Venture Law Corporation

– August 9, 2024 –

The regulation of securities trading in Canada is essential to ensuring the integrity of financial markets and protecting investors. A critical aspect of this regulation is the requirement for individuals and companies to register with the appropriate regulatory authorities if they are engaged in the business of trading in securities. However, the interpretation of what constitutes “the business of trading in securities” and when registration is required can be complex. This article aims to clarify these rules, particularly focusing on the definitions and exemptions that play a crucial role in determining whether registration is necessary.

What is “Trading” in Securities?

Under Canadian securities law, the term “trade” is broadly defined. According to Section 1(1) of the British Columbia Securities Act (the” Act”), “trade” includes the disposition of a security for valuable consideration and any act, advertisement, solicitation, or negotiation in furtherance of such activities. This broad definition ensures that various forms of transactions and related activities fall under the regulatory scope of securities trading.

What is a “Security”?

A “security” is defined in Section 1(1) of the Act to encompass a wide range of financial instruments. These include documents or instruments commonly known as securities such as bonds, debentures, notes, shares, stocks, and investment contracts, among other instruments. This extensive definition ensures that various forms of financial instruments are regulated to maintain market integrity and protect investors.

Registration Requirements

According to Section 34(a) of the Act, anyone engaging in the trading of securities must be registered in accordance with the regulations. National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”) further details the circumstances under which registration is required, as well as the exemptions available.

Exemptions from Registration

Part 8 of NI 31-103 sets out several exemptions from the requirement in section 34(a) of the Act that a person must be registered to trade in securities.

In particular, Section 8.4(1) of NI 31-103, states:

“In British Columbia and New Brunswick, a person or company is exempt from the dealer registration requirement if the person or company

1. is not engaged in the business of trading in securities or exchanges contracts as a principal or agent, and
2. does not hold himself, herself, or itself out as engaging in the business of trading in securities or exchanges contracts as a principal or agent.”

Determining whether someone is in the “business of trading” involves assessing several factors as outlined in the Companion Policy to NI 31-103 (“CP 31-103”). These factors include:

• Engaging in activities similar to a registrant: Acting as an intermediary between buyers and sellers of securities is a key indicator of being in the business of trading.
• Repetition and regularity: Regularity and frequency of transactions suggest a business purpose, even if trading is not the primary activity of the individual or entity.
• Compensation: Receiving or expecting to receive compensation for trading activities is a strong indicator of a business purpose.
• Solicitation: Actively soliciting potential investors implies a business purpose.* 

Securities Issuers and the Business of Trading

For securities issuers, the need to register as a dealer depends on whether their activities suggest they are in the business of trading. Generally, issuers with an active non-securities business do not need to register if they:

• do not hold themselves out as being in the business of trading in securities,
• trade in securities infrequently,
• are not or do not expect to be compensated for trading in securities,
• do not act as intermediaries, and,
• do not intend to produce a profit from trading in securities.

The Companion Policy notes that frequent trading during a start-up phase or where capital is raised to advance the business, does not automatically indicate that the issuer is in the business of trading in securities.

The Companion Policy emphasizes that the following activities are indicators that an issuer is in the business of trading:

• continuous frequent capital raising,
• employment or contracting someone primarily to raise capital through the distribution of the issuer’s securities or conduct other activities similar to those performed by a registrant,
• employee or contractor compensation or remuneration is based solely or primarily on the amount of capital they raise for the issuer,
• majority of time spent by an individual or issuer is raising capital,
• actively soliciting investors through advertisement,
• acting as an intermediary by introducing or investing other parties’ money in securities.

This does not mean that officers, directors, or other employees cannot solicit or raise capital. Raising capital simply cannot be the primary purpose or objective in how officers, directors, or employees are compensated by an issuer.

Regulatory Interpretation: When is Registration Necessary?

This section explores how the BC Securities Commission has approached this issue through recent decisions and settlement agreements, highlighting the factors that lead to the conclusion that an entity is in the “business of trading” and therefore subject to registration requirements under the Act.

In Re Gravelle, 2019 BCSECCOM 63, the BC Securities Commission Administrative Tribunal (the “Tribunal”) examined whether the respondents, Mr. Gravelle and WY Enterprises, were required to be registered under the Act for their activities involving the issuance of promissory notes. The primary questions were whether the promissory notes issued were “securities” under the Act and whether the respondents were in the “business of trading” such securities.

