33-5XX - Registration exemption for trades in connection with certain prospectus-exempt distribution [BCP Advance Notice - Lapsed]
- BCN 2009/12 - Advance Notice of National Instrument 31-103 Registration Requirements and Exemptions,Companion Policy 31-103CP Registration Requirement and Exemptions,BC Interpretation Note XX, and BC Instrument 33-5xx and its companion policy, and consequential amendments to national and local instruments [BCN - Lapsed]
BC Policy 33-5xx
Registration exemption for trades in connection with
certain prospectus-exempt distributions
On March 28, 2010, the Commission ordered that BC Instrument 33-xxx Registration exemption for trades in connection with certain prospectus-exempt distributions come into force and effect. This BC Policy explains how the Commission interprets and applies that instrument.
The Commission has ordered that a person is exempt from the dealer registration requirement when trading in securities in connection with a distribution made in reliance on one or more of the following prospectus exemptions contained in National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106):
- accredited investor (section 2.3);
- family, friends, and business associates (section 2.5);
- offering memorandum (section 2.9), and
- minimum investment amount (section 2.10).
The purpose of this Policy is to guide market participants in understanding when they may rely on the blanket registration exemption, including information on the conditions upon which the exemption is granted and the Commission’s expectations of market participants who rely on the exemption.
A market participant that is in the business of trading in securities is required to register as a dealer. To decide whether you are in the business of trading in securities, see the discussion in Companion Policy 31-103CP Registration Requirements and Exemptions on this point.
Exemption not available to registered persons
The exemption is not available to a person registered in any jurisdiction, including foreign jurisdictions. We feel this restriction is necessary to ensure a registrant has the same obligations to all its clients who purchase, or seek advice on, any type of security.
No suitability advice
A market participant relying on this exemption must not provide advice to the purchaser, and is restricted to providing factual information about the security and the purchase agreement. For example, a market participant may tell the purchaser about the features of the security, the risks of the investment, how the subscription agreement works, and other items of a general, factual nature.
That same market participant must not give suitability advice to the purchaser. This means the market participant cannot tell the purchaser that the securities are a good investment or that the purchaser should, for whatever reason, enter into the purchase agreement. The market participant must refrain from saying or doing anything that might lead the purchaser to think that they should buy the security because it somehow meets their investment needs or desires. The market participant must refrain from answering any of the purchaser’s questions that are related to the purchaser’s
- investment needs and objectives;
- financial circumstances, or
- risk tolerance.
To prevent any misunderstanding, a market participant relying on this exemption should communicate to the purchaser that only a registered dealer or adviser that is permitted to trade in or advise on these securities can tell the purchaser whether the security is suitable for the purchaser. If a purchaser persists in asking questions that relate to suitability, the market participant should reiterate the point.
Market participants relying on this exemption should refrain from using marketing materials that suggest general suitability or suitability for a particular kind or demographic of purchaser. Marketing materials that are at odds with or contradict the information in the risk acknowledgement the purchaser reads and signs create genuine opportunities for confusion. We will take the effect of marketing materials into account when considering whether this condition for using the exemption has been met.
The risk acknowledgement signed by the purchaser and obtained by the market participant must be in the form specified in the exemption order.
The disclosure in this risk acknowledgment describes risks that are particular to the purchase transaction and the absence of suitability advice, in addition to describing the general risks inherent in prospectus-exempt securities. The disclosure in this risk acknowledgement differs from, and is additional to, the disclosure in the risk acknowledgement required by NI 45-106. When the market participant trading the security to the purchaser is an agent of the issuer, the agent must ensure that the purchaser signs both the NI 45-106 risk acknowledgement, if applicable, and this risk acknowledgement. We note that this risk acknowledgement must be obtained for all trades under this exemption (accredited investor, friends, family, and business associates, and minimum investment amount), even if there are no risk acknowledgement requirements under the related NI 45-106 prospectus exemption.
It is the market participant’s responsibility to understand the contents of the risk acknowledgement and to explain the risk acknowledgement in a clear, plain way to the purchaser. The purchaser should clearly understand, by the end of discussions with the market participant, that this purchase transaction offers fewer protections than are available when purchasing other kinds of securities.
No hold or have access to purchaser’s assets
A market participant who holds or has access to a purchaser’s assets cannot rely on this exemption. Indicia of holding or having access to a purchaser’s assets include, but are not limited to:
- holding a purchaser’s securities certificates or cash for any period of time;
- having authority (e.g. power of attorney) to withdraw funds or securities from a purchaser’s account;
- accepting funds from a purchaser directly (e.g. a cheque made payable to the market participant) or accepting funds on the purchaser’s behalf from a custodian;
- acting in the capacity of a trustee for a purchaser;
- having, in any capacity, legal ownership of, or access to, the purchaser’s funds or securities.
For the purposes of this condition, we interpret the phrase “hold or have access” as not including the handling in transit of a purchaser’s cheque made payable to a third party. Thus, for example, a market participant can normally handle a purchaser’s cheque made payable to the issuer of the securities being traded pursuant to this exemption. This would not be the case, however, if the issuer and the market participant have the same officers in which case we would interpret the market participant as holding or having access to the purchaser’s assets.
A market participant that relies on this exemption must file an information report with the Commission within 10 days of relying on this exemption. Where a market participant has previously filed an information report pursuant to this exemption and is subsequently relying on this exemption to trade in securities, the market participant is required to update any changes to that previously filed report, within 10 days of relying on this exemption.
We will use the information collected for research and compliance purposes.
To demonstrate compliance, market participants will need to keep records demonstrating that they met the conditions of this exemption when they sold a prospectus-exempt security. Evidence of the purchaser’s risk acknowledgement should be kept for a reasonable period of time. In NI 45-106, the equivalent prospectus exemption risk acknowledgement condition requires that the risk acknowledgement be kept for 8 years.
The market participant should also retain evidence of communications between the market participant and the purchaser. This will serve the market participant well from a compliance standpoint and if a dispute ever arises between the market participant and the purchaser.