This resource has been prepared by Nicholas dePencier Wright of Wright Business Law for educational purposes. This information is current as of the date of writing and does not constitute legal advice, which should be obtained prior to relying on anything herein.
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Navigating the landscape of “finder” activities under securities law in Ontario is essential for anyone seeking to connect businesses with potential investors. In Ontario, as in much of Canada, securities laws are highly regulated, and the role of a finder can be complex. This post will cover what it means to be a finder, the rules governing finder activities, and how Ontario securities laws apply to different scenarios.
- Who Is a Finder?
A finder is an individual or entity that introduces investors to companies in need of capital. Unlike traditional investment dealers or brokers, finders do not generally advise on the suitability of an investment or provide ongoing services to the parties involved. Instead, they play a more limited role, facilitating introductions without further engagement in the actual transaction.
- Key Rules and Regulations for Finders in Ontario
Ontario securities law, governed by the Ontario Securities Act (OSA) and regulated by the Ontario Securities Commission (OSC), outlines several rules that affect finder activities. Here are some of the key regulatory principles:
A. Registration Requirements
Under Ontario’s securities law, anyone in the business of trading in securities is required to be registered unless an exemption applies. The term “trading” is broadly defined to include:
• The sale or disposition of securities,
• Directly or indirectly soliciting an investor to purchase securities.
Since introducing investors to issuers often falls within this definition, a finder might technically be engaging in “trading,” which could require registration. This means that unless an exemption is available, the finder may need to be registered as a dealing representative of a registered dealer.
B. Exemptions from Registration
While the registration requirement is the rule, there are exemptions that may allow finders to avoid registration under certain conditions:
Non-Business Trigger Exemption: The “business trigger” test under Ontario’s securities law assesses if a person or company is in the business of trading based on factors such as:
Regularity of Activity: If the finder only occasionally introduces investors without seeking compensation, they may not trigger registration.
Expectation of Profit: If the finder is not seeking to profit from each introduction, registration may not be necessary.
International Dealer Exemption: If the finder is based outside Ontario and meets certain criteria, they may be able to operate under an exemption tailored for foreign dealers, though this is uncommon for purely domestic transactions.
However, the lack of precise guidelines for non-registered finder activities means that any regular or compensated activity in introducing investors likely triggers registration.
D. Permissible Activities for Unregistered Finders
In Ontario, unregistered individuals are limited in what they can do without breaching securities law. Generally:
Passive Introductions Only: An unregistered finder can make introductions between parties, but cannot negotiate terms, offer advice, or otherwise participate in the transaction.
No Promotional Activities: Unregistered finders cannot actively promote securities or solicit investors. This includes refraining from creating any marketing materials or making investment recommendations.
No Compensation Based on Success: Compensation contingent upon the success of a transaction (success fees) or other forms of commission-based compensation are often indicators of activity that requires registration.
D. Accredited Investor Requirement
Unregistered finders are also restricted in the type of investors they can introduce. Typically, unregistered finders should limit introductions to “accredited investors”, which include high-net-worth individuals and institutional investors. This is to ensure that those being introduced are sophisticated enough to handle the risk without relying on regulated advice.
- The Role of Registered Dealers and Investment Dealers
In Ontario, registered investment dealers and exempt market dealers are the primary channels through which most securities are sold to investors. By working with a registered dealer, companies can ensure compliance with securities law. A registered dealer can legally engage in broader activities, such as:
• Directly soliciting investors,
• Providing advice on the investment,
• Earning fees based on transactions.
In practice, if a company wants to use a finder, it may still be necessary for the finder to operate under or in partnership with a registered dealer.
- Consequences of Non-Compliance
Non-compliance with Ontario’s finder rules can have serious consequences, including:
Regulatory Action: The OSC has the authority to investigate unregistered trading activities and may impose fines, cease trading orders, or other sanctions.
Voidable Transactions: Investors may have the right to void transactions that were made through improper or unregistered channels, potentially leading to financial liabilities for issuers and finders.
Reputational Damage: Any enforcement action can harm the reputations of both the finder and the company involved.
- Steps to Comply with Ontario Securities Law as a Finder
For those seeking to act as a finder under Ontario law, the following steps are recommended:
A. Assess the Scope of Activities: Determine whether your activities meet the “business trigger” and are likely to require registration.
B. Consider Exemptions: If registration is not desired, consider the limited activities permissible without registration, such as passive introductions.
C. Engage Accredited Investors Only: Limiting introductions to accredited investors helps reduce regulatory scrutiny.
D. Partner with a Registered Dealer: When more involvement is desired, partnering with a registered dealer can allow broader activities within legal parameters.
E. Consult with Legal Counsel: Given the complexities of Ontario’s securities law, legal advice is invaluable to ensure compliance, especially when compensation or frequent introductions are involved.
- Conclusion
Acting as a finder in Ontario can be a valuable role, but it is subject to stringent securities law requirements. Ontario’s Securities Act and the OSC’s regulations prioritize investor protection, imposing clear boundaries on who can engage in trading activities and under what circumstances. For individuals or companies interested in becoming finders, understanding these rules and aligning activities with the law are essential steps to avoiding potential regulatory issues and maintaining a reputable presence in Ontario’s capital markets.
Sources:
Ontario Securities Act, R.S.O. 1990, c. S.5
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations
Companion Policy 31-103CP Registration Requirements, Exemptions and Ongoing Registrant Obligations
Ontario Securities Commission Staff Notice 33-753 – Registration Requirements for the Sale of Securities
Canadian Securities Administrators (CSA) Staff Notice 31-347 – Guidance for the Registration of Finders and Other Intermediaries