Photo of Adam RockBy Adam RockNovember 08 2016
Business Law

Is a Private Equity Firm Required to Register?

This is the first of three posts that summarize the circumstances under which a venture capital or private equity management company (a PE Firm) may be required to register under Alberta securities law. The focus of this particular post is the dealer registration requirement. 

Insights in Brief

  • The Alberta Securities Commission refers to a PE Firm as an entity that becomes actively involved in the management of the companies in which it invests.
  • A dealer is an individual or an entity that is in the business of trading in securities.  
  • A PE Firm is generally not required to register as a dealer on the condition that, when it trades in securities, those trades are occasional and uncompensated.

What is a PE Firm?

As discussed here, the Alberta Securities Commission’s guidance on venture capital and private equity investing (the PE Guidance) characterizes a PE Firm as an entity thatinvests for the purpose of being actively involved in the management of its portfolio companies. See here for more details.

According to the PE Guidance, the typical PE Firm engages in activities that may require it to register as a dealer under Alberta securities law.

What is a dealer?

Alberta securities law defines a dealer as an individual or an entity that engages in or holds itself out as engaging in the business of trading in securities as principal or agent. Trading refers to an offer to sell, or the sale of, a security for valuable consideration, as well as any act that is directly or indirectly in furtherance of that offer or sale.

The Alberta Securities Commission refers to trading for a business purpose as the “business trigger” for registration. It determines whether a PE Firm is trading for a business purpose by asking several questions, including the following:

  • Is the PE Firm engaging in activities similar to those of a registered dealer?
  • Is the PE Firm directly or indirectly soliciting trades?
  • Is the PE Firm brokering trades?
  • Is the PE Firm trading with repetition, regularity or continuity?
  • Are the PE Firm’s trades producing, or intending to produce, a profit?
  • Is the PE Firm being, or expected to be, compensated for trades?

This is not a complete list and no single answer determines whether a PE Firm is trading for a business purpose.

What is the dealer registration requirement?

The dealer registration requirement is the requirement in Alberta securities law that prohibits a PE Firm from acting as a dealer unless that the PE Firm is registered in the appropriate category of dealer with the Alberta Securities Commission.

An individual who trades on behalf of a registered PE Firm, or acts as that PE Firm’s ultimate designated person (i.e., chief executive officer) or chief compliance officer, is also required to register with the Alberta Securities Commission.

In order to be registered, and to maintain its registration, as a dealer, a PE Firm must satisfy certain capital and insurance requirements, and the individuals whose registration the PE Firm sponsors must satisfy certain proficiency requirements.

When is a PE Firm required to register as a dealer?

The PE Guidance states that a PE Firm is generally not required to register as a dealer on the condition that, when it trades in securities, the trades are occasional and uncompensated. Factors that suggest a PE Firm’s trades may not be occasional and uncompensated include the following:

  • The PE Fund is authorized to issue an unlimited number of securities;
  • The PE Firm is authorized to raise capital at any time;
  • The PE Firm repeatedly raises capital for one or more PE Funds;
  • The PE Firm employs individuals for the principal purpose of raising capital;
  • The PE Firm employs individuals who spend the majority of their time raising capital;
  • The PE Firm employs individuals whose compensation is based solely, or primarily, on the amount of capital they raise.

The Alberta Securities Commission recognizes that, during the formation of a PE Fund, a PE Firm frequently trades in the PE Fund’s securities. If the trading is primarily for the purpose of advancing the PE Firm’s business, namely the active management of the PE Firm’s portfolio companies, then the frequency with which the PE Firm raises capital should not alone result in the PE Firm triggering the dealer registration requirement.    

What are the categories of registration as a dealer?

In Alberta, a PE Firm that is required to register as a dealer usually registers in the category of exempt market dealer, which permits it to trade in any security that is distributed under an exemption from the prospectus requirement in Alberta securities law, whether or not a prospectus was filed in respect of the security. An exempt market dealer is generally not permitted to trade in a security listed on a stock exchange.

Are there exemptions from the dealer registration requirement?

There are several exemptions from the dealer registration requirement, the availability of which depends on the nature of a PE Firm’s activities. For example:

  • The dealer registration requirement does not apply to a trade that is made through a dealer that is registered in a category that permits the trade, on the condition that the PE Firm does not have any direct contact with, and does not directly solicit, the investor. 
  • The dealer registration requirement does not apply to a trade that is made to a dealer that is registered in a category that permits the trade, on the condition that the dealer is purchasing as principal, rather than as agent for a client.
  • The dealer registration requirement does not apply to an entity that is registered as a dealer in a foreign jurisdiction on the condition that the entity trades only with a certain type of highly-sophisticated investor, known as a “permitted client”, and satisfies certain other conditions.

A PE Firm may apply to the Alberta Securities Commission for discretionary relief if it is unable to comply with a specific provision of a dealer registration exemption.

Invitation for discussion

If you would like to discuss this blog in greater detail, or any other business law matter, please do not hesitate to contact one of the lawyers in the Business Law group at Nerland Lindsey LLP.

Disclaimer

The foregoing is for general discussion purposes only and should not be construed as legal advice to any one firm. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.

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