We have received many inquiries lately about selling investment fund securities from outside the jurisdiction to residents in Ontario. Before speaking with potential investors, there are a number of potential issues to keep in mind.
Anyone who is in the business of trading in securities requires registration as a dealer in the appropriate category, or an exemption from the dealer registration requirement. National Instrument 31-103 - Registration Requirements, Exemptions, and Ongoing Registrant Obligations (NI 31-103), does contain an exemption for international dealers. The exemption is available provided that trades are made in a “foreign security” with a “permitted client” – essentially, high net worth investors and institutions as defined in NI 31- 103.
The international dealer exemption contains a number of conditions, including that the person or company involved in the activity must be registered as a dealer under the securities legislation of the foreign jurisdiction where its head office is located, and must submit the requisite form (Form 31-103F2 Submission to Jurisdiction and Appointment of Agent for Service) to the securities regulatory authorities in Canada. The permitted client must be provided with prescribed notices, and an agent for service of process in the local jurisdiction must be appointed. In Ontario, annual filings and fees are payable to the Ontario Securities Commission (OSC) under OSC Rule 13-502 – Fees.
If advice is being provided regarding a managed account of a client located in a Canadian jurisdiction, the person or company in the business of giving advice on the purchase or sale of securities (i.e., the purchase of an investment fund for a managed account) would also require registration as an adviser in the appropriate category, or an exemption from the adviser registration requirement. NI 31-103 contains an exemption for international advisers. In addition to requirements similar to those noted above, in order to utilize this exemption, not more than 10% of the aggregate consolidated gross revenue of the adviser and certain related parties can be derived from its portfolio management activities in Canada.
In Ontario (and Québec and Newfoundland and Labrador), an exemption is also needed from the investment fund manager (IFM) registration requirement when investment fund securities are sold to residents in these jurisdictions. Multilateral Instrument 32-102 – Registration Exemptions for Non-Resident Investment Fund Managers, contains a few exemptions. One such exemption from the IFM registration requirement is available if, among other conditions:
- the investor is a permitted client
- the investment fund manager does not have its principal place of business in Canada and was formed outside of Canada
- none of the investment funds are reporting issuers (i.e., a public fund) in Canada
The IFM must submit the requisite form (Form 32-102F1 Submission to Jurisdiction and Appointment of Agent for Service for International Investment Fund Manager) to the securities regulatory authorities. The permitted client must also receive certain prescribed notices. The securities regulatory authority must be notified, by December 1 each year, if the exemption has been relied upon during the preceding 12-month period.
In addition to registration concerns, there are a number of other considerations prior to selling securities into Canada. The investment fund securities must be distributed under an exemption from the prospectus requirements. Practically speaking, this usually means that the investor must be an accredited investor – investors that qualify as a permitted client will most likely also qualify as an accredited investor, even though the tests are not identical. As noted below in our piece below “Is Your OM Too Tightly Wrapped?” specific Canadian disclosure is generally required to be appended to the foreign offering document and subscription agreement. Sales of exempt securities, including investment fund securities sold on a private placement basis, must be reported as exempt trades to the applicable securities regulators within the specified timeframes, and in many jurisdictions the offering document must be filed with the regulators.
Carrying on business as a dealer or adviser in Ontario and other Canadian jurisdictions may require the filing of extra-provincial corporate registrations, potentially resulting in tax filing obligations. If the fund is a limited partnership, the fund itself may require registration under Ontario’s Limited Partnerships Act. In addition, international dealers and advisers are subject to Canada’s anti-money laundering legislation, which means that they must have Canadian anti-money laundering policies and procedures, as well as file monthly reports relating to the suppression of terrorism. We have helped many international clients, working with tax advisors, to navigate through these somewhat onerous obligations.