The Exempt Market (Private Placements and Other Exempt Distributions)
| Author | Christopher C. Nicholls |
| Profession | Faculty of Law, Western University |
| Pages | 242-304 |
242
CHA PTER 7
THE EXEMPT MARKET
(PRIVATE PLACEMENTS
AND OTHER EXEMPT
DISTRIBUTIONS)
A. INTRODUC TION
1) Registration and Prospectus Exemptions
The two fundamental tools of Can adian securities law regulating the
sale of securities are t he registration requirement and the prospect us
requirement. The registration requirement refers to the rules requiring
individuals or companie s in the business of tra ding securities to be
registered (i.e., licensed) under securities legislation. The prospectus
requirement refers to the rules t hat require certain k inds of securities
trades — distributions — to be undertaken only if t he seller prepares, files,
and delivers to the purchasers a prospectus, as discu ssed in Chapter 6.
Canadian sec urities law does provide exemptions i n certain case s
from both the registr ation and the prospectus requirements. At one
time, the registration exemptions played a more significant role than
they do today, as explained briefly in the next section. This chapter
therefore focuses primarily on prospectus exemptions.
a) Registration Requirement and Exemptions
Historically, the registrat ion requirement and the prospectus require-
ment were parallel but distinct obligations: t he registration requirement
was triggered whenever there wa s a “trade” in securities (unless an
exemption was available), and the prospectus requirement was trig gered
whenever there was a “distribution” of securities (unless an exemption
The Exempt Market (Priv ate Placements and Other Exempt Di stributions) 243
was available). In almost every case where a distr ibution of securities
was exempt from the prospectus requ irement, that distribution was also
exempt from the registration requirement, but the registration exemp-
tions and prospectus exemptions were, nevertheless, dealt with in sep-
arate provisions of secu rities leg islation.
This approach to registration and regi stration exemptions changed
following legislative reforms in 2009. Now, as discussed in Chapter 5,
instead of a tran saction “trigger,” the registration requirement is subject
to a business “trig ger”: in other words, it is no longer every trade in a
security th at triggers the requirement to register. Instead, the registra-
tion requirement is triggered only when someone engages in, or holds
themselves out as engaging in, the business of trading in securities or
derivatives. Many exemptions from the registration requirements were
originally included in the same National Instrument that contains most
prospectus exemptions (National Instrument (NI) 45-106). Those regis-
tration exemptions have since been removed to Part 8 of NI 31-103 or to
various local rule s or blanket order s.1
A second important change introduced at the time of the 2009
reforms (which came into full eect in 2010) was the introduction of
a new securities dea ler registration category: “Exempt Market Dealer.”
Under the pre-2009 regime, in most provinces a dealer was not requi red
to be registered as long as its bu siness was limited to t ransactions
involving only securities t hat could be sold without a prospectus, rely-
ing on a prospectus exemption. The situation was dierent in Ontario
and in Newfoundland and Labrador. Those two jurisdictions imposed
a “universal regist ration requirement,” which ma ndated registration for
dealers even if they dealt only w ith exempt securities. However, the
requirements to which such dealers were subject were very modest.
They were typically obliged to register a s “Limited Market Dealers,” a
category of registration th at imposed minimal obligations upon them.
Under the rules in eect today, a dealer that deal s only in securities that
are distributed pursu ant to prospectus exemptions must become regis-
tered in every jurisdiction as an “Exempt Market Dealer.” The Exempt
Market Dealer registration requirements are somewhat more demand-
ing than those of t he “Lim ited Ma rket Dealer” category under the prior
Ontario and Newfoundla nd and Labrador regime. The registration rules
are dealt with in more detail in Chapter 5.
1 See CSA Sta Not ice 31-312, s 1(a) (2009), 32 OSCB 6252.
SECU RITIE S LAW244
b) Prospectus Requirement
The remainder of this chapter deals not with registration requirements
or exemptions but rather with exemptions from the requirement to file
and deliver a prospectus in connection with the distribution of securities.
The prospectus exemptions provide important examples of the balance
securities laws must reach between investor protection and the eciency
of capital markets. If investor protection were the sole, unqualified goal
of securities laws, then one might expect that no exemptions would
ever be granted from the requirement to produce and deliver a prospec-
tus whenever securities are distributed. After all, additional disclosure
would surely always make investors better o — even if only marginally
so. But requiring the delivery of a prospectus when the cost to the seller
is enormous and the benefits to the buyer trivial would be a very unwise,
economically destructive public policy. If Canada is to continue to have
viable businesses in which people may invest, our securities laws must
reflect an informed and appropriate balancing of interests.
2) Overview of the Prospectus Exemptions:
PrimaryOerings
Clearly, assembling a prospectus is not financi ally feasible for all issuers.
For example, putting a prospectus together is out of the question for a
small, start-up corporation seek ing to raise $50,000 from relatives and
friends of the corporation’s main shareholders. Any sensible scheme of
securities regu lation recognizes that a prospectus is not cost eective in
such a situation and so oers exemptions from the prospectus require-
ment to recognize the practica l realities of financing small ventures.
In other cases, buyers of secur ities do not require the level of pro-
tection aorded by a mandated prospectus, perhaps because of their
bargaining leverage vi s-à-vis the issuer, or their sophistic ation in finan-
cial matters, or even their capacity to sustain some financi al loss. In
such cases, the cost imposed on the issuer of preparing a prospectu s
(which would ultimately be borne by investors) would not be justified
by the benefits. Again, any sen sible scheme of secur ities regulation pro-
vides exemptions from the prospectus requirement to accommodate
such purchasers in appropriate circumstances. A third important class
of exemptions recognizes t hat some securities are so inherent ly safe
that it is unnecess ary to protect buyers by insisting that the vendor of
the securities incur the considerable time and expense of producing
a prospectus. For example, the Government of Can ada does not need
to prepare a prospectus when issuing bonds. For obvious reasons, the
Government of Canada is rega rded as an extremely creditworthy debtor,
more creditworthy than any Canadian corporate is suer.
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