Investment Funds in Québec

May 2017

Investment Funds in Québec

Michel G. Beaudin
This email address is being protected from spambots. You need JavaScript enabled to view it.
514 878-3224

In Canada, each of the provinces have jurisdiction over their securities issues. Section 11 of the Securities Act (Québec) (“QSA”) stipulates that the distribution of securities to residents of Québec requires a  prospectus subject to a receipt issued by the Autorité des marchés financiers (“AMF”), unless a prospectus exemption is available under National Instrument 45-106 – Prospectus Exemptions (“NI-45-106”).

PRIVATE PLACEMENT EXEMPTION
Among the various prospectus exemptions provided by NI-45-106 the “accredited investor” under section 2.3 is the most commonly used and stipulates that the prospectus requirement does not apply to the distribution of a security if the purchaser purchases the security as principal and is an accredited investor.

The definition of an “accredited investor” includes:

(d) a person registered under the securities legislation of a jurisdiction of Canada as an adviser or dealer
(j) an individual who, either alone or with a spouse, beneficially owns financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $1,000,000
(k) an individual whose net income before taxes exceed $200,000 in each of the 2 most recent calendar years, or whose net income before taxes combined with that of a spouse exceeds $300,000 in each of the 2 most recent calendar years and who, in either case, reasonably expects to exceed that net income level in the current calendar year,
(l) an individual who, either alone or with a spouse, has net assets of at least $5,000,000
(m) a person, other than an individual or investment fund, that has assets of at least $5,000,000 as shown on its most recently prepared financial statements
(n) an investment fund that distributes or has distributed its securities only to a person that is or was an accredited investor at the time of the distribution and various specified subsequent acquirers
(t) a person in respect of which all of the owners of interests, direct, indirect or beneficial, except the voting securities required by law to be owned by directors, are persons that are accredited investors, and
(u) an investment fund that is advised by a person registered as an adviser or a person that is exempt from registration as an adviser.

REGISTRATION AND MARKETING
Section 148 of the QSA stipulates that “no person may act as a dealer, adviser or investment for manager unless the person is registered as such”. In Québec, the AMF is the registration authority. Under the QSA,

  • “dealer” means a person engaging in or holding themselves out as engaging in the business of (1) trading in securities as principal or agent; (2) distributing a security for their own account or for another’s account; or (3) any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of an activity described in paragraph 1 or 2
  • “adviser” means a person engaging or holding themselves out as engaging in the business of advising another with respect to investment in or the purchase or sale of securities, or the business of managing securities portfolio
  • “investment fund manager” means a person who directs the business, operation and affairs of an investment fund
  • “investment fund” means a mutual fund or a non-redeemable investment fund
  • “mutual funds” means (1) an issuer whose primary purpose is to invest money provided by its security holders and whose securities entitle the holder to receive on demand or within a specified period after demand an amount computed by reference to the value of a proportionate interest in the whole or in part of the net assets, including a separate fund or trust account, of the issuer; or (2) a mutual fund designated by the AMF or determined by regulation
  • “non-redeemable investment fund” means (1) an issuer whose primary purpose is to invest money provided by its security  holders, that does not invest for the purpose of exercising or seeking to exercise control of an issuer or of being actively involved in the management of any issue in which it invests and that  is not a mutual fund; or (2) a nonredeemable investment fund designated by the AMF or determined by regulation.

National Instrument 31-103 – Registration requirements, Exemptions and Ongoing Registrant Obligations (“NI-31-103”) lists the registration requirements for dealers, advisers and mutual fund managers. NI-31-103 provides numerous exemptions from the requirement to register, notably for international dealers and international advisers under specified conditions.

Subject to certain conditions, section 8.18 (International dealer) of NI-31-103 provides that the dealer registration requirements would not apply in respect of a trade in a foreign security with a “permitted client” or an investment dealer (which is a specific category of dealer). The definition of a “permitted client” includes:

(k) a person or company acting on behalf of a managed account managed by the person or company, if the person or company is registered or authorized to carry on business as an advisor or the equivalent under the securities legislation of a jurisdiction of Canada or a foreign jurisdiction;
(l) an investment fund if one or both of the following apply: (i) the fund is managed by a person or company registered as an investment fund manager under the securities legislation of a jurisdiction of Canada; (ii) the fund is advised by a person or company authorized to act as an adviser under the securities legislation of a jurisdiction of Canada
(o) an individual who beneficially owns financial assets (cash, securities, a contract of insurance or a deposit that is not a security) having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $5 million
(q) a person or company, other than an individual or an investment fund, that has net assets of at least $25 million as shown on its most recently prepared financial statements.

Subject to certain conditions, section 8.26 (International adviser) of NI-31-103 provides that the adviser registration requirement does not apply to a person or company in respect of its acting as an adviser to a permitted client, other than a permitted client that is a person or company registered under the securities legislation of a jurisdiction of Canada as an adviser or dealer, if the adviser does not advise that client on securities of Canadian issuers, unless providing that advice is incidental to providing advice on a foreign
security.

Generally, an investment fund must be marketed and sold in Québec through a registered dealer or an international dealer that has complied with the requirements of section 8.18 of NI-31-103.

_________________________________________
This article was also published in Interlaw guide to “Offering Investment Funds to Family Offices and Institutional Investors" on April 2017.

 

Michel G. Beaudin, partner, De Grandpré Chait

This bulletin provides general comments on recent developments in the law. It does not constitute and should not be viewed as legal advice. No legal action should be taken on the basis of the information contained herein.

 

DE GRANDPRÉ CHAIT LLP

1000, Rue De La Gauchetière Street West, Suite 2900 Montréal, Québec Canada H3B 4W5

T 514 878-4311 | F 514-878-4333 | This email address is being protected from spambots. You need JavaScript enabled to view it. | www.degrandprechait.com