This resource has been prepared for educational purposes only. This information is current as of the date of writing and does not constitute legal, investment or other professional advice, which should be obtained prior to relying on anything herein.
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In Ontario, the role of “finders” in securities markets is complex and often misunderstood. A finder is an individual or firm that introduces investors to companies seeking capital, usually in exchange for a fee or commission. Finders can be valuable for startups and smaller companies in raising funds, but their activities fall under close scrutiny by the Ontario Securities Commission (OSC). In Ontario securities law, finders may be required to register, and failing to do so can have serious regulatory consequences. Here, we’ll discuss what finders do, how they are regulated, and what businesses and finders should consider to stay compliant.
Who Are Finders?
Finders are intermediaries who connect companies looking to raise capital with potential investors. Unlike licensed brokers or dealers, finders may not offer full financial advisory services, nor are they typically involved in the detailed structuring or sale of securities. Instead, their role is limited to introducing companies to potential investors.
Finders are especially common in early-stage funding rounds, where companies may lack the resources to work with large investment banks or brokerage firms. In return for their services, finders generally earn a fee, which can be a fixed amount or a percentage of the funds raised.
The Regulatory Status of Finders in Ontario
Under Ontario securities law, the activities of finders can fall under the category of “trading” or “advising” in securities, which would typically require registration with the OSC. Whether a finder must register depends on the nature and extent of their activities, as well as their relationship with the issuer and the investors. However, the regulatory framework for finders is somewhat ambiguous, as Ontario does not have a specific “finder’s exemption” like some U.S. states do.
In Ontario, finders are regulated according to their activities. If a finder’s actions meet certain criteria, they may be required to register as a dealer or exempt market dealer (EMD). Finders who provide specific recommendations, manage funds, or advise on the merits of an investment are more likely to fall under registration requirements. The OSC considers activities like solicitation, handling funds, and providing advice as potentially requiring registration.
When Does a Finder Need to Register?
The OSC examines several factors to determine if a finder needs to register. Key factors include:
1. Involvement in Solicitation or Promotion:
If a finder actively solicits investors, promotes securities, or engages in marketing efforts to attract investors, they are likely viewed as engaging in securities trading, which would require registration. For instance, organizing events to promote investments or reaching out to a large pool of potential investors can trigger registration requirements.
2. Expectation of Compensation:
Finders who are compensated based on the success of their efforts, particularly on a per-transaction or commission basis, are more likely to require registration. This form of contingent compensation aligns the finder’s financial interests with the outcome of the investment, which is one of the OSC’s main concerns for investor protection.
3. Providing Investment Advice or Recommendations:
Any advice or recommendations about the suitability or merits of a particular investment can trigger the requirement for registration. Finders who provide specific guidance on investment decisions, even informally, may be considered to be advising in securities.
4. Involvement in Negotiating Terms or Closing Transactions:
If a finder is involved in negotiating the terms of the investment, handling investor funds, or closing the transaction, their activities are considered more than simply making an introduction and would likely require registration.
5. Ongoing Relationship with Investors:
A finder who maintains an ongoing relationship with investors or continues to be involved post-introduction may also trigger the registration requirement, as this suggests a level of responsibility and influence over investor decisions.
Registration Options for Finders
If finders meet the criteria for registration, they have a few options:
1. Register as an Exempt Market Dealer (EMD):
EMDs can trade in or provide advice on securities in the exempt market, making this a suitable option for finders involved in private placements. EMDs must comply with strict regulatory standards, including maintaining compliance policies, reporting, and ensuring suitability assessments for investors.
2. Work with a Registered Dealer:
Finders may partner with a registered dealer or brokerage firm, which can oversee their activities. By working under the supervision of a registered dealer, finders can operate without needing their own registration but must adhere to the dealer’s compliance rules and regulatory standards.
3. Operate as a Referral Agent:
Finders may limit their role to simply making introductions without soliciting, advising, or handling transactions. If the finder does not receive compensation based on transaction success, handles no funds, and provides no investment advice, they may avoid triggering the need for registration.
Exemptions and Alternatives to Registration
While Ontario does not have a specific “finder’s exemption,” there are a few limited scenarios where finders might not need to register:
1. Family, Friends, and Business Associates Exemption:
Under this exemption, private companies can sell securities to individuals who have close personal or business relationships with the company’s executives or directors. If the finder limits their activities to introducing people within this close network and does not receive a commission (which is not permitted under this exemption), they may avoid the need for registration.
2. Incidental Advice Exemption:
Professionals like lawyers, accountants, and engineers who provide incidental advice related to their main services may not need to register. For example, an accountant introducing a client to potential investors while assisting with tax planning may qualify for this exemption.
3. Limited Activity for a Non-Commercial Purpose:
Finders who make one-off introductions without the expectation of compensation or without engaging in broader solicitation activities may be able to avoid registration requirements. However, this is limited and would not apply if the finder is regularly involved in fundraising activities.
Risks and Consequences for Unregistered Finders
Engaging in finder activities without proper registration can lead to significant risks and regulatory consequences:
1. OSC Sanctions:
The OSC has the authority to impose penalties on unregistered finders, including fines, cease-and-desist orders, and even permanent bans from participating in Ontario’s securities market.
2. Voidable Transactions:
Transactions facilitated by unregistered finders may be considered invalid, which could lead to legal challenges from investors or other parties. This can damage the reputation of both the finder and the issuer.
3. Legal Liability:
Unregistered finders who fail to meet regulatory requirements may be personally liable for losses suffered by investors, especially if misrepresentations or inappropriate advice were given.
4. Reputational Risks:
Operating without registration can damage a finder’s credibility and reputation within the industry, limiting their future opportunities and relationships with other market participants.
Tips for Compliant Finder Activity
To navigate the regulatory environment successfully, finders should:
1. Limit Activities to Pure Introductions:
If a finder’s role is limited to connecting investors with companies without promoting, negotiating, or advising on the investment, they may be able to avoid registration. Staying within this boundary helps reduce regulatory risks.
2. Avoid Transaction-Based Compensation:
To avoid the registration requirement, finders can consider alternative compensation structures, such as a flat referral fee, instead of a commission or success-based fee, which is less likely to trigger the need for registration.
3. Work Through a Registered Dealer:
Finders may partner with a registered dealer, allowing the dealer to oversee their activities and ensuring they meet compliance standards without direct registration.
4. Seek Legal Advice:
Consulting with a securities lawyer can help finders assess whether their activities require registration and can provide guidance on structuring their activities to meet regulatory requirements.
Conclusion: The Regulatory Landscape for Finders in Ontario
Finders play a valuable role in helping companies access capital, but Ontario securities law strictly regulates their activities to protect investors and maintain market integrity. While there is no clear “finder’s exemption,” individuals and firms involved in introducing investors to issuers must be mindful of the business trigger for registration. If a finder’s activities include solicitation, advice, or compensation based on successful transactions, registration with the OSC is likely required.
By understanding the regulatory framework and staying within established guidelines, finders can navigate Ontario’s securities market responsibly. For issuers, working with compliant finders—whether registered or adhering to limited roles—ensures that fundraising efforts align with Ontario securities law, helping to protect both the company and its investors.