Another Seat at the Table: Exempt Market Dealers Can Now Act as Selling Group Members in Prospectus Offerings

On June 20, 2024, the securities regulatory authorities in the provinces of Alberta, British Columbia, Nova Scotia, Ontario, Québec and Saskatchewan (collectively, the “Provinces”) announced that exempt market dealers would now be permitted to participate as selling group members in distributions of securities made under a prospectus (each, a “Prospectus Offering”), provided that certain requirements are met.[1] This relief came in the form of local blanket orders issued by each of the Provinces (collectively, the “Blanket Orders”), which intend to assist early stage businesses raise capital by providing a temporary exemption from the restrictions provided by subsection 7.1(2)(d) of National Instrument 31-203 – Registration Requirements, Exemptions and Ongoing Registrant Obligations.

The Blanket Orders are effective June 20, 2024, and will remain in effect until December 20, 2025, unless extended by the Provinces.

Rationale

The Provinces recognize that start-ups and small- to-medium-sized issuers are important contributors to provincial economies. By distributing their securities under exemptions from the prospectus requirement, exempt market dealers play an important role in assisting these issuers raise capital.

As these issuers begin to grow and mature, exempt market dealers are often unable to continue their support; as the issuers begin to distribute their securities through Prospectus Offerings, exempt market dealers have historically been excluded since they have been limited to distributions made under an exemption from the prospectus requirement, while participation in Prospectus Offerings has generally been restricted to investment dealers.

The Blanket Orders aim to support start-ups and small- to-medium-sized issuers by allowing exempt market dealers to continue their involvement as these issuers grow and begin to tap into the public markets. The Blanket Orders are intended to make available additional sources of capital for issuers, offer more opportunities to investors and allow exempt market dealers to support an issuer’s entire lifecycle.

More Details

Pursuant to the Blanket Orders, an exempt market dealer is permitted to act as a dealer in a Prospectus Offering if it satisfies certain requirements, which include:

a) the exempt market dealer must comply with the terms of the selling group agreement entered into with either the issuer or the investment dealer acting as the lead underwriter in connection with the Prospectus Offering;

b) the exempt market dealer must only act as a dealer to a person that would otherwise be entitled to rely on an exemption from the prospectus requirement;

c) the exempt market dealer must not act as an underwriter in relation to the Prospectus Offering and must not receive fees in excess of the customary distributor’s or seller’s commission payable by an issuer or underwriter. The exempt market dealer must be able to rely on the exemption for selling group members in the definition of an “underwriter” pursuant to applicable securities legislation; and

d) the total compensation payable to the exempt market dealer must not exceed 50% of the lowest total compensation payable to any member of the selling group that is an investment dealer.

Additional details can be found within the respective local Blanket Orders. While the language in each individual Blanket Order varies slightly, it is the intent of the Provinces that the Blanket Orders have the same effect in each of the participating jurisdictions.

Pursuant to National Instrument 33-109 – Registration Information, exempt market dealers that intend to rely on the Blanket Orders must report a change in business activity by filing a Form 33-109F5 – Change of Registration Information to indicate their participation as a member of selling groups in Prospectus Offerings.

If you have any questions regarding the Blanket Orders, please contact Michael Rennie at mrennie@wildlaw.ca, Geoffrey Cher at gcher@wildlaw.ca, Alex Karlsen at akarlsen@wildlaw.ca or any other member of Wildeboer Dellelce LLP. The authors gratefully acknowledge the assistance of summer student Zehra Irfan in the preparation of this update.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.

[1] The securities regulatory authority in New Brunswick has indicated that it intends to follow with a similar local blanket order in the coming weeks.