Education Centre

Should I Register as a Dealer To Talk About My Product? | Part I

(or When does Advertising become Advising?)

By Gregory M. Colford, B.A., J.D., C.I.M.®

Asset managers of private mortgage investment entities often pose the following question: “Do I need to be registered with the securities regulatory authorities to discuss openly my product offering?” It depends: are you advertising or are you advising?

Private issuers like private mortgage investment entities distribute their security under National Instrument 45-106, “Prospectus Exemptions”. The exempt market has a unique panoply of rules that can be complex. An issuer can certainly tell the world what it has to offer. Advertising by itself is okay. Yet caution is important.

A brief word on Advertising

When looking at the volume of material the regulators have circulated on advertising, one can quickly conclude their primary concern is not advising, but on misrepresentation and public market manipulation.

The regulator’s primary concern is advertising or promotion that is (i) unbalanced and misleading, (ii) selective and/or (iii) misuses of future oriented information. Get rich quick schemes, guaranteed return puffery, no loss promotions, exaggerated and unsubstantiated performance claims, misleading use of statistical data, unrealistic hypothetical performance scenarios, out-and-out lies, falsehoods and fabrications are all the primary concerns of the regulators when dealing with advertising.

In the public markets there are further concerns. There are provisions in the Securities Act that prohibit certain kinds of advertising at certain times when an issuer is distributing or expects to be distributing securities to the public under a prospectus. Those rules generally revolve around “preparing the market for a trade” or advertising in anticipation of a trade. Both are rooted in the concern for public market manipulation.

Yet, as said above, advertising by itself is okay. In respect of exempt market product Companion Policy 45-106 says: “NI 45-106 does not prohibit the use of registrants, finders, or advertising in any form (for example, Internet, e-mail, direct mail, newspaper or magazine) to solicit purchasers under any of the exemptions.” Where advertising is misleading, untruthful or purposed for market manipulation then it will quickly run afoul of the guidelines in respect of advertising the security regulatory authorities have published over time.

When Advertising Becomes Advising

The further concern the regulators have beyond misleading advertising, is whether the issuer is acting in the capacity of an “advisor” to persons to whom they are advertising their wares. Depending on what exemptions are relied upon, only certain persons can participate in certain transactions. For this reason private issuers have to be very careful to whom they sell their security. Complicating the matter more, simply because someone is able to purchase the exempt security, does not mean it is suitable for that person. Determining first whether a proposed purchaser is qualified and then secondly whether the investment per se is suitable for that particular proposed purchaser is really the bailiwick of advisors, and in the case of the exempt market, Exempt Market Dealers (EMDs), like Fundscraper Capital Inc., who are licensed dealers for advising on securities that trade in the exempt market.

“Advising” is a unique activity that is quite different from simply advertising.

An “adviser” is defined by the Securities Act (Ontario) to mean a person or company engaging in or holding himself, herself or itself out as engaging in the business of advising others as to the investing in or the buying or selling of securities.

The Business of Advising

So, when is an issuer in the business of “advising”? Companion Policy 31-103 attempts to help us understand when we might be involved in the business of advising. Whether or not a firm or individual ought to register, the regulator will look for certain “triggers” for registration. The list is non-exhaustive, but includes the following:

  1. Is the firm or individual holding itself out as being in the business of buying and selling or advising on the buy and sell of securities?
  2. Is the firm or individual acting as an intermediary – a broker – between the issuer and the buyer/seller?
  3. Is the firm or individual regularly trading or advising in any way that produces, or is intended to produce, profits to be for a business purpose. The regulator will consider any other sources of income and how much time an individual or firm spends on all activities associated with the trading or advising. This is targeted at folks who want to defend their activity as “not primary purpose” or as “one-time” only when, really, it’s likely not!
  4. Receiving, or expecting to receive, any form of compensation for carrying on the activity, including whether the compensation is transaction or value based, indicates a business purpose.
  5. Contacting anyone to solicit securities transactions or to offer advice may reflect a business purpose. Solicitation includes contacting someone by any means, including advertising that proposes buying or selling securities or participating in a securities transaction, or that offers services or advice for these purposes.

If one is found to be in the business of advising, then that one has to be registered with the regulatory authorities. In Ontario that would be the Ontario Securities Commission.

Solicitation: Two takes

The word “solicitation” is used in two ways. In the most general usage “solicitation” means making potential purchasers aware of a given product. It’s running an advertisement in the Globe and Mail, a radio spot on 1010 AM or being a panelist on BNN.  There is no law prohibiting an asset manager from boasting about his or her product provided the boast is truthful. There is nothing that prevents an asset manager from advertising the unique construction of his or her investment product and contrasting it to other products in the market provided it is not misleading. Again, that is an advertising concern.

Where “solicitation” evolves into contacting people by making a direct request for the purpose of obtaining a purchase order, then that’s a trigger! Subscriber conversion occurs when a promoter stops promoting a product and focuses instead on the subscriber. When the promoter engages a person with the goal of having that person subscribe for units, then the promoter is dealing in securities. It may impress some as a fine line, but there is a clear distinction between advertising and advising or product promotion and subscriber conversion.

This is consistent with the final words CP 45-106 where the regulator sums up: “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.” [emphasis added] This is subscriber conversion!

Where an issuer elects to embark on any kind of advertising campaign, it is imperative that the issuer involve legal counsel to ensure that the fine line between advertising and advising is respected

This is the first part of a two-part article. If you want to read Part II, feel free to check it out here: Should I Register as a Dealer To Talk About My Product? | Part II

For more information, contact us at www.fundscraper.com.

ABOUT THE AUTHOR

Gregory Colford
Gregory Colford

PRINCIPAL BROKER, EXECUTIVE VICE-PRESIDENT & CHIEF COMPLIANCE OFFICER

Gregory Colford, JD, CIM, was a senior partner at Heenan Blaikie LLP, once one of Canada’s ten largest law firms. Over his 12 years at Heenan Blaikie LLP, he headed the Toronto Securities Department, the Corporate Services Department, the Precedent Committee, the Legal Opinion Precedent Committee, and was the Toronto representative on the firm’s Stock Trading Committee. Through the course of his practice, he brought many companies to the public capital markets and advised extensively on corporate governance, board integrity, and market compliance.  He was also the co-founder of Carlisle Capital Structures Corporation and helped the company grow to over $1 billion CAD in AUM of mortgage securities on behalf of a top tier Ontario pension fund.