rules and regulations

The Alberta Securities Commission (ASC) is proposing to do away with the so-called “Northwestern exemption” — which allows firms and reps to participate in exempt offerings without registering as exempt market dealers — replacing it with a new exemption for “finders” that help start-ups seeking capital.

In a notice published on March 25, the ASC proposed the creation of a new exemption, the small business finder’s exemption, to replace the controversial Northwestern exemption, which has already been scrapped in most of the other provinces and territories that once used it.

Investor advocates, such as the Canadian Foundation for Advancement of Investor Rights (FAIR Canada) had long complained that the Northwestern exemption (that was only adopted in the western provinces and territories) harmed investors by allowing the sale of high-risk exempt securities to investors without registration.

In a 2013 letter to regulators, FAIR Canada said, “significant investor abuses have been observed where there has been purported reliance upon the Northwestern Exemption.”

The ASC’s proposed new exemption is intended to address some of the investor protection concerns with the existing regime while providing “more targeted” relief from dealer registration requirements, said the regulator in its notice.

The change would also allow for better integration with the prospectus exemptions that are available to small companies seeking capital.

“Small businesses are an important part of our economy. We understand that when they are raising small amounts of capital, they may not be able to attract a registered dealer to assist with the financing and may need to look to finders to help them identify potential investors,” said Stan Magidson, chair and CEO of the ASC, in a release.  “The goal of this proposed exemption is to assist Alberta small businesses address their capital raising challenges but with conditions that prioritize investor protection.”

Among other things, the proposal seeks to more specifically target small businesses (i.e. those businesses raising less than $5 million) in Alberta.

The proposal also adds conditions for qualifying for an exemption. For instance, under the new exemption, finders that help connect small companies with investors can only be individuals (not firms) and they cannot be a so-called “bad actor” (previously involved in fraud or similar misconduct).

The new exemption also sets limits on what “finders” can do, advertising, for example, is restricted. As well, the proposal clarifies that “finders” can’t have previously provided financial services to prospective investors (such as serving as their financial planner or insurance agent).

The proposal is out for comment until May 7.

Separately, the ASC and the Financial and Consumer Affairs Authority of Saskatchewan (FCAA) proposed a new small business financing prospectus exemption that aims to help small firms raise capital in those markets.

The proposed new prospectus exemption would allow companies to raise up to $5 million under a simple, streamlined offering document.

The proposal contemplates a two-tiered exemption, with different limits on the size of the offering, and investment limits, based on the amount of disclosure provided to investors.

“We are hopeful that this proposal will help address the financing challenges of small local businesses that do not currently have the profile or growth prospects to attract the interest of venture capitalists or public capital markets,” said Roger Sobotkiewicz, chair and CEO of the FCAA, in a release.