling groups in prospectus offerings.

The Blanket Order took effect on June 20, 2024, and will remain in effect until December 20, 2025, subject to being extended by the participating jurisdictions.

Footnotes

1 The securities regulatory authority in New Brunswick also anticipates publishing a similar local blanket order.

2 For an example, see paragraph (a) of the definition of "underwriter" under the Securities Act (Ontario).

3 This was the percentage threshold recommended in the January 22, 2021 Capital Markets Modernization Taskforce Report, which included a recommendation to expand the purview of EMDs to include prospectus-qualified offerings.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.