British Columbia Proposes to Revoke
By Brian Koscak, EMDA Chairman and Partner, Cassels Brock & Blackwell LLP
the Northwest Exemption & the MIE Exemption
In early January the British Columbia Securities Commission
(BCSC) issue a notice and request for comment in connection
with its proposed revocation of the NW exemption and MIE
exemption (collectively, the Exemptions).
NW and MIE exemptions - background
When National Instrument 31-103 came into effect in 2009,
British Columbia, Alberta, Manitoba, Saskatchewan, Northwest
Territories, Nunavut, and Yukon (the Exemption Jurisdictions)
provided an exemption from the requirement to register as an
exempt market dealer (EMD) for persons selling only private
placement securities under the capital raising exemptions.
Subsequently, the BCSC also issued comparable relief specifically
for mortgage investment entities (MIEs). The BCSC states that it
issued the Exemptions since it did not have the information to
understand what impact the EMD registration requirement would
have on private enterprise financing or investors.
2012 amendments to the NW exemption
In 2012, the BCSC revised the NW exemption so it was
no longer available to a former registrant or to a person
who has provided ‘financial services’ to the purchaser.
BCSC stated that such conditions were added to further protect
investors and improve market integrity.
2012 extension of MIE exemption
The MIE exemption was originally due to expire on March 31,
2012 and was extended until December 31, 2012 while the BCSC
continued to evaluate how the dealer registration requirements
apply to MIEs recognizing the obligations imposed on them by
the Mortgage Brokers Act (British Columbia). In November 2012,
the BCSC announced that it was extending the MIE exemption
until June 30, 2013.
2013 revocation of the Exemptions
The BCSC now proposes to revoke the Exemptions and has
provided the following rationale:
a) the impact on capital raising will be negligible -
the BCSC states that approximately 1% of capital (by dollar value)
could be impacted;
b) those relying on the exemptions are not complying with
its investor protection conditions – the BCSC states there is
significant non-compliance with the exemptions, thereby putting
investors at greater risk. The BCSC cited a 74% non-compliance
rate for NW filers providing investors with a risk disclosure
document which increased to 90% for MIE filers; and
c) private placement investors will be better protected if they
purchase securities through registrants – in particular, the
BCSC states that investors in private placement securities would
benefit from the advice of a registrant includingadvice on whether
a purchase is suitable for them before they decide to invest.
Impact of revocation
Many market participants have been calling for a level
playing field across Canada in requesting the revocation of the
Exemptions - for those market participants, this is good news.
For others, such as issuers, this is not necessarily welcome news.
For example, the revocation of the Exemptions, if approved,
will have an immediate impact on MIEs including, mortgage
investment entities, and those issuers who are in the business of
trading but not currently registered since they are relying on the
Exemptions. The revocation of the Exemptions will also impact
other issuers who are continuously raising capital including those
selling proprietary products. If the Exemptions are revoked these
issuers will have to become registered as an EMD or engage an
EMD to sell their product. This will impact the cost of capital and
the regulatory burden on BC market participants as they come to
understand how National Instrument 31-103 will affect them.
It is noteworthy that British Columbia is unilaterally
considering the revocation of the Exemptions and not other CSA
members in the Exemption Jurisdictions; most notably Alberta.
The comment period ends on February 28, 2013.