October 1, 2012
Since 2009, the manager of an investment fund that has its head office located in Canada has been required to register as an “investment fund manager”. A manager for these purposes includes any person or other entity who (i) directs the business, operations or affairs of an investment fund, (ii) organizes the investment fund and (iii) is responsible for the management and administration of an investment fund. As of September 28, 2012, the investment fund manager registration requirement will also apply, in certain circumstances, to international investment fund managers who do not have their head offices in Canada.
First it is important to note that the investment fund manager registration requirement only applies to managers of “investment funds”. Investment funds include only “mutual funds” and “non-redeemable investment funds”. A mutual fund is defined as a fund (i) whose primary purpose is to invest money provided by its security holders, and (ii) whose interests entitle the holder to receive on demand, or within a specified period after demand, an amount computed with reference to the value of a proportionate interest in the whole or part of the net assets of the fund (i.e., the interests are redeemable for a pro rata share of the fund's net asset value). A non-redeemable investment fund is a fund (i) whose primary purpose is to invest money provided by its security holders, (ii) that does not invest for the purpose of exercising or seeking to exercise control of an issuer, or for the purpose of being actively involved in the management of any issuer in which it invests (other than an issuer that is a mutual fund or a non-redeemable investment fund), and (iii) that is not a mutual fund. Thus, a fund that (i) does not permit redemption on demand at net asset value, and (ii) invests for the purpose of exercising control over and actively managing the issuers in which it invests (other than another investment fund), generally will not be considered to be an investment fund and its manager would therefore not be required to register as an investment fund manager in Canada.
The Canadian securities regulators have provided guidance which indicates that funds that generally engage in private equity or venture capital (“PE/VC”) investing will not be considered to be investment funds and that the managers of PE/VC funds will not be required to register as investment fund managers. In this regard, the Canadian securities regulators have identified certain characteristics typical of PE/VC investment: (i) PE/VC funds typically raise money under one of the prospectus exemptions inNational Instrument 45-106 (Prospectus and Registration Exemptions), including for trades to “accredited investors”; (ii) investors in PE/VC funds typically agree that their money will remain invested for a period of time; (iii) PE/VC funds typically use the money raised from investors to invest in the securities of portfolio companies that are not publicly traded; (iv) PE/VC funds usually become actively involved in the management of their portfolio companies, often over several years, and in this respect examples of active management of a portfolio company include circumstances when a PE/VC fund has (a) representation on the board of directors, (b) direct involvement in the appointment of managers, and/or (c) a say in material management decisions; (v) a PE/VC fund looks to realise on its investment either through a public offering or a sale of business, at which point the investors’ money will generally be returned to them, along with any profit; (vi) investors rely on the expertise of the PE/VC fund and its manager to select and manage the portfolio companies it invests in; and (vii) a PE/VC fund manager typically receives a management fee and carried interest in the profits generated from its investments and does not receive compensation for raising capital or trading in securities.
For non-Canadian managers of mutual funds and non-redeemable investment funds that qualify as investment funds, registration as an investment fund manager will depend on what activities the investment fund and its manager carry on in Canada and where in Canada such activities take place. In Ontario, Quebec and Newfoundland and Labrador, registration would not be required if an investment fund manager does not have a place of business in Ontario, Quebec or Newfoundland and there are no security holders of the investment fund, or there has been no active solicitation of residents by the investment fund manager (or any of the investment funds it manages), in Ontario, Quebec or Newfoundland after September 27, 2012. Active solicitation involves intentional actions taken to encourage a purchase of the securities of the mutual fund or non-redeemable investment fund. If there are fund security holders resident in Ontario, Quebec or Newfoundland or if there is active solicitation in these provinces after September 27, 2012, registration of the investment fund manager is required.
There is, however, a registration exemption for international investment fund managers without a place of business in Canada where all of the securities of the investment funds managed by the investment fund manager are distributed under a prospectus exemption to permitted clients only (the “Permitted Client Exemption”). “Permitted clients” are a subset of “accredited investors” which includes institutional investors and ultra high net worth individuals (who beneficially own financial assets, before taxes and liabilities, in excess of CDN$5 million).
In order to rely on the Permitted Client Exemption, certain notice requirements must be satisfied:
- notice of reliance on the exemption must be sent to the applicable securities regulatory authority, which includes disclosure of assets under management attributable to investors in the local jurisdiction, a submission to jurisdiction and the appointment of an agent for service;
- notice of reliance on the exemption must be sent to the applicable securities regulatory authority regarding disciplinary history, settlement agreements and ongoing investigations of the investment fund manager; and
- notice must be sent to permitted clients that the investment fund manager is not registered in the local jurisdiction together with certain other prescribed disclosure.
In all of the other Canadian jurisdictions, regulators have indicated that the need to register as an investment fund manager in those provinces will depend on what activities are taking place in the jurisdiction. The presence or solicitation of security holders in or by an investment fund does not automatically trigger the requirement to register. Registration will be only required in a jurisdiction if investment fund management activities take place within the jurisdiction. Multilateral Policy 31-202 describes some of the activities that would trigger the registration requirement including, among others, overseeing the day-to-day administration of the investment fund and establishing a distribution channel for the investment fund.
If required, a manager of a non-Canadian investment fund has until December 31, 2012 to file the investment fund manager registration application and/or the documentation allowing it to rely on the Permitted Client Exemption.
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