The PCMA believes the ASC needs to
provide additional guidance involving
the Do’s and Don’ts involving unregistered referral agents rather than
promoting a registration framework.
The existing securities laws in Canada
describe what an unregistered referral
agent cannot do and, if they engage in
such activities, states that they must be
registered. In contrast, the PCMA
believes the ASC and other CSA members should publish what non-registered
referral agents can do, to increase
compliance, remove uncertainty and
provide better investor protection.
The PCMA submits that the ASC and
other CSA members should provide
bright-line rules on what non-registerable activities can be undertaken
by referral agents and request input
from referral agents to create better
guidance. The ASC can easily publish
permitted and non-permitted referral
agent activities, including FAQs that can
be updated from time to time.
The PCMA also requests that the ASC
and other CSA members review and
rationalize certain case law involving
referral agent activities that cross the
line into registerable activities. The
PCMA and others in the exempt market
are very concerned with a 2018 decision
by the BCSC Re Liu, 2018 BCSECCOM
37210. In this matter the British Columbia Securities Commission scrutinized
the details of certain referral arrangements and determined that some of the
referral agents engaged in registerable
activities. The British Columbia Securities Commission disregarded the
guidance on referral arrangements in
the Companion Policy to NI 31-103
which is both concerning and highly
confusing. The purpose of the Companion Policy is to provide the interpretation of the regulators with respect to the
application of securities legislation.
The PCMA believes that burden reduc-
tion involves clear and easy to under-
stand regulations to increase compli-
ance. The continued emphasis by the
ASC and other CSA members on what
cannot be done and broad-based
principles that are used against referral
agents is unhelpful and increases the
regulatory burden, even on Commission
staff who are responsible for investigat-
ing such matters that can and should be
simplified. Accordingly, the PCMA
requests better guidance and informa-
tion on permitted and non-permitted
activities by referral agents. Such
certain will increase compliance and
may provide greater comfort for others
to act as referral agents without the
worry and risk of contravening appli-
cable securities law.
Closely-Held Issuer Exemption
The ASC should consider Ontario’s
former closely-held issuer prospectus
and registration exemption if it wants to
consider new ways of raising capital.
Simply, with prescribed disclosure and
investment limits that protect investors,
it allows issuers to raise up to
$3,000,000 from no more than 35
non-AIs that are not required to have any
prescribed type of relationship with an
issuer’s officer, directors or otherwise.
This former OSC exemption had its
roots in what was called the “seed
capital” prospectus exemption that
allowed a private issuer to solicit
investment capital from no more than
50 prospective purchasers, provided
sales are made to no more than 25
purchasers.
The PCMA supports a type of Closely
Held Issuer Exemption or hybrid model
incorporation aspects of Ontario’s
former seed capital exemption. Select
aspects of the Closely Issuer Exemption
is set out in Schedule E.
f) Reducing compliance costs for
registered dealers when dealing with
Accredited Investors
As stated in the Consultation Paper,
securities regulation currently allows
“permitted clients”, as defined in NI
31-103, to waive certain investor
protections involving a registrant’s KYC
and suitability obligations under appli-
cable securities law. The PCMA supports
the introduction of a similar waiver of a
suitability assessment for AIs in Alberta
as proposed in the Consultation Paper.
If the ASC and the Alberta Government
are truly committed to making it easier
to raise capital for SMEs while protecting investors, a better balance between
capital formation and investor protection needs to be achieved. One means
would be the introduction of an AI
suitability waiver that allows certain
investors to invest as they chose, without
Government regulation, while protecting
investors by limiting such a waiver to
AIs (i.e., not retail investors).
The PCMA believes that AIs should be
allowed to waive suitability and certain
suitability-related KYC processes.
However, a registrant, such as an EMD,
would still have all other responsibilities
towards an investor, as imposed by
applicable securities law, including
duties of care, registrant proficiency,
know-your-product, conflicts of interest
obligations, complaint and dispute
resolution obligations, pre and post-trade disclosure, books and record
retention and financial solvency and
bonding/insurance requirements.
Suitability and other KYC, obligations,
to the extent they are required the
determination of suitability) are some of
the few registrant duties that are
directly tied to an investor’s own
sophistication and risk tolerance. As AIs
have already been deemed to have a
certain amount of sophistication and
risk tolerance under the principles of NI
45-106, it is not incongruous to allow
an AI to waive these obligations for the
purposes of an NI 31-103 regulated
transaction so long as it is their decision
voluntary made with full disclosure of all
information necessary to make an
informed investment decision.
