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Fintechs looking to commercialize a new product must consider whether it will trigger securities laws, and how to follow industry best practices for working 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
- Advantages of working with a large institution
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Brigitte Goulard (00:04): Today’s session is going to focus on securities, and I have my colleague, a partner at Torys, Glen Johnson. So if you could just give us a very brief overview of securities law in Canada, because I know it’s very complicated and includes all the provinces. But in short, what does it look like?
Glen Johnson (00:20): Exact. As you said, it’s a matter of provincial jurisdiction. So instead of having, as in most of the financial industry, 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 where you’re providing a product or service and who you’re catering to? Where is your user base or potential client, and where are they located?
Brigitte Goulard (00:53): What about the small and medium-sized fintechs who are thinking of entering the market and do not want to trigger securities law issues? What do they have to think about and how do they prepare for that kind 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 use what they call a targeted approach to securities regulation. In fact, they are looking for, is it a transaction involving securities of any kind? Is there intermediation taking place in any respect, whether it is trading, advisory, perhaps providing custody services or other administrative or back office services that may affect securities? The other issue they will look at is who regulates this? If there is another regulator responsible for the supervision or particular activity or conduct, and who will perform an investor protection function, they will be less likely to intervene if it is on the margins. But what will be important for 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 case, and we think it’s going to be an important requirement for investor protection.
Brigitte Goulard (02:05): Right. For example, let’s say a fintech has decided, “Oh, we think this might actually imply this.” What will be the steps they need to take? What do they think they need to do to ensure they are 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 is the scope? Where will the pressure points be? Do we potentially implicate securities in any respect? Is there an additional functionality where we can cross a border or a particular service that, if we go that far, could be exempt from securities regulation? But this additional feature or this other use that our service or product can afford, is that actually going to be a step too far or do we have to consider, do we have to be registered as a dealer because we’re an intermediary and securities? Are we an adviser because we facilitate advice or assessments regarding securities? Do we operate some sort of platform or marketplace where we bring together buyers and sellers of securities? And if you see that kind of activity and that connection to securities transactions, it’s worth looking into, because I think that will help you decide how you can proceed without potentially getting involved in securities law, or if you should move forward , is there an opportunity to engage with the securities regulators, possibly to gain an exemption to limit certain aspects of your service and not be subject to a full regulatory burden?
Brigitte Goulard (03:41): So would it make sense as fintechs draw their strategy and their plans to think through these issues so that, you know, there might be a way to be able to be exempted or find a way to minimize the regulatory impact?
Glen Johnson (03:58): The good idea comes first, and the development must come second, but the regulatory analysis will be a central part of it. The securities supervisors are very concerned about the fintech area. They want to support both national and international players who want to serve 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 are happy to engage with fintechs and others to help them to understand again how securities laws may apply to them, and perhaps even to consider unique regulatory models, whether it is an exemption or a path 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 market and, you know, where the pressure points might be that suggest, well, you know, we need terms and conditions here, or there is an additional regulatory protection that we have to build in.
Brigitte Goulard (05:15): In terms of sandboxes, you know, a term that we’ve been hearing more and more, especially because there are some of the international jurisdictions that have used it more than we have in Canada today. In short, how does it work, and what does it mean to say fintechs play in that sandbox?
Glen Johnson (05:31): Exact. Well, it is actually a self-directed approach to employees of the Norwegian Securities Authority. Usually in their registration branch or their compliance group. And what you want to do is explain to them in an effective way who you are, this is what we do, this is the service or functionality that we offer, these are the target users that you might be offering a white label type of product where registration is not so important to you because you will deliver the service to someone who has registered themselves and they will provide the client-facing functionality. In other cases, you may need to go deeper into the model, which is, I think, why some of the initial analysis can be useful. It’s a great script for your initial approach to a securities commission to say, you know, this is who we are, this is what we do, and this is why we think there may be specific elements of our business model or our plan . which 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 raise capital in the markets and I have to start thinking about securities? Is it really all in the process, or you know, you advise your customers, develop the product, come back and see me when you start thinking about expanding? Like, where is it in that process?
Glen Johnson (06:45): I think raising capital is probably a key imperative from day one. You know, how do we build out and capitalize and build this great idea that we’ve got. At every stage of the capital raising process, you know, no matter what you call the instrument, securities regulators will have their investor protection rationale front and center. And whether you’re raising money with a traditional instrument like common stock or raising debt, or something more novel, a token or a crypto-asset of some kind. Securities regulators are going to see it as a security and expect you to have identified a prospectus exemption so that you don’t have to comply with the full suite of prospectus rules when selling to investors. That, where necessary, you use a registered dealer to convey your trades and you know that you take a look at your disclosure documents and ensure that you are comfortable as a fintech issuer with your representations about yourself, both as you is today, and where you see your business model and business growing, that kind of forward-looking information or financial forecasts, they have a reasonable basis for such potential or forward-looking statements, so you are not subject to liability of any kind. misrepresentation in your offer material.
Brigitte Goulard (08:05): You know, a lot of fintechs are thinking about merging with maybe like a financial institution that’s already regulated. I guess there are some advantages to leveraging the larger institutions that already have the securities expertise or perhaps larger fintechs or some retailers. So is there anything that, you know, is a plus in terms of working with someone who is bigger than you?
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Glen Johnson (08:28): Yes, it can definitely help on the regulatory front, both in terms of maybe even being able to leverage their registration status so that the fintech provider itself doesn’t require their own registration. It may not be direct to clients or users, and the registrant, bank or other institution assumes that burden. You can also benefit from their in-house compliance and legal expertise and benefit from some of the inside knowledge they will have. You must still have an understanding of the other party’s registration status. It’s always going to be important so that you understand what their obligations are and what they want fintech to do in terms of support and necessary backup, so you know that your client can also meet their obligations consistently with securities law.
Brigitte Goulard (09:15): Right. Thank you very much. I think that’s a wrap for our securities session on fintech and I’ll see you in the next session. Thank you very much.
