If you’re involved in assisting companies to raise capital through the sale of shares or other securities, or assisting investors to locate opportunities, you must assess whether you need to be a registered securities dealer/advisor.

The key assessment that determines whether you are in ‘regulated’ territory is whether you are engaged in “trading or advising in securities for a business purpose” and is also known as the “business trigger” for registration.

There are five main factors that are considered when applying the business trigger and no one factor is determinative. When applying the business trigger, you are engaging in a process of determining the essential nature or character of the situation, with each factor pointing one way or the other and with the final determination being a judgment call based on all evidence and circumstances. In fact, the relevant factors themselves are derived from case law and regulatory decisions that have interpreted the “business purpose test” for securities matters.  When reviewing the factors, it is important to keep in mind that the term ‘trade’ is very broadly defined by the Ontario Securities Act to include not only a sale or disposition of securities for valuable consideration, but also any act, advertisement, solicitation, conduct, or negotiation directly or indirectly in furtherance of a sale or disposition. Further, the inclusion of “indirectly” in the definition of “trade” clearly speaks to the intent of regulators to seek out proposed business activities that attempt to avoid registration requirements.

Here are the factors:

• Are you engaging in activities similar to a registrant?

There are many categories of registrants in the securities market. However, at the simplest level, registrants charge a fee for advising, promoting or facilitating issuers and others in the sale of securities, or advising, promoting or facilitating others in the purchase of securities. An activity as basic as stating that an individual or company will buy or sell securities may tip the scale in favour of registration.

• Are you intermediating trades or acting as a market maker?

When you intermediate, you act between two related things – in this case between and a buyer and seller of securities. Market makers help create markets for securities, usually by offering to buy or sell securities for a fixed or quoted price.

• Are you directly or indirectly carrying on the activity with repetition, regularity or continuity?

The first two factors look to the nature of your activities. This factor looks to whether you are carrying out your activities as a business. When you engage in an activity as a business you generally spend a material proportion of your time on the activity and perform it on multiple occasions. Other factors considered is whether you have other material business activities and other sources of income.

• Are you being, or expecting to be remunerated or compensated for your services?

Another key component of carrying on a business is charging a fee for your services. If you are being paid a fee for assisting a company to raise funds or for helping an investor to source investment opportunities, it is a strong indicator that you are in the business of providing that service. Interestingly, in its discussion of venture capital funds in Companion Policy 31-103, the OSC expressly used the profit model typically found in venture capital arrangements as a differentiating factor (among others) pointing away from registration: “Investors rely on the VC’s expertise in selecting and managing the companies it invests in. In return, the VC receives a management fee or “carried interest” in the profits generated from these investments. They do not receive compensation for raising capital or trading in securities.”

• Are you directly or indirectly soliciting?

This final factor returns to assessing the nature of your activities. If your activities include contacting or advertising for potential buyers or sellers, regulators see this as being consistent with trading or advising in securities.

To help us better understand how to apply the business trigger, the OSC provides examples of its application. It is important to remember throughout this discussion that we are focusing on the obligation to register as a dealer/advisor. Regardless of registration, the actual trade of the securities will still have to comply with prospectus requirements or exemptions.

Activities by Issuers.

If you are an ‘issuer’ seeking to sell your own securities (such as a corporation selling common shares to an investor) you are generally not required to register as a dealer/advisor in respect of infrequent trades that are incidental to your main business and where you do not generate a profit from trading. However, you may still have to register if you frequently trade your securities, actively solicit purchasers, and/or maintain employees or contractors to perform services that are similar to those performed by a registrant. In fact, the OSC deems this last factor to be determinative.

Venture Capital & Private Equity

Generally, a venture capital firm (other than a labour sponsored fund, or a BC venture capital corporation or employee venture capital corporation) is not required to register as a dealer/advisor if it follows standard venture capital practices such as:

• raising its funds via a prospectus exemption such as the Accredited Investor exemption,
• requiring its investors to commit their capital for a specified period of time,
• investing its funds in private rather than public entities,
• taking an active role in the management of its investees
• taking its profit via carried interest (i.e., from profits on the sale of the business rather than for raising capital or trading activities)

One-time Activities

Securities regulators do not typically require registration for one-off trading or advising activities.

Incidental Activities

Professionals like lawyers and accountants who are involved in trades or provide advice in the normal course of their professional services are not generally required to register because their actions are viewed as being incidental to their professional services. This may not be the case, however, if they are routinely compensated for advising on securities, solicit clients based on their securities advice, or hold themselves out as being in the business of advising on securities.

 

Failure to comply with the Ontario Securities Act can result in significant penalties including disgorgement orders for revenue earned, fines of up to $5 million, and imprisonment for a term of not more than 5 years.

If you are concerned your business may have crossed the line into trading and advising in securities and you are not a registrant, the lawyers at Ross Rumbell have the expertise to assess your situation and structure your business to comply with the requirement of the Ontario Securities Act.