The Tribunal quickly resolved the first question. Promissory notes are included in the definition of a security under the Act. The only time promissory notes are not considered securities is when they have a commercial purpose (i.e., your bank has you sign a promissory note as part of a loan from the bank, or acquisition of assets – see Ontario Securities Commission v. Tiffin, 2020 ONCA 217 and FS Financial Strategies, 2017 BCSECCOM 238 for a broader discussion on this issue.)

The Tribunal spent more time on the second question. They found that the respondents were not in the business of trading as their activities did not meet the criteria outlined in CP 31-103. Although Mr. Gravelle and WY Enterprises issued securities, they did so as part of their broader business activities which included investments in commercial real estate and other ventures. The Tribunal noted that, if such activities were deemed to constitute being in the business of trading, it would imply that many start-ups and small issuers would also need to be registered which is not the intent of the regulatory framework.

In two related settlement agreements, Re Peterson Investment Group Inc., 2022 BCSECCOM 12 and Re Peterson Investment Holdings Inc., 2022 BCSECCOM 13, the BC Securities Commission determined that both entities were in the “business of trading” and required registration under Section 34(a) of the Act.

In both settlement agreements, the BC Securities Commission highlighted the following key activities:

1. Engaging in Registrant-Like Activities: Both Peterson Holdings and Peterson Investment engaged in actions similar to those of registered dealers including trading in securities.
2. Raising Substantial Capital in a Series of Transactions: Peterson Holdings raised $80,050,000 through 258 trades of units of 20 special purpose limited partnerships (“SPLP”), while Peterson Investment raised $66,758,000 through 399 trades of securities in 36 syndicated mortgage loans. The scale and frequency of these transactions signaled ongoing business operations centered around securities trading.
3. Active Investor Communication and Solicitation: Both entities actively communicated and solicited investment opportunities to potential investors, with Peterson Holdings promoting SPLPs and Peterson Investment soliciting interests in syndicated mortgage loans.*
4. Receiving Compensation: Both entities received compensation for their securities-related activities in 1 to 3 above. Peterson Holdings received direct compensation for its capital-raising activities, while Peterson Investment received an administration fee for administering the loans and associated out-of-pocket expenses. Although in both instances this compensation was small, it further confirmed their business purpose in trading.
5. Repetition and Continuity: The consistent and repeated nature of the above activities over several years reinforced the BC Securities Commission’s conclusion that these entities were conducting a business of trading in securities.

In almost all instances, mortgage investment corporations like Peterson Investment must be registered or raise capital through a registered dealer. Similarly, investment companies like Peterson Holdings will likely need to be registered or raise capital through a registered dealer if they plan to raise capital continuously.

In a series of settlement orders, the BC Securities Commission has also made it clear that individuals who enter into compensation arrangements for identifying and introducing investors are engaged in the business of trading with a business purpose will trigger the requirement for registration. See: Re Chan, 2024 BCSECCOM 253; Re Mushaluk, 2021 BCSECCOM 418; Re Hogaboam, 2019 BCSECCOM 80; Re Weinstein, 2018 BCSECCOM 305.

Conclusion

Understanding when registration is required under Canadian securities law can be challenging due to the broad definitions and multiple factors that must be considered. The key takeaway is that registration is required when an individual or entity is in the business of trading securities. However, there are exemptions, particularly for issuers engaged in non-securities businesses who do not regularly trade or solicit investments.

For anyone involved in issuing or trading securities, it is crucial to carefully assess whether their activities might require registration. Consulting with legal professionals or regulatory experts can help ensure compliance and avoid potential legal issues.

_______

End Note:

* Companion Policy 45-106 – Prospectus Exemptions
“3.2 Soliciting purchasers – Ontario – The Ontario Securities Commission takes the position that if an issuer retains an employee whose primary job function is to actively solicit members of the public for the purposes of selling the issuer’s securities, the issuer and its employee are in the business of selling securities. Further, if an issuer and its employees are deemed to be in the business of selling securities, the Ontario Securities Commission considers both the issuer and its employees to be market intermediaries. This applies whether the issuer and its employees are located in Ontario and solicit members of the public outside of Ontario or whether the issuer and its employees are located outside of Ontario and solicit members of the public in Ontario. Accordingly, in order to be in compliance with securities legislation, these issuers and their employees should be registered under the appropriate category of registration in Ontario.”

---