Exempt Market Dealers (EMDs) in several Canadian provinces—British Columbia, Alberta, Saskatchewan, Ontario, Quebec and Nova Scotia—can now, under certain conditions, participate in prospectus offerings as part of a selling group. This change comes through a new blanket order issued by the securities regulatory authorities in these jurisdictions, effective June 20, 2024. The blanket order, known as Coordinated Blanket Orders 31-930, provides a temporary exemption until at least December 31, 2025, from certain restrictions on the activities of EMDs under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Previously, EMDs were restricted from participating in offerings where securities were qualified by a prospectus. New Brunswick is expected to issue a similar blanket order in the coming weeks.
This is not the first attempt by Canadian securities regulators to integrate EMDs into prospectus offerings. This issue has seesawed back and forth for more than a decade. Prior to the current announcement, the state of play was that EMD's were shut out of prospectus offerings, leaving only investment dealers eligible to participate. Allowing EMDs to join selling groups for these offerings could potentially provide more funding sources for issuers, increase investment opportunities for investors, and enable EMDs to support issuers throughout their entire growth cycle, from early stages to maturity. Such flexibility will help issuers access the more than 45,000 investors that participated in Ontario's exempt market in 2021.1
The issuance of the blanket order acknowledges the significant role EMDs play in fostering the growth of smaller issuers and recognizes the relationships developed between EMDs, their clients, and these issuers. By permitting EMDs to participate in selling groups for prospectus offerings, it aims to encourage EMDs to support smaller issuers from their early stages of growth onward. This support can be significant: in 2023, Alberta-based issuers in the exempt market raised slightly more than half of the $20.1 billion raised by Alberta-based issuers in the public market.2 As issuers mature, EMDs can continue to support them through more comprehensive offerings under a prospectus, ensuring ongoing support and continued relationships. These relationships will also benefit EMDs' clients by providing greater access to capital markets.
The blanket order will help tap into Canada's strong exempt markets. In 2021, Ontario's exempt market saw Canadian and foreign issuers raise approximately $171 billion from institutional investors and an additional $4 billion from individual investors.3 In Alberta last year, issuers raised $10.2 billion in the exempt market.4 Similarly, in 2022 British Columbia issuers raised $29.49 billion in the exempt market.5
It will be interesting to see how the practical aspects of selling group participation play out for EMDs. Prospectus distributions of securities issued by reporting issuers typically settle through CDS. EMDs do not participate in CDS, leaving a gap between the outcome for clients of EMDs and the clients of investment dealers. Securities can be certificated and delivered out to clients of EMDS, which requires those clients to take additional steps to affect future trades. Alternative arrangements could be made through the selling group leader, for example, but that would require a willingness to cooperate among the investment dealers and the participating EMDs.
EMDs intending to rely on the blanket orders must meet specific conditions, including acting according to the terms of the selling group agreement with the issuer or lead underwriter, limiting their role to offering securities only to purchasers for whom an applicable exemption from the prospectus requirement would be available, refraining from acting as underwriters, receiving standard selling group commissions and adhering to compensation limits.
EMDs planning to utilize the blanket orders must report their change in business activities by filing Form 33-109F5 Change of Registration Information.
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