circumstances where the accredited investor exemption would
• Therefore, an EMD can trade in securities distributed to an
accredited investor whether or not a prospectus was filed in
respect of the distribution of those securities.
This analysis puts EMDs squarely into the stream of distribution
flowing under a prospectus offering, subject to two restrictions:
1. an EMD has to stay within the bounds mapped out by the
prospectus exemptions (e.g., dealing only with accredited
2. an EMD can only act as dealer, it can’t act as underwriter, in
connection with a prospectus offering.
Based on this analysis, so long as an EMD lives within the
restrictions, it can act on a trade even if a prospectus is filed.
Unfortunately, the 2013 Proposed Amendments undermined
Early support for EMD participation in prospectus offerings
Support for EMD participation in prospectus offerings goes
back to the time before NI 31-103 came into effect. On February
29, 2008, the CSA published a revised version of what was still
the “proposed” NI 31-103 (the 2008 Version: http://www.osc.gov.
103_rfc-reg-req.pdf) Section 2.1(1)(d)(B) of the 2008 Version
clearly stated that an EMD is permitted to trade . . .
• in securities that are distributed under a prospectus if the
distribution may have been made under an exemption from
the prospectus requirement [emphasis added]
For some reason, the final version of NI 31-103 that came into
force on September 28, 2009 features language in section 7.1(2)
(d)(i) that seems to have conflated the language from the 2008
Version, so it now reads that an EMD may . . .
• act as a dealer by trading a security that is distributed under
an exemption from the prospectus requirement, whether
or not a prospectus was filed in respect of the distribution
The final version of Section 7.1(2)(d)(i) set out above (which is
currently in force) shifted focus from securities “distributed under
a prospectus” (as originally proposed) to securities “distributed
under an exemption from the prospectus requirement” (in the final
wording). The original wording had the EMD distributing under the
prospectus, where only the circumstances necessary to make a
prospectus exemption available needed to be in place. The final
wording has the EMD distributing under a prospectus exemption,
where the prospectus itself is filed “in respect of” the distribution.
The original proposed language was clearer. The final language
suggests there may be two distributions taking place, which leads
to some technical questions addressed later in this article.
2009 CSA Staff Notice 31-313 ― FAQs
More support for EMD participation in prospectus offerings
is found in CSA Staff Notice 31-313 – NI 31-103 Registration
Requirements and Exemptions and related instruments – Frequently
Asked Questions as of December 18, 2009: http://www.osc.gov.
313_faq- 31-103.pdf (the FAQs). In response to whether an EMD
can trade prospectus qualified securities to clients, such as
accredited investors, Section 7.1 of the FAQs stated an EMD could
do so in circumstances where an exemption from the prospectus
requirement would be available. That response is consistent with
the original language proposed in the 2008 Proposed Amendments
(see the first excerpt above). The FAQs went on to say that an EMD
may provide the investor with a copy of the prospectus.
All of this analysis and the succession of amendment proposals
and commentary supporting EMD participation in prospectus
offerings was cast into doubt by the 2013 Proposed Amendments.
In response to the proposed changes, the Private Capital
Markets Association of Canada (PCMA) canvassed the views of
its members. EMDs serve an important capital raising function in
the exempt market and also contribute as selling group members
in prospectus offerings. In fact, certain prospectus offerings would
not happen in the first place but for the work of an EMD financing
a company’s growth in its early stages, especially in the mining, oil
and gas and technology sectors, prior to a company going public.
EMDs should not be denied the ability to participate, in a limited
way, in the prospectus offering of its issuer-clients. In fact, some
companies with small market capitalizations are particularly reliant
on an EMD’s ability to continue accessing the capital markets
post public offering. These issuers, and other stakeholders, also
benefit from having more dealers participating in the underwriting
syndicate of a prospectus offering, particularly at the selling group
level. Certain prospectus offerings would not be completed but for
the involvement of an EMD in providing a certain amount of sales,
which should not be forgotten.
The PCMA presented this view in its response to the request