Regulation of ‘Finders’
This article is provided for general informational purposes only and does not constitute legal advice. Whether a person is required to register under Canadian securities laws depends on the specific facts, the activities being carried on and the applicable securities legislation.
Finders have long played a role in Canada’s private capital markets by introducing prospective investors to issuers seeking to raise capital. Although the term “finder” is widely used within the exempt market, it is not a defined category under Canadian securities legislation.
Instead, whether a finder may carry on a particular activity depends on the nature of the services being provided. In some circumstances, a person acting as a finder may be carrying on the business of trading in securities and therefore be required to register under securities legislation or conduct those activities through an appropriately registered dealer.
This article explains how Canadian securities laws generally apply to finders, the activities that may raise registration concerns and how issuers can structure capital raising activities in a compliant manner.
What Is a Finder?
A finder is generally a person or business that introduces prospective investors to an issuer or investment opportunity. Finders may assist private companies, investment funds, mortgage investment corporations (MICs), real estate investment trusts (REITs) and other exempt market issuers seeking to raise capital.
Unlike exempt market dealers (EMDs), finders are not a separate category of registration under Canadian securities laws. The title used by an individual is less important than the activities they actually perform.
For this reason, a person describing themselves as a finder, consultant, business development representative or capital raising adviser may still be subject to dealer registration requirements depending on the services they provide.
When Can Finder Activities Trigger Registration?
Canadian securities legislation generally requires any person or company that is in the business of trading securities to be registered unless an exemption is available.
Determining whether registration is required depends on the facts and circumstances of each situation. Securities regulators commonly consider whether a person is engaged in activities that form part of a business of trading securities rather than focusing solely on a person’s job title or contractual relationship. Activities that may increase the likelihood that registration is required include:
* regularly introducing investors to investment opportunities;
* recommending or promoting specific investments;
* participating in investor meetings or sales discussions;
* negotiating investment terms;
* receiving transaction-based compensation tied to successful investments; and
* playing an ongoing role in raising capital for issuers.
The analysis is fact specific and should be considered before engaging individuals to assist with fundraising activities.
Finders and Exempt Market Dealers
Finders and exempt market dealers perform different functions within an exempt offering. An exempt market dealer is a registered securities dealer that conducts regulated dealer activities, including investor onboarding, Know Your Client (KYC) reviews, suitability assessments and regulatory supervision.
A finder’s role, if used, is generally much narrower and should be carefully defined to avoid conducting activities that require registration. Issuers should not assume that referring to someone as a finder eliminates the need to consider dealer registration requirements.
Trades Through a Registered Dealer
National Instrument 31-103 includes an exemption from the dealer registration requirement for certain trades conducted through an appropriately registered dealer.
However, this exemption is subject to important conditions. In particular, the Companion Policy to NI 31-103 explains that a person relying on the exemption generally cannot solicit or contact prospective purchasers directly. Securities regulators specifically identify finders as an example of individuals who may fall outside the exemption where they actively solicit investors.
Accordingly, simply involving a registered exempt market dealer in an offering does not automatically permit unregistered persons to engage in capital raising activities. Each offering should be reviewed individually to determine whether the proposed activities are consistent with applicable securities laws.
Best Practices When Using Finders
Issuers considering the use of finders should establish clear responsibilities before capital raising activities begin. Good practices include:
* clearly defining the finder’s role;
* reviewing proposed compensation arrangements;
* engaging a registered exempt market dealer where appropriate;
* establishing procedures for investor communications;
* documenting referral arrangements; and
* obtaining legal advice where registration issues may arise.
Careful planning at the outset can reduce regulatory risk and help avoid delays during an exempt offering.
Frequently Asked Questions
What is a finder?
A finder is generally a person or business that introduces prospective investors to an issuer seeking to raise capital. The term is an industry description rather than a category of registration under Canadian securities laws.
Can a finder receive compensation?
Compensation arrangements should be carefully reviewed. Transaction-based compensation may be one of several factors considered when determining whether a person is carrying on the business of trading securities.
Can a finder recommend investments?
Providing investment recommendations or participating in the sale of securities may raise dealer registration considerations depending on the circumstances.
Does every finder need to register?
No. Whether registration is required depends on the specific facts, the activities being carried on and the applicable securities legislation.
Can a finder work with an exempt market dealer?
An issuer may engage both a finder and a registered exempt market dealer. However, the involvement of an EMD does not permit an unregistered finder to undertake activities that require dealer registration. The responsibilities of each participant should be carefully considered before the offering begins.
Conclusion
Finders continue to play a role in Canada’s exempt market, but their activities must be carefully structured within the framework of Canadian securities laws. Because dealer registration requirements depend on the substance of the activities being performed rather than the title used, issuers should carefully assess the role of any person assisting with capital raising before an offering is launched.
Contact Us
Startly Capital provides exempt market dealer services to investment funds and other issuers raising capital under prospectus exemptions. Contact us to learn more about our EMD services and how we support exempt market distributions.
This article is current as of the time of publication, is for informational purposes and does not constitute professional advice. Independent legal advice should be sought prior to relying on any information herein.