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Northwest Exemption to be Revoked by Securities Regulators in Certain Jurisdictions

  • Helen Racic
  • Sean Hawkins

On April 30, 2019, the securities regulators in British Columbia, Manitoba, Nunavut, the Northwest Territories, and the Yukon will revoke their local orders that comprise the “Northwest Exemption”. The Alberta and Saskatchewan securities regulators have also announced that they are considering whether to revoke their local orders comprising the Northwest Exemption and will advise of their approach in
due course.

Overview of the Northwest Exemption

The Northwest Exemption exempts firms from the requirement to register as an exempt market dealers and individuals from the requirement to register as dealing representatives under National Instrument 31-103 ­– Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”), provided that certain conditions are met, including that such firms and individuals cannot provide advice about whether an investment is suitable for an investor.

In practice, the Northwest Exemption allows early-stage companies to raise venture capital by engaging unregistered finders to locate investors to participate in private placements. However, the securities regulators warn that investors in these situations lose the benefit of receiving advice from a registrant, including the benefit of a registrant’s advice about whether the investment is suitable for the investor in their circumstances. Investors also lose the protection offered by the due diligence a registrant must perform on the security to determine if it is suitable for the investor. In order to enhance investor protection and increase harmonization of securities laws across Canada, the securities regulators in British Columbia, Manitoba, Nunavut, and the Northwest Territories decided to revoke the Northwest Exemption.

Business Trigger for Trading in Securities

As a consequence of the revocation of the Northwest Exemption, persons who are in the business of trading in securities in the above noted jurisdictions will need to be registered under NI 31-103 by April 30, 2019.

Securities regulators use a “business trigger” test to determine whether a person is engaged in the business of trading in securities. Several factors contribute to the characterization of trading activities, including whether or not the person engages in activities similar to those of a dealer, intermediates trades between sellers and buyers of securities, directly or indirectly carries on the activity with repetition, receives or expects to receive compensation for carrying out the activity, and whether they are directly or indirectly soliciting securities transactions. One-time activities and activities incidental to a company’s primary business generally do not require the company to register as a dealer. Furthermore, directors, officers, and employees that solicit investors on behalf of a company generally do not need to register if such activities are incidental to their primary role in the company. If the “business trigger” test has been met, however, then the person will be required to register as a dealer or exempt market dealer in the relevant province, unless they meet one of the exemptions provided under NI 31-103.

Transition Procedure

Transition provisions have been implemented to allow those persons previously relying on the Northwest Exemption to continue relying on the exemption after April 30, 2019 provided that:

  • a substantially complete Form 33-109F6 – Firm Registration and related fees have been submitted to the applicable securities regulator before April 30, 2019; and
  • the person continues to be in compliance with the requirements of the Northwest Exemption.

An applicant that meets the relevant conditions can continue to rely on the Northwest Exemption until the registration application has been either accepted or rejected. The securities regulators will also consider interim relief on a case-by-case basis for those individuals that are not able to meet the proficiency requirements for registration under NI 31-103.

Further Information

For more information on the revocation of the Northwest Exemption, see Multilateral CSA Notice 32-302 Notice of Revocation for Certain Local Orders Providing Registration Exemption for Trades in Connections with Certain Prospectus-Exempt Distributions and Update on BC Instrument 32-517 Exemption from Dealer Registration Requirement for Trades in Securities of Mortgage Investment Entities.