EMDs Can Be Part of Selling Groups

Securities regulators in six provinces[1] have executed local blanket orders granting a temporary exemption that allows EMDs to participate in selling groups for prospectus qualified securities with New Brunswick issuing a similar order in a few weeks.

The Reasons Underlying the Exemptions

These seven securities regulators have recognized that part of their mandate is to foster the capital markets and to do so they must assist small and medium size businesses (SMEs) in raising capital.  EMDs, in reliance on prospectus exemptions, are often the only dealer registrants who are willing to help SMEs enter the capital markets.  As the SMEs prosper it is often the case that their need for capital, whether in the form of equity or debt, cannot be met by prospectus exempt offerings alone.

Are the Exemptions Significant

The blanket orders offer temporary exemptions, subject to a number of limitations discussed below, that we hope are tentative first “baby steps” on the road to a broader role for EMDs in the distribution of prospectus qualified securities.  At this stage, it is not certain what the regulators are looking for in terms of success or what success will trigger in terms of the range of permissible activities for EMDs.

Investment Dealers Will Run the Show under the Exemptions

Under the exemptions one or more investment dealers will act as the underwriter of the prospectus offering and will determine which investment dealers and EMDs, if any, will be part of the group that will distribute the prospectus qualified securities (the selling group).  One can hope that the SMEs (and other issuers) that an EMD has supported will insist that the underwriting investment dealers include the EMD in the selling group and receive a “fair” allocation of the securities to be sold. The allocations will likely be restricted as noted below. The exemption does not ensure this result and only time will tell if EMDs are members of selling groups, let alone significant members.

Who can EMDs sell to?

Despite being prospectus qualified, the EMDs can only sell the securities to a person or company to whom an exemption from the prospectus requirement would be available if the securities were being offered without a prospectus.  While the exemption opens a new potential distribution channel, the EMDs are limited to selling the prospectus qualified securities to those it already has as clients and potential clients (e.g. $150,000 minimum purchase, accredited investors). 

Other restrictions

EMDs will bound to act in accordance with the selling group agreement, cannot act as an underwriter of the offering of the prospectus qualified securities, can only receive the usual and customary seller’s commission as compensation and the total compensation of an EMD can not exceed the lowest total compensation paid to any selling group member who is an investment dealer.  This last provision likely will ensure allocations to EMDs are modest in comparison to other selling group members.

Let us Guide Your Decision to Join a Selling Group

At North Star, we combine deep industry knowledge with practical experience to help you decide whether you should join a selling group, both from a theoretical and practical perspective  

Connect with Kanchan Mehta today at info@northstarcompliance.com and take the first step towards deciding whether you should rely on these new exemptions and how to do so most effectively and efficiently.

[1] Alberta, British Columbia, Nova Scotia, Ontario, Quebec and Saskatchewan