Clients must be given priority over non-client2 for issuances of securities via private placement.
Who gets Priority?
Section 3503 requires priority to be given to existing eligible clients – those are clients who have already entered into a relationship with the Dealer either by opening an account or seeking advice from the Dealer or its employees and for whom such a purchase would be suitable taking into consideration the client’s investment objectives, risk tolerance, financial situation and eligibility under securities legislation to take advantage of the prospectus exemption under which the private placement is offered.
When do we consider the client priority requirements to apply?
When the Dealer is the underwriter, agent, advisor or member of a selling group for an issuer or where the non-clients in the Dealer own 20% or more of the issuer’s issued and outstanding securities (as calculated after the issuance).
What steps should the Dealer take to disseminate information to clients?
The Dealer should make reasonable efforts to inform existing eligible clients of the availability of the private placement. The Dealer should take into account the size of its eligible client list, the nature of the issue, and the effectiveness of its communication links with clients. The Dealer should communicate by way of email, press release, newswire, fax or phone the existence of the private placement to eligible clients and allow them sufficient time to respond. The response time will depend on the number of eligible clients, the profile of the issuer and the means of communication.
The nature of the prospectus exemption under which the private placement is being made must also be taken into account in disseminating information. If the prospectus exemption prohibits public solicitation of the private placement, then other means of communication must be employed.
We expect that Dealers will determine what steps should be taken to inform eligible clients of the availability of the private placement.
Dealers are expected to have written policies and procedures in place to fulfil this requirement. These procedures should include:
- development and maintenance of a list of eligible clients,
- development of a protocol to communicate the information by telephone, fax, mail or electronic means,
- issuance by the issuer of a press release announcing availability and price of the private placement,
- establishment of a suitable time period for clients to receive and act on the information, and
- adequately informing its employees of the policies and procedures to be followed before a private placement can be distributed.
When should Dealers not abridge hold periods?
The hold period restricting the resale of private placement securities should not be abridged where non-clients in the Dealer firm hold 20% or more of the issuer’s issued and outstanding securities. It is the Dealer’s responsibility to show that non-clients do not own this 20% when requesting an abridgement.
When should Dealers consider abridging hold periods?
Even where non-clients own 20% or more of the issuer’s issued and outstanding securities, the hold period may be abridged if the private placement issuance was accepted by an exchange and the private placement securities were sold for a price greater than 80% of the public offering price or where the securities are being disposed of pursuant to an arm’s length take-over or merger and the exchange grants consent.
Dealers are advised to review section 3503 and this Guidance Note with the exchange or securities commission being asked to grant the abridgement.
IIROC Rules this Guidance Note relates to:
- section 3503.
Previous Guidance Note
This Guidance Note replaces Compliance Interpretation Bulletin C-122 - Rules implementing the Recommendations of the Joint Securities Industry on Conflicts of Interest.
This Guidance Note was published under Notice 21-0190 - IIROC Rules, Form 1 and Guidance.
- 2See definition of “non-client account” or “non-client order” in section 1202 of the IIROC Rules.