The Canadian fintech review: Staying on the right side of securities regulators

Fintechs looking to commercialize a new product need to consider whether it will trigger securities laws, and how to follow industry best practices for collaborating with securities regulators.

Glen Johnson and Brigitte Goulard share what regulators are looking for, plus:

  • Key compliance issues for fintechs
  • Why the securities sandbox supports innovation
  • Benefits of collaborating with a large institution

Click here to see other videos and webinars in this series.

Brigitte Goulard (00:04): Today’s session is going to be focusing on securities, and I have my colleague, a Partner at Torys, Glen Johnson. So if you could just maybe give us a very brief oversight of securities law in Canada, because I know it’s very complicated and includes all the provinces. But briefly, what does it look like?

Glen Johnson (00:20): Exactly. As you said, it’s a matter of provincial jurisdiction. So rather than having, as in most of the financial industry space, a federal regulator, you actually have provincial securities commissions that administer and enforce provincial securities law, on a jurisdiction-by-jurisdiction basis. So it’s largely harmonized, but there are 13 separate regulators and who regulates you will depend on from where are you providing a product or service, and who are you doing outreach to? Where is your user base or potential client, and where are they located?

Brigitte Goulard (00:53): What about the small- to medium-sized fintechs who are thinking about entering the market and do not want to trigger securities law issues? What is it that they need to think about and how do they prepare for that type of regulatory oversight?

Glen Johnson (01:07): Well, I think one of the things that’s most important is the fact that, you know, securities regulators apply what they call a purposive approach to securities regulation. Effectively, they’re looking for, is there a transaction involving securities of some kind? Is there intermediation happening in some respect, whether that’s trading, advising, perhaps providing custodial services or other administrative or back-office services that may touch upon securities? The other issue that they’re going to look at is, who’s regulating this? If there’s another regulatory authority responsible for the oversight or particular activity or conduct, and that will be discharging an investor protection function, they’re going to be less likely to intervene if it’s on the margins. But what will be important to them is to determine, you know, do we have a role here and is there a need for us to assert jurisdiction? Because we have a securities matter and we think there’s going to be an important investor protection imperative.

Brigitte Goulard (02:05): Okay. Let’s say, for example, a fintech has decided, “Oh, we think that this might actually implicate this.”What would be the steps that they need to do? What would they think they need to do in order to make sure that they're going to be compliant?

Glen Johnson (02:21): I think the challenge is going to be that you have to have a thoughtful analysis of, you know, what is our product and service? What's its scope? Where are the pressure points going to be? Do we potentially implicate securities in some respects? Is there an added functionality where we may cross a line or particular service that, if we go this far, we can be exempt from securities regulation? But this added feature or this other use that our service or product may afford, is that actually going to be a step too far or do we need to consider, do we need to be registered as a dealer because we are intermediate trades and securities? Are we an advisor because we're facilitating advice or judgments in respect of securities? Are we operating some kind of a platform or a marketplace where we are bringing together buyers and sellers of securities? And if you see those kinds of activities and that nexus to securities transaction, it's worth drilling down further because that will, I think, help determine how you can proceed without engaging securities law potentially, or if you are going to move forward, is there an opportunity to engage with the securities regulators possibly to get exemptive relief to scope out certain aspects of your service and not become subject to a full regulatory burden?

Brigitte Goulard (03:41): So would it make sense as fintechs are drawing their strategy and their plans to think through these issues so that, you know, there might be a way of being able to be exempt or finding a way to minimize the regulatory impact?

Glen Johnson (03:58): The great idea comes first, and the build out has to be number two, but the regulatory analysis is going to be a key part of it. The securities regulators are very keen about the fintech space. They're looking to be supportive to both domestic and international players that will be serving the Canadian marketplace. They are interested in learning about the ecosystem and developing their own understanding and approach from a regulatory standpoint. Most of the securities commissions have published resources to help fintech participants understand where regulation can engage the larger securities commissions in Ontario, Québec, BC and Alberta have established sandboxes or regulatory platforms where they're happy to engage with fintechs and others to help them understand again how securities law can apply to them, and perhaps even to consider unique regulatory models, whether it's exemptive relief or a pathway to registration. So that both the fintech participant, as well as the securities regulator can see how the model works, how it can be beneficial to the marketplace and, you know, where the pressure points may be that suggest, well, you know, we need terms and conditions here, or there's an additional regulatory protection that we need to build in.

Brigitte Goulard (05:15): In terms of sandboxes, you know, a term that we've heard more and more, especially because it's some of the international jurisdictions have used it more than we have in Canada today. Briefly, how does that work and what does it entail to say, you know, fintechs playing in that sandbox?

Glen Johnson (05:31): Exactly. Well, it's really a self-directed outreach to the staff of the securities regulator. Usually in their registration branch or their compliance group. And what you'd want to do is explain to them effectively who you are, this is what we do, this is the service or the functionality we provide, these are the target users who you may be offering a white label kind of product where registration is not so important to you because you will be delivering the service to someone who's registered themselves and they'll be providing that client facing functionality. In other cases, you may have to delve more deeply into the model and that's, I think, why part of that initial analysis can be helpful. That's a great script for your initial outreach to a securities commission to say, you know, this is who we are, this is what we're doing, and this is why we think there may be specific elements of our business model or our plan that we think we want to talk to you about.

Brigitte Goulard (06:27): At what point should a fintech start thinking, I'm going to be raising capital on the markets and I need to start thinking about securities? Is it really all in the process or, you know, you advise your clients, develop the product, come back and see me when you're starting to think about expanding? Like, where is it in that process?

Glen Johnson (06:45): I think that capital raising is probably a key imperative from day one. You know, how do we build out and capitalize and build this great idea we've had. At all stages of the capital raising process, you know, whatever you call the instrument, the securities regulators are going to have their investor protection rationale, front and centre. And whether you're raising money by a traditional instrument like common shares or raising debt, or something more novel, a token or a crypto asset of some kind. The securities regulators are going to see that as a security and expect that you've identified a prospectus exemption so that you do not need to comply with the full suite of prospectus rules when you're selling to investors. That you are, where necessary, using a registered dealer to intermediate your trades, and you know, taking a look at your disclosure documents, ensuring that you are comfortable as the fintech issuer that your representations about yourself, both as you are today, and where you see your business model and the business growing, that kind of forward looking information or financial forecast, they've got a reasonable basis for those kinds of prospective or future-oriented statements so that you aren't subject to liability for any kind of misrepresentation in your offering material.

Brigitte Goulard (08:05): You know, a lot of the fintechs are thinking about joining up with perhaps like a financial institution that is already regulated. I guess there's some upside of leveraging those larger institutions that already have the securities expertise or perhaps bigger fintechs or some retailers. So is that something that, you know, is a plus side in terms of collaborating with someone who's bigger than you?


Glen Johnson (08:28): Yeah, that could definitely help on the regulatory front, both in terms of, maybe even be able to leverage their registration status so that the fintech provider itself doesn't require its own registration. It won't be directly facing clients or users perhaps, and the registrant, the bank or the other institution takes on that burden. You can also benefit from their internal compliance and legal expertise and take advantage of some of that internal knowledge that they'll have. You'll still need to have an understanding of your counterparty’s registration status. That's always going to be important so that you understand what their obligations are and what they'll be looking to the fintech to do in terms of the support and the necessary back up so that, you know, your client can also discharge its obligations consistent with securities law.

Brigitte Goulard (09:15): Okay. Thank you very much. I think that's a wrap for our securities session on fintech, and we will see you for the next session. Thank you very much.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

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