On June 20, 2024, the Canadian Securities Administrators (“CSA”) introduced Coordinated Blanket Order 31-930 (the “Blanket Order”), representing a significant change aimed at enhancing capital market accessibility for start-ups and small and medium-sized businesses. This initiative aligns with the CSA’s focus on improving, coordinating, and harmonizing the regulation of Canadian capital markets.
The securities regulatory authorities in Alberta, British Columbia, Nova Scotia, Ontario, Québec, and Saskatchewan have collectively published the Blanket Order as a 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, allowing exempt market dealers (“EMDs”) to participate in prospectus-qualified distributions as selling group [1] members.
EMDs typically assist start-ups and small and medium-sized issuers in raising capital by acting as dealers or underwriters for securities under exemptions from the prospectus requirement. However, as these businesses grow and seek access to capital through additional channels, such as prospectus offerings, EMDs are traditionally unable to continue supporting these businesses as they transition to prospectus offerings. By enabling EMDs to join selling groups for prospectus offerings, the CSA aims to provide additional capital-raising avenues for issuers, offer more investment opportunities for investors, and allow EMDs to support businesses throughout their lifecycle, from inception to maturity.
UNDERSTANDING THE BLANKET ORDER
The Blanket Order facilitates EMD participation in prospectus offerings, provided they adhere to specific conditions, which include the following:
- Compliance with Selling Group Agreements. EMDs must operate according to the terms set forth in the selling group agreement with the issuer or the lead underwriter.
- Prospectus Exemption Criteria. An EMD can only act as a dealer to investors that would qualify for a prospectus exemption if the securities were distributed on a prospectus-exempt basis, such as accredited investors.
- Non-Underwriter Role. The EMD is restricted from acting as an underwriter. Their role is confined to that of a distributor or seller, receiving standard commissions without taking on the broader responsibilities and liabilities of an underwriter, such as being strictly liable for any misrepresentations and being required to certify that the prospectus contains full, true, and plain disclosure of all material facts.
- Compensation Limits. The compensation for an EMD cannot exceed 50% of the lowest aggregate compensation paid to any other selling group member who is an investment dealer. This provision ensures that the compensation structure remains fair and consistent across the board, reflects the fact that an EMD is not an underwriter, and prevents potential conflicts of interest or disproportionate earnings.
REPORTING AND COMPLIANCE REQUIREMENTS
EMDs wishing to leverage the Blanket Order must comply with National Instrument 33-109 Registration Information, which includes reporting a change in business activity by filing a Form 33-109F5 to indicate their intention to participate in prospectus offerings. This requirement ensures that regulatory bodies remain informed about the activities of EMDs and can monitor their involvement in the expanded scope of operations.
DURATION OF THE BLANKET ORDERS
The Blanket Order came into effect on June 20, 2024, and will remain valid until December 20, 2025, unless extended by the participating jurisdictions. This period allows the CSA to assess the impact of the exemption on the market and make any necessary adjustments based on observed outcomes.
ANTICIPATED DEVELOPMENTS
The securities regulatory authorities in other Canadian jurisdictions may introduce similar local blanket orders in the future, thereby further expanding the scope of this initiative.
FINAL THOUGHTS
The temporary exemption introduced by the CSA marks a progressive step towards enhancing the Canadian capital market’s inclusivity and efficiency. This regulatory change aims to bridge the gap, creating additional avenues for capital for issuers and offering more investment opportunities for investors that have been traditionally served by EMDs. By allowing EMDs to participate in prospectus offerings, the CSA is providing start-ups and small and medium-sized businesses with broader access to capital, thereby fostering a more robust and dynamic economic environment.
For further information or assistance with regards to any of the above matters, please contact the Capital Markets and Securities group at Miller Thomson LLP.
[1] A “selling group” is a group of investment dealers and EMDs formed in relation to a prospectus offering of securities.
