Registration Archives - Thauli Law

Applicability of Canadian Securities Laws and the use of Artificial Intelligence Systems in Capital Markets

Harveen Thauli — Fri, 20 Dec 2024 22:27:03 +0000

On December 5, 2024, the Canadian Securities Administrators issued CSA Staff Notice and Consultation 11-348 – Applicability of Canadian Securities Laws and the use of Artificial Intelligence Systems in Capital Markets. This Notice is an important read for securities registrants and other capital market participants if they are considering the use of AI in their securities business activities as it provides clarity and guidance on how securities legislation applies to the use of AI systems.

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The Canadian Securities Administrators Develop an Integrated Information System

Harveen Thauli — Sun, 02 Jun 2019 23:29:36 +0000

On May 2, 2019 the Canadian Securities Administrators (“CSA”) published a CSA Notice and Request for Comment introducing the National Systems Renewal Program (“NSPR”) aimed at developing a new centralized information technology system (the “Renewed System”) to replace various local records filing systems, as well as the System for Electronic Development Analysis and Retrieval (“SEDAR”), the System for Electronic Disclosure by Insiders (“SEDI”), and the National Registration Database (“NRD”).

In conjunction with the NSPR, the CSA proposes to revise Multilateral Instrument 13-102 — System Fees for SEDAR and NRD (“MI 13-102”), and to repeal and replace National Instrument 13-101 — System for Electronic Document Analysis and Retrieval (SEDAR) with National Instrument 13-103 — System Replacement Rule (“Proposed MI 13-103”). Proposed MI 13-103 will require that, subject to certain exceptions, all documents required or permitted to be filed with or delivered to a securities regulatory authority or regulator be transmitted electronically in accordance with the proposed legislation.

This change can be seen as overdue as the fee structure in MI 13-102 has not been changed since the models were implemented in 1997 (for SEDAR) and in 2003 (for NRD).

This article contains general information only and is not intended to provide a legal opinion or advice. Please consult a lawyer for matters related to your situation before relying on any of the statements made in this article.

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What Will Be the Impact on Issuers Relying on the Northwestern Exemption if it is Revoked?

Harveen Thauli — Tue, 22 Jan 2019 18:09:04 +0000

I initially wrote the below article on March 19, 2014. On August 18, 2018, the securities regulatory authorities of British Columbia, Manitoba, Nunavut, the Northwest Territories, and Yukon (the “participating jurisdictions”) announced that they will revoke their local orders that form the “Northwestern Exemption”. Alberta and Saskatchewan are still considering whether to revoke their local orders. The local orders will cease to be effective on April 30, 2019. Therefore, the below article is no longer a hypothesis but an inevitable reality.

March 19, 2014

Raising money in the private markets is an efficient and economical alternative to filing a prospectus for businesses needing funds for its operations. To do so, however, you must be able to rely on prospectus and registration exemptions.

Exemptions from the prospectus requirement are found in National Instrument 45-106 – Prospectus and Registration Exemptions (“NI 45-106”). The most common exemptions in NI 45-106 include sales of securities to accredited investors, to family, friends and business associates, under an offering memorandum or the minimum investment amount. These exemptions are often referred to as the “capital raising exemptions”.

You cannot stop at relying solely on a prospectus exemption. A registration exemption must also be available. Otherwise, you would have to consider registering as an Exempt Market Dealer (“EMD”) or dealing with an EMD as an intermediary to sell your securities.

British Columbia, Alberta, Manitoba, Saskatchewan, the Northwest Territories, Nunavut, and the Yukon provide a registration exemption for a person or company selling private placement securities under one of the capital raising exemptions. This registration exemption is most commonly known as the “Northwestern Exemption” and provides an exemption from the requirement to register as an EMD under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”).

In British Columbia, this registration exemption is found in BC Instrument 32-513 – Registration Exemption for Trades in Connection with Certain Prospectus-Exempt Distributions (“BCI 32-513”). The main criteria of this exemption are:

the person is not registered under any securities legislation or was not formerly registered¹;

before the trade, the person does not advise, recommend or otherwise represent to the purchaser that the security being traded is suitable;

the person does not hold or have access to the purchaser’s assets; and

the person has not provided financial services to the purchaser other than in connection with a prospectus-exempt distribution.

