B.C. likely to end “Northwest” exemption

While Ontario contemplates whether to expand prospectus exemptions, British Columbia is proposing to scrap one of its more contentious exempt- market provisions.

The B.C. Securities Commission is proposing to revoke its so-called “Northwest” exemption, which allows firms to trade in the exempt market without registering.

The controversial exemption was adopted by a handful of regulators in the Northwest (including Alberta, B.C., Manitoba, Saskatchewan, the Northwest Territories, Nunavut and the Yukon) in the wake of registration reforms that created the new exempt market dealer (EMD) category. This exemption means that, unlike in the rest of the country, firms don’t have to register as an EMD in order to sell securities in the exempt market in these jurisdictions.

Although firms may be happy to avoid the burdens of registration, the measure has proven to be controversial with investor advocates – notably, the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) – which worries that allowing unregistered firms to sell exempt-market securities leaves investors without any regulatory protection.

Now, the BCSC appears to be coming around to the same view, saying it wants to get rid of the Northwest exemption over concerns about investor protection.

The BCSC says that its compliance reviews in this area found that 74% of firms relying on the exemption aren’t providing investors with the required disclosure – the one shred of investor protection under this regime.

At the same time, the BCSC is no longer worried that requiring firms to register as EDMs will have a major negative effect on raising capital in the province. The BCSC indicates that requiring registration is not expected to have much effect on private-enterprise financing – only about 1% of capital (by dollar value) could be affected by repealing the Northwest exemption, according to BCSC estimates.

FAIR Canada is applauding the BCSC’s move, and calling on the other jurisdictions to follow B.C.’s lead.

Alberta is not planning to abandon the Northwest exemption just yet. Mark Dickey, senior advisor, communications, with the Alberta Securities Commission (ASC) reports that the ASC “is not reviewing the Northwest exemption at this time.” Instead, he notes, the ASC does intend to “observe the results of the BCSC proposal.”