People with money are often looking for suitable investment opportunities.  And companies looking to grow (or survive) are often looking for suitable investors.  However they often have a hard time finding each other.  Enter the middle man who wants to be paid a finder’s fee for putting the two of them together.  While this is quite customary, both the company and the “finder” will want to ensure that their activities do not run afoul of Canadian securities laws.

Canadian securities legislation provides that a person (i.e. the finder) shall not be engaged in the business of trading in securities or advising others with respect to the trading in securities unless that person (i) is appropriately registered with the applicable Canadian securities regulators and complies with the terms of that registration, or (ii) relies on a prescribed exemption from the registration requirement.

If a person is not registered under Canadian securities laws, and no exemption from the registration requirement is available, they can still be paid a finder’s fee for “introducing” potential investors to a company, but the range of activities that they may engage in to earn that fee is quite limited.  And Canadian securities regulators often frown upon the practice, which means any such activities could invite regulatory scrutiny.  The following is a list of what we understand to be permitted, recommended and prohibited activities:

Permitted Activities

A person that has a referral-fee arrangement with a company may:

  • introduce a prospective investor to another person associated the company;
  • provide a term sheet (which one Canadian securities regulator characterizes as “a skeletal outline of the features of an issue without dealing extensively with the business and affairs of the issuer”) to a prospective investor; and
  • refer a prospective investor to publicly-available information about the company.

Recommended Activities

A person that has a referral-fee arrangement with the company should:

  • disclose to any prospective investor that the person has a referral arrangement with the company;
  • disclose to any prospective investor that the person is not registered to trade or advise in securities; and
  • introduce any prospective investor to another person associated with the company as soon as practicable under the circumstances

Prohibited Activities

A person that has a referral-fee arrangement with a company should not:

  • provide a subscription agreement to a prospective investor;
  • provide an investor presentation to a prospective investor;
  • provide an offering memorandum to a prospective investor;
  • participate in an information session about the sale of the company’s securities;
  • discuss in detail with a prospective investor the business and affairs of the company;
  • offer or give an opinion on the investment merits of the company or the company’s securities;
  • accept a signed subscription agreement from a prospective investor;
  • accept subscription proceeds from a prospective investor;
  • countersign a subscription agreement; or
  • distribute share certificates.

Note that this list of prohibited activities is not an exhaustive list.  The key is for the finder to be very clear in both words and actions that the finder is not trading in securities or advising others with respect to the trading in securities.

The “Northwest Exemption”

Notwithstanding the foregoing, the securities commissions in each of British Columbia, Alberta, Saskatchewan, Manitoba, the Northwest Territories, Nunavut, and the Yukon have adopted the “Northwest Exemption” which exempts unregistered persons from the registration requirements when selling or trading in securities distributed under certain common prospectus exemptions in those provinces.

Each province, and British Columbia in particular, may have additional requirements that a person must follow in order to rely on the Northwest Exemption but at a minimum the person seeking to rely on the Northwest Exemption must:

  • confirm the distribution of the company’s securities can be made to the purchaser under a common prospectus exemption;
  • not be registered in any jurisdiction, including a foreign jurisdiction;
  • not have advised the purchaser regarding suitability;
  • obtain from the purchaser a signed risk acknowledgement in the form prescribed by the applicable securities commission in its order establishing the Northwest Exemption;
  • not have provided financial services to the purchaser (other than  for a prospectus-exempt distribution under the common exemptions);
  • not hold or have access to the purchaser’s assets; and
  • file an information notice, in the prescribed form, with the applicable securities regulator with their current or updated information on or before ten days from the exempt distribution.

The British Columbia Securities Commission proposed the rescission of the Northwestern Exemption in British Columbia in January 2013. The British Columbia Securities Commission cited as reasons for rescission, significant non-compliance with the conditions of the Northwest Exemption, and the view that investors would be better protected if they purchased securities from or through registrants.

The common prospectus exemptions relied upon for the purposes of the Northwest Exemption Order are found in the following sections of NI 45-106:

  • section 2.3 (accredited investor),
  • section 2.5 (family, friends and business associates),
  • section 2.9 (offering memorandum); and
  • section 2.10 (minimum investment amount – $150,000 and above).

But Everyone Else Is Doing It

Remember that Canadian securities regulators often frown upon the practice of non-registrants being paid finder’s fees which means any such activities could invite regulatory scrutiny, even though a case can be made that such activities are common industry practice.

Also remember that securities is a dynamic area of the law that has experienced numerous changes during the past few years. What may have been acceptable conduct five years ago may not be acceptable conduct today.

Invitation for Discussion:

If you would like to discuss this article in greater detail, or any other securities law matter, please do not hesitate to contact one of the lawyers in the Business Law group at Linmac LLP.

Disclaimer:

Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.