To rely on this exemption, you have to obtain a Risk Acknowledgement from the purchaser and file an Information Report with the Commission.

The British Columbia Securities Commission (the “Commission”) proposed revoking BCI 32-513 in early 2013² for the following reasons:

(a) the impact on capital raising would be negligible,

(b) those relying on the exemption are not complying with its investor protection conditions, and

(c) private placement market investors would be better protected if they purchase securities through registrants.

The Commission has not yet revoked BCI 32-513, but discussions about its revocation remain ongoing with the Ministry of Finance. If it is revoked, this will have an immediate impact on issuers that are in the business of trading in securities, but are not registered because they are relying on BCI 32-513. Some real estate developers, for example, will be immediately impacted by its revocation.

It may be difficult to understand that some real estate transactions are subject to securities regulation, but consider the scenario where a purchaser is buying a strata unit in a hotel. Although this purchaser may use this unit, one of the main reasons for purchasing is to earn returns by allowing others to book its use. The purchaser will enter into not only a contract of purchase and sale for the unit itself but also an ancillary rental pooling agreement whereby a management company, which is often affiliated with the developer, will supervise and rent the strata units. Depending on the terms of the rental pooling agreement, the strata unit owners may receive a guaranteed minimum payment from the pooled funds or variable payments. The main difference between this transaction and one where a purchaser buys a condo for personal use is the rental pooling agreement, which essentially turns this investment into a security.³

If the Commission revokes the Northwestern Exemption, real estate developers will have to become registered as an EMD or hire an EMD to sell its real estate securities. This will inevitably increase their cost of doing business and impose an additional regulatory burden on them because they will be forced to learn and consider the implications of NI 31-103.

This article contains general information only and is not intended to provide a legal opinion or advice. Please consult a lawyer or compliance advisor for matters related to your situation before relying on any of the statements made in this article.

This requirement is specific to British Columbia.

To date, the other jurisdictions that have adopted the Northwestern Exemption are not considering revoking their equivalent Instrument or Blanket Order.

This security is more specifically considered an investment contract. The test to determine if a real estate investment is an investment contract has been established by case law and is often referred to as the common enterprise test or the risk capital test. The test involves these three elements: 1) an investment in a common enterprise; 2) an expectation of profit by the investors; and 3) such profits will arise through the efforts of the promoter or a third party such as the developer.

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Multilateral CSA Notice 32-302 – Notice of Revocation of Certain Local Orders

Harveen Thauli — Sat, 25 Aug 2018 22:10:35 +0000

If you haven’t already heard, the securities regulatory authorities of British Columbia, Manitoba, Nunavut, the Northwest Territories, and Yukon (the participating jurisdictions) announced that they will revoke their substantially harmonized registration exemptions that form the “Northwestern Exemption” (the local orders). This announcement was made in Multilateral CSA Notice 32-302 (the Notice) Notice of Revocation for Certain Local Orders Providing Registration Exemption for Trades in Connection with Certain Prospectus-Exempt Distributions and Update on BC Instrument 32-517 Exemption from Dealer Registration Requirement for Trades in Securities of Mortgage Investment Entities.

The local order in BC is BC Instrument 32-513 Registration Exemption for Trades in Connection with Certain Prospectus-Exempt Distributions (BCI 32-513). BCI 32-513 as well as the local orders in the other participating jurisdictions will cease to be effective on April 30, 2019. Alberta and Saskatchewan are also considering revoking their local orders.

The BC Securities Commission (the BCSC) further announced that it will not be renewing BC Instrument 32-517 Exemption from Dealer Registration Requirement for Trades in Securities of Mortgage Investment Entities (BCI 32-517). BCI 32-517 will cease to be effective February 15, 2019. The Notice did not state why BCI 32-517 will cease to be effective sooner than BCI 32-513.

The Notice discusses that the Capital Markets Regulatory Authority (CMRA) had communicated in published commentary to the draft initial regulations that the registration exemptions would not carry forward to the CMRA. However, the fate of the CMRA is unknown given the announcement that the CMRA will not be ready for business in December 2018. Therefore, the securities regulatory authorities of the participating jurisdictions decided to take the initiative to revoke their local orders and BCI 32-517 in the BCSC’s case because they firmly believe that investors would benefit considerably from the additional protections of the registration regime.

