Photo of Adam RockBy Adam RockNovember 09 2016
Business Law

Is a Private Equity Firm Required to Register?

This is the second 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 adviser 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 its portfolio companies.
  • An adviser is an individual or an entity that is in the business of advising in securities.  
  • A PE Firm is generally not required to register as an adviser on the condition that, when it trades in the securities of its portfolio companies, the advice it provides in connection with the trades is incidental to its active management of the portfolio companies.

What is a PE Firm?

As previously noted, 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. According to the PE Guidance, the typical PE Firm engages in activities that may require it to register as an adviser under Alberta securities law.  

What is an adviser?

An adviser is an individual or an entity that engages in or holds itself out as engaging in the business of advising. Alberta securities law does not define advising, but Alberta case law characterizes it as offering or giving an opinion on the investment merits of a security, or making an investment decision in respect of a security on another individual or entity’s behalf.

The Alberta Securities Commission determines whether a PE Firm is advising for a business purpose by asking several questions, including the following:

  • Is the PE Firm engaging in activities similar to those of a registered adviser?
  • Is the PE Firm directly or indirectly soliciting investors on the basis of its securities advice?
  • Is the PE Firm advising with repetition, regularity or continuity?
  • Is the PE Firm being, or expected to be, compensated for advising?
  • Is the advice that the PE Firm is providing producing, or intending to produce, a profit?

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

What is the adviser registration requirement?

The adviser registration requirement is the requirement in Alberta securities law that prohibits a PE Firm from acting as an adviser unless the PE Firm is registered in the appropriate category of adviser 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 an adviser, 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 an adviser?

The PE Guidance states that a PE Firm is generally not required to register as an adviser on the condition that, when its trades in the securities of its portfolio companies, the advice its provides in connection with the trades is incidental to its active management of the portfolio companies. Examples of active management of a portfolio company include representation on a portfolio company’s board of directors, direct involvement in the appointment of a portfolio company’s managers, and input in a portfolio company’s material management decisions.

Factors that suggest the PE Firm’s advice might not be incidental to the active management of its portfolio companies include the following:

  • The PE Firm holds itself out as being in the business of advising;
  • The PE Firm directly or indirectly solicits investors on the basis of its advice;
  • The PE Firm is authorized to invest the PE Fund’s capital at any time; or
  • The PE Firm is compensated separately for its advice.

In addition, the Alberta Securities Commission’s analysis of whether the PE firm is required to register as an adviser may apply differently if the PE Firm engages in activities that are not described in the PE Guidance.

What are the categories of registration as an adviser?

In Alberta, a PE Firm that is required to register as an adviser usually registers in the category of restricted portfolio manager, which permits the PE Firm to advise in securities subject to the terms and conditions established by the Alberta Securities Commission. If the PE Firm is active in the energy industry, as is often the case in Alberta, these terms and conditions usually require the PE Firm to act as an adviser only in respect of securities of portfolio companies engaged in oil and gas exploration and development or oil and gas services.

Are there exemptions from the adviser registration requirement?

There are a small number of exemptions from the adviser registration requirement, the availability of which depends on the nature of the PE Firm’s activities. A PE Firm may apply to the Alberta Securities Commission for discretionary relief if it is unable to comply with a specific provision of an adviser 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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