ASC Dealer Registration Exemption

ASC Dealer Registration Exemption
Written by: Gordon Walters 

On November 10, 2021, the Alberta Securities Commission (“ASC”) adopted a dealer registration exemption under ASC Blanket Order 31-536 Alberta Small Business Finder’s Exemption (“the Order”).[1] The exemption allows a finder who meets certain conditions to intermediate the sale of the securities of an Alberta Small Business Issuer under certain prospectus exemptions.
 
The exemption is effective as of November 10, 2021, and expires November 11, 2024.[2] The ASC is revoking the current ASC Blanket Order 31-305 Registration Exemption for Trades in Connection with Certain Prospectus-Exempt Distributions.[3]
 
Substance and Purpose
The new small business finder’s exemption is intended to help small businesses use finders to raise money.[4] Start-up and small businesses are an important part of Alberta’s provincial economy, serving as key contributors to employment, quality of life, and income within communities.[5] In fact, as of 2019, small businesses (defined as having between 1 and 99 paid employees) employed 8.4 million individuals in Canada, or 68.8 percent of the total private labour force.[6] In 2016, small businesses contributed 41.9 percent to gross domestic product (GDP) generated by the private sector.
 
Although the size of these capital raisings are not traditionally supported by registered dealers, they can be assisted by finders who may have close friends, family, and business associates in the community that wish to invest in these types of opportunities.[7] It was through this lens that the ASC reviewed Blanket Order 31-305 and the current exemptions from the prospectus requirement to design a more targeted exemption from the dealer registration requirement for finders.
 
Finders
Finders are individuals who introduce two or more parties they believe have a mutual interest and who subsequently allow those parties to work out a transaction between themselves.[8] A finder may be compensated for his or her introductory services.[9] The finder is required to disclose the details of the compensation received from the Alberta Small Business Issuer in relation to each purchaser’s purchase in the Risk Acknowledgement Form provided to the purchaser. If a finder does more than say “there is an investor/company” and instead sells or acts as the go-between person in a securities transaction, they are likely in violation of applicable securities laws by acting as an unregistered broker-dealer.[10]
 
To register for the exemption, the finder can be an individual, as defined in the Securities Act (Alberta) as a natural person, or a company in respect of which the only registered shareholders and beneficial shareholders are an individual and the individual’s spouse alone or together.[11] The finder cannot be a party registered under securities legislation in Canada or a foreign jurisdiction, cannot previously have provided services as a registrant to the purchaser, and cannot be a “bad actor” (subject to a court or regulatory sanction relating to fraud, theft, deceit , or misrepresentation).[12]
 
Dealer registration requirement
The dealer registration requirement prohibits a person or company from acting as a dealer unless registered in accordance with Alberta Securities Laws.[13] A person or company is only required to be registered as a dealer if the person or company engages in or holds itself out as engaging in the business of trading in a security or exchange contract as principal or agent, or acts as an underwriter.
 
However, under ASC Blanket Order 31-536, the dealer registration requirement does not apply to a finder in connection with a specified distribution, provided they do so in compliance with the Order.
 
The Order
A summary of the material aspects of the Exemption are as follows:[14]
 

a) Which issuers can finders act for?

• A finder relying on this Exemption can only act for an Alberta Small Business Issuer, which means an issuer
  • with its head office in Alberta raising money from Alberta purchasers, and
  • that has not raised in aggregate more than $5,000,000 under the Specified Distributions.

 
b) When can a finder participate as a salesperson in financing?

• A finder can participate in sales under the following specified distributions:
  • Section 2.3 [accredited investor] of National Instrument 45-106 Prospectus Exemptions (“NI 45-106”)
  • Section 2.9 [offering memorandum] of NI 45-106
  • Section 2.10 [minimum amount investment] of NI 45-106
  • Section 2.4(2)(i) [private issuer to an accredited investor] or 2.4(2)(1) [private issuer to a person or company that is not the public] of NI 45-106
  • Blanket Order 45-538 Self-Certified Investor Prospectus Exemption
  • Blanket Order 45-539 Small Business Financing

 
c) What can’t a finder do?

• The finder cannot represent to the purchase that the security being traded is a suitable investment for the purchaser.
• The finder cannot hold or have access to any of the purchaser’s assets.
• The finder cannot sell to a prospective purchaser unless they have a substantial pre-existing relationship with them.
• The finder cannot directly or indirectly solicit prospective purchase other than persons or companies with whom they have a substantial pre-existing relationship.

 
Transition Period
The ASC has included a six-month transition period before the revocation of Blanket Order 31-505 is effective.[15] The six-month period will allow finders that are currently relying on the dealer registration exemption contained in Blanket Order 31-505 a transition period in which to complete private placements that are in progress.
 

Gordon Walters is a member of the BLG Business Venture Clinic and is a 2rd year student at the University of Calgary Faculty of Law

Footnotes:
[1] ASC Blanket Order 31-536 Alberta Small Business Finder’s Exemption (2021), online: ASC Notice of Implementation: <https://asc.ca/securities-law-and-policy//-/media/ASC-Documents-part-1/Regulatory-Instruments/2021/11/5976826-ASC-Notice-Blanket-Order-31-536.ashx>.
[2] Alberta Small Business Finder’s Exemption, 2021 ABASC 172, s 8.
[3] ASC Blanket Order 31-536 Alberta Small Business Finder’s Exemption (2021), online: ASC News Release:  <https://asc.ca/News-and-Publications/News-Releases/2021/11/Nov-10-ASC-adopts-new-small-business-finders-exemption-to-facilitate-capital-raising>.
[4] Ibid.
[5] ASC Notice of Implementation, supra note 1.
[6] Canada, Key Small Business Statistics, Report by Government of Canada (2020), online (pdf): Government of Canada <https://www.ic.gc.ca/eic/site/061.nsf/eng/h_03126.html>.
[7] ASC Notice of Implementation, supra note 1.
[8] “What you need to know about finders, agents & brokers” (n.d.), online: Venture Law Corporation <http://venturelawcorp.ca/finders_agents_brokers.html>.
[9] ASC Notice of implementation, supra note 1.
[10] Supra note 8.
[11] Alberta Small Business Finder’s Exemption, supra note 2 at s 2.
[12] Ibid at s 6.
[13] Securities Act, RSA 2000, c S-4, s 75(1)(a)
[14] ASC Notice of interpretation, supra note 1.
[15] Ibid.