This article contains general information only and is not intended to provide a legal opinion or advice. Please consult a lawyer for matters related to your situation before relying on any of the statements made in this article.

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How Bitcoin is Revolutionizing the Investment Space

Harveen Thauli — Wed, 29 Nov 2017 18:33:59 +0000

The Pacific Capital Markets Association published this article called, “How Bitcoin is revolutionizing the investment space” on November 20, 2017. The article provides an overview of Bitcoin’s history, investing in Bitcoin and its safety.

This article contains general information only and is not intended to provide a legal opinion or advice. Please consult a lawyer for matters related to your situation before relying on any of the statements made in this article.

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BC Securities Commission Grants Landmark Bitcoin Investment Fund Manager Registration

Harveen Thauli — Sun, 10 Sep 2017 22:47:16 +0000

The BC Securities Commission posted the below press release on its website on September 6, 2017. It announces the the first registration allowing the operation of a bitcoin investment fund.

The British Columbia Securities Commission (BCSC) announced the first registration of an investment fund manager in Canada solely dedicated to cryptocurrency investments. The BCSC has granted First Block Capital Inc. registration as an investment fund manager and an exempt market dealer in order to operate a bitcoin investment fund.

“Cryptocurrency investments are a new and novel form of investing in Canada. We have seen from the market and from investors that there is a strong appetite for access to these kinds of investments,” said Zach Masum, Manager, Legal Services, Capital Markets Regulation, and leader of the BCSC’s Tech Team. “This first registration allows access to bitcoin investments, while providing the BCSC with unique mechanisms to monitor operations in a rapidly developing area.”

Cryptocurrency investments raise risks that are different from traditional asset classes, including the cybersecurity risks inherent in dealing with digital currencies. These risks relate not only to the registrant, but also to the bitcoin fund’s custodian, a third party chosen to facilitate the safekeeping and exchange of bitcoins.

The conditions of registration imposed on First Block Capital were crafted to give flexibility to allow them to operate under the present regulatory framework, and give tools to the BCSC to evaluate the identified risks of this innovative fund type. First Block Capital is also now registered as an investment fund manager and exempt market dealer in Ontario; the BCSC is its principal regulator.

“We strongly encourage other companies in British Columbia, whether they are potential new registrants or existing investment fund managers, to contact the BCSC’s Tech Team if they are considering pursuing cryptocurrency investments in their funds,” said Masum. “The Tech Team can help ensure compliance with securities regulation, which can help save time and potential costs later on.”

The BCSC launched the Tech Team in January 2017 as part of its fintech outreach initiative to help B.C.-based fintech and technology companies understand their securities regulatory requirements. The Tech Team is also actively involved with the Canadian Securities Administrators’ Regulatory Sandbox Initiative, which supports fintech businesses seeking to offer innovative products, services and applications in Canada.

The Tech Team will continue engaging with key stakeholders, and anticipates issuing a publication later this year summarizing results of its outreach and proposing next steps to meet the needs of B.C. financial technology industry participants.

This article contains general information only and is not intended to provide a legal opinion or advice. Please consult a lawyer for matters related to your situation before relying on any of the statements made in this article.

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PMAC Regulatory Alert

Harveen Thauli — Thu, 29 Jan 2015 20:17:15 +0000

CSA Announces Limited Extension for Certain CRM 2 Requirements for Dealers and Advisers

In an announcement made yesterday by Bill Rice, Chair of the Canadian Securities Administrators (CSA), the CSA has decided:

The July 15, 2015 requirements applicable to registered dealers and advisers will be delayed until December 31, 2015. This means that the new disclosure requirements required in quarterly account statements (or monthly in certain prescribed circumstances) including position cost information will come into force at the end of this year.

There will be no changes to the requirement to provide cost disclosure and performance reporting information to investors as in effect on July 15, 2016.

For firms that will report performance for the calendar year 2016, there will be no requirement to include comparative data from 2015 in their investment performance reports. They will be able to base their first investment performance reports on 2016 information alone.

