deemed to require registration under REBBA. In a way, that’s
understandable (to the extent that any thought at all is given to the
application of REBBA) especially so in the context of providing
M&A advisory services, where the typical response is “Oh, that
Act governs real estate agents and brokerages and my firm isn’t
operating as a real estate brokerage. Why are you bothering me?
End of story.”
Nothing could be further from the truth. REBBA’s purpose
is to regulate individuals and firms that ‘trade’ in ‘real estate,’
whether directly or indirectly. The difficulty arises from how these
terms are defined in the Act, as well as the title of the Act itself.
The title of the Act clearly evidences an intention to regulate
“Business Brokers”, and “Real Estate” is intentionally defined
to include a ‘business’, whether with or without premises, and
the goods connected with operating a business (in any sector).
“Business”, in turn, means an undertaking carried on for gain or
profit or any interest in such undertaking. “Trade” (not unlike
the all-encompassing definition in the Securities Act) includes a
disposition, acquisition or transaction in “real estate”, and any
act, advertisement, conduct or negotiation directly or indirectly
in furtherance of any such transaction.
REBBA’s starting point (subject to the crucial exemptions
discussed below) is that engaging in a ‘trade in real estate’ requires
registration under the Act. So on a plain reading of the Act, at a
minimum, capital-raisers arranging equity or convertible financing
for real property issuers (such equity, particularly partnership
interests, being considered an ‘interest in’ real estate), or an M&A
advisory firm assisting clients in any sector would need to be
registered as brokerages in order to offer the services typically
contemplated by a standard Term Sheet or M&A engagement letter.
The registration requirement has two important potential
consequences. First, there exists the “nuclear bomb” contained
in Section 9 of the Act, that a non-REBBA licensed M&A advisor
is legally barred from bringing an action to enforce a client’s
contractual obligation to pay fees or commissions where a
transaction involved a ‘trade in real estate’ – the practical effect
of which is that a non-REBBA licensed M&A advisor may have no
recourse in the event a client chooses not to honour that obligation
in such circumstances (what we refer to as “we’d love to pay you
but, but simply aren’t permitted to,” i.e. an advisor’s ‘financial
risk’). Second, the Real Estate Council of Ontario (RECO) is
authorized to institute a criminal proceeding and impose fines
for non-compliance with the Act, and may also apply for a court
order restraining a non-REBBA licensed M&A advisor’s conduct
in relation to perceived non-compliance (what we refer to as an
advisor’s ‘regulatory risk’).
Registered brokerages under REBBA are subject to a
comprehensive conduct and compliance regime similar in nature
(though not as to specifics) to that applicable to firms registered
under securities laws. Given the attendant compliance burden,
registration under REBBA is likely to be a suboptimal solution for
the vast majority of capital-raisers and M&A advisors. So, we must
consider: the key factors affecting the risks of being unlicensed,
the critical statutory exemptions to REBBA available to capital-
raisers and M&A advisors (which in our view give a leg-up to
EMD’s over their non-EMD-registered competitors), and most
importantly, the positive steps and measures capital-raisers and
M&A advisors might take in an effort to mitigate their regulatory
and financial risk.
Practical Aspects of Regulatory Risk
The fact is, the most serious consequences described above
are relatively unlikely to occur in respect of a capital-raiser or M&A
advisor’s operations. For instance, there have been no reported
instances of a capital-raiser or M&A advisor being charged with
an offence under REBBA. However, we have had very recent firsthand experience with RECO making unsolicited inquiries and
requesting a detailed accounting of the activities of non-EMD-registered M&A advisors for the apparent purpose of determining
whether their registration under the Act is required. Most recently,
a beneficial resolution was reached with RECO that permitted the
advisor to continue operations without a REBBA registration or
other regulatory obligations under the Act, largely on the basis
of the reasoning summarized below. It is noteworthy that RECO
does not wield the same broad investigative powers as the Ontario
Securities Commission in respect of compelling information and
investigating alleged misconduct or unregistered trading activity.
Nonetheless, to the extent RECO’s recent inquiries into the
activities of M&A advisors signify a trend of increased regulatory
scrutiny of M&A advisory services, M&A advisors and financial
advisors should sit up and take notice.
What about capital-raisers or M&A advisors located or advising
on transactions outside Ontario? Though there are no hard and
fast rules concerning the connection to Ontario in the context of
a particular transaction sufficient to trigger the application of the
Act, the general view is that if an capital-raiser, M&A advisor, client
or target business is situated in Ontario, any of these features
may attract the application of REBBA to the advisor’s activities.
However, the specific geographical orientation of the parties to
a transaction is likely to significantly impact RECO’s legal and
practical ability to pursue a compliance action.
Practical Aspects of Financial Risk
What if a client refuses to pay the success fee it agreed to
in the engagement letter following successful completion of a
mandate on the basis that your firm is not licensed under REBBA?
Given the lack of published regulatory enforcement proceedings
under REBBA, the most useful guidance for gauging both the
regulatory and financial risks arising from the Act’s exceptionally
broad drafting is in the context of Court proceedings instituted
by M&A advisors against former clients for unpaid success fees.
Fortunately, in the context of success fee collection cases,
Courts have tended to interpret REBBA in a restrictive manner,
preferring the plain and ordinary meanings of the controversially
defined terms, and have read the Act in such a way as to avoid
the unfairness that would result from preventing an advisor from
collecting success fees they have otherwise fairly earned.
We can infer two key points from these success fee collection Court
decisions, namely that without requiring registration under the Act:
• an M&A advisor may generally render services in relation to
the sale of a business effected as an acquisition of previously
issued shares; and
• a single transaction may be divided into separate parts and