Canada is an attractive market for foreign private funds that wish to market to, and place their interests with, institutional or high-net-worth investors.
Foreign private fund managers sometimes find themselves perplexed by the various rules and regulations that apply to their private placements in Canada. While these rules may at first appear confusing, a number of clear and well-trodden paths are available for foreign fund managers that wish to access the exempt market in Canada.
The marketing, offering and issuance of securities by foreign private funds in Canada are regulated under the securities regime established in each province or territory. Although each province and territory has its own securities regulatory regime, many of the applicable rules and regulations have been harmonized across Canada. Four principal regulatory "buckets" must be addressed by any private fund that seeks to place its interests with an investor in Canada:
1 Prospectus Exemption. Funds that are offering their interests to investors in Canada must ensure that a prospectus exemption is available in respect of the offering. The most typical exemption relied upon by foreign private funds is the "accredited investor" exemption.
2 Dealer Registration Requirement. Due to the nature of their businesses, open-ended funds such as hedge funds must involve a registered dealer in the placement of their securities in Canada. Many closed-end funds are able to take the position that they are not engaged in the business of trading in securities and are therefore not required to be registered as a dealer. However, for closed-end funds that are marketed through an affiliated dealing entity, that dealing entity may be subject to the dealer registration requirement unless an exemption is available.
3 Adviser Registration Requirement. The manager of a foreign fund that is managed from outside Canada is not required to register as an adviser. However, an adviser that advises a managed account or fund located in Canada would be caught by the adviser registration requirement.
4 Investment Fund Manager Registration Requirement. The manager of a private fund that is an "investment fund" for Canadian securities law purposes may be required to register as an investment fund manager. Private equity and venture capital funds may not be considered "investment funds" for Canadian securities law purposes if they are actively involved in the management of their portfolio companies. For managers of funds that fall within the definition of "investment fund" for Canadian securities law purposes, the Canadian securities regulators have not achieved consistency as to when the managers of such funds are required to register in the local jurisdiction. As a result, in the provinces of Ontario, Qubec, and Newfoundland and Labrador, investment fund managers must register if any of their funds have issued securities in the local jurisdiction and they or their funds have actively solicited investors in that local jurisdiction, unless their investors and potential investors are "permitted clients" and certain other requirements are satisfied. In all the other provinces and territories of Canada, investment fund managers are not subject to the registration requirement unless they have a physical place of business or a head office in that province or territory.