There will be no change to the definition of “book cost” despite recent industry concerns. Firms that wish to provide tax-adjusted cost information to their clients can do so as supplementary information, affirming that the definition of “book cost” will not change and will remain as currently reflected in CRM 2 rules.

The announcement came as a response to a request made by the Investment Industry Association of Canada (IIAC) to modify certain dates associated with the CRM2 initiative to allow dealers more time for implementation and testing. The CSA has noted that they will be preparing the necessary instruments to give effect to these decisions in the near term.

This article contains general information only and is not intended to provide a legal opinion or advice. Please consult a lawyer or compliance advisor for matters related to your situation before relying on any of the statements made in this article.

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Amendments to the Exempt Market Dealer Registration Category in NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”)

Harveen Thauli — Thu, 22 Jan 2015 20:19:27 +0000

The Canadian Securities Administrators (the “CSA”) and the Ontario Securities Commission (the “OSC”) recently introduced amendments to the exempt market dealer (“EMD”) registration category. Some of these amendments will undoubtedly make it more difficult for EMDs to become registered or restrict their business activities.

Experience

As of January 11, 2015, the chief compliance officer (“CCO”) of an EMD is now required to have 12 months of relevant securities industry experience in the 36-month period before applying for registration (section 3.10 in NI 31-103). The CSA’s rationale for introducing this experience requirement was that it was consistent with the proficiency standard stated in section 3.4 of NI 31-103. Section 3.4 states that a CCO must have “the education, training and experience that a reasonable person would consider necessary to perform the activity competently”. This includes having the knowledge and ability to design and implement an effective compliance system.

The CSA has not provided any additional guidance for this experience requirement beyond what is stated in section 3.4. The immediate concern is that CSA members will only permit an applicant with past experience as a registered CCO to become a CCO of an EMD. However, if this happens, the pool of qualified CCOs will not increase and may possibly shrink. It is more likely that this experience requirement will develop over time on a fragmented and possibly inconsistent basis among the CSA members.

Pre-Registration Reviews

On September 25, 2014, the OSC began pre-registration reviews as part of the registration process, which the OSC is referring to as “Registration as the first Compliance Review”. The procedures include reviewing an EMD applicant’s financial condition, business plan and at a high level, the policies and procedures manual (the “PPM”). OSC staff may gather information through written requests, holding interviews of the Ultimate Designated Person (“UDP”) and CCO, or both. If OSC staff opt to interview the UDP and CCO of an EMD applicant, they should be prepared to answer questions about their PPM as well as their understanding of their obligations under securities legislation. The one potential advantage of this process is that a CCO applicant can make the case that he/she satisfies the new experience requirement. For more information about the OSC’s pre-registration review process, please refer to OSC Staff Notice 33-745.

Trading on a Marketplace

On July 11, 2015, an EMD will no longer be permitted to trade a security that is listed, quoted or traded on a domestic or foreign marketplace whether the trade is on or off the marketplace, unless the trade requires reliance on a further exemption from the prospectus requirement. This includes prohibiting an EMD from establishing an omnibus account with an investment dealer and trading securities for clients through that account. The CSA’s rationale for this change was to ensure consistency with IIROC’s marketplace rules, which prohibit an IIROC dealer from trading freely tradeable exchange-traded securities off marketplace.

Please note that there have been other amendments to NI 31-103. The above are the highlights.

This article contains general information only and is not intended to provide a legal opinion or advice. Please consult a lawyer or compliance advisor for matters related to your situation before relying on any of the statements made in this article.

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An Overview of the Investment Fund Manager Registration Requirement

Harveen Thauli — Wed, 19 Mar 2014 19:20:43 +0000

When National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”) came into force, it introduced a new category of registration for firms. NI 31-103 requires all managers, whether persons or companies, of investment funds to register as an Investment Fund Manager (“IFM”) unless an exemption is available. IFMs direct the business, operations or affairs of an investment fund. The Companion Policy to NI 31-103 further indicates that IFMs organize the fund and are responsible for its management and administration.¹

An investment fund is a collective investment vehicle in which money is pooled together for the purpose of investing. The investment fund may invest in a portfolio of securities, but it is not restricted to investments in securities. Provided the collective investment vehicle meets the definition of an investment fund and a person or company directs its business, its manager must register as an IFM.

The definition of investment fund is found in National Instrument 81-106 – Investment Fund Continuous Disclosure, which defines it as a mutual fund or non-redeemable investment fund.² A mutual fund is a fund whose primary purpose is to invest money provided by its securityholders and offers securities that are redeemable on demand or within a specified period of time after demand at its net asset value per security. A non-redeemable investment fund is a fund (i) whose primary purpose is to invest money provided by its securityholders; (ii) that does not invest for the purpose of exercising or seeking to exercise control of an issuer, or for the purpose of being actively involved in the management of any issuer in which it invests (other than an issuer that is a mutual fund or a non-redeemable investment fund); and (iii) that is not a mutual fund.

It is apparent that the IFM registration requirement applies broadly and gives regulators much wider power to regulate this industry since it casts its net over mutual funds and non-redeemable investment funds. Although there are exceptions to this registration requirement, the regulators appear to accept very few. However, whether registration is required will depend on the facts and will differ from case to case. There are, for example, corporate structures that have non-redeemable securities, but those entities are not necessarily investment funds.

Consider the scenario where a group of closely-related investors pool their money for the purpose of forming a syndicate to purchase race horses. The investors contribute an equal amount of money and receive non-redeemable securities for their investment in return. The money is used to buy race horses as well as care for, train, and enter the horses in various races. The expectation is that any winnings will be shared equally among the investors. Although one investor may be tasked with managing the bank account, that investor is not directing the business, operations or affairs of the syndicate. The investors are collectively making decisions for the syndicate as well as exercising control over it. This is different from a situation where investors pool their money for the purpose of buying percentage interests in various race horses and someone is managing their money, making the purchase decisions as well as all decisions related to the horses. This latter example may have the attributes of a non-redeemable investment fund and the manager of this fund will more than likely require registration as an IFM.³

If the fund meets the definition of an investment fund, the manager must not only register but also comply with other requirements stipulated in NI 31-103. Some of the compliance requirements are as follows:

The IFM must designate, and apply for registration of, a chief compliance officer (“CCO”) who satisfies proficiency requirements set out in NI 31-103 as well as an ultimate designated person (“UDP”). Depending on the size of the firm, the CCO and UDP may be the same person. The IFM registration requirement does not apply to other individuals who are acting on behalf of a registered IFM.

The IFM must comply with specific capital requirements, including maintaining a minimum capital of $100,000 and insurance requirements.

The IFM must file annual and quarterly financial statements to the applicable securities regulator. The financial statements must include calculations of excess working capital and a description of any net asset value adjustments made during the financial year or quarter.

The IFM is subject to conduct rules, which include maintaining and applying policies and procedures as well as rules related to client assets, record-keeping and retention, and referral agreements.

The priority of the securities regulators is to protect the public interest. As a result, it is more likely than not that a manager of a collective investment vehicle will require registration as an IFM if the investment vehicle meets the definition of an investment fund. The manager will then be subject to the compliance regime set out in NI 31-103. Therefore, think carefully about the structure of your investment vehicle and consider whether its manager is subject to the IFM registration requirement.

This article contains general information only and is not intended to provide a legal opinion or advice. Please consult a lawyer or compliance advisor for matters related to your situation before relying on any of the statements made in this article.

Specific examples of functions or activities that an IFM directs are listed in Multilateral Policy 31-202 – Registration Requirement for Investment Fund Managers (“MP 31-202”). This policy applies in British Columbia, Alberta, Saskatchewan, Manitoba, Prince Edward Island, Nova Scotia, New Brunswick, Northwest Territories, Yukon and Nunavut.

The complete definition of investment fund in NI 81-106 is “investment fund” means a mutual fund or a non-redeemable investment fund, and, for greater certainty in British Columbia, includes an EVCC (employee venture capital corporation) and a VCC (venture capital corporation). For the purpose of this article, EVCCs or VCCs are not discussed.

The purpose of these examples is solely to show whether registration as an IFM is required. They do not consider if registration in other categories is required.

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