On February 27, 2014, the Canadian Securities Administrators (the “CSA”) published a notice and request for comment (the “Notice”) on proposed amendments to the accredited investor exemption (the “AI Exemption”) and the $150,000 minimum amount exemption (the “MA Exemption”) found in National Instrument 45-106 Prospectus and Registration Exemptions (“NI 45-106”). The CSA conducted a review of the AI Exemption and MA Exemption and found that the AI Exemption is the most relied upon capital raising exemption and after the AI Exemption, the MA Exemption raised the second highest amount of capital.
These proposals arise from the CSA’s concerns that individual investors may not fully appreciate the risks involved when investing using the AI Exemption or that they may not actually qualify as accredited investors for the AI Exemption. With respect to the MA Exemption, the CSA’s concerns were that the threshold of $150,000 “may not be a proxy for sophistication or ability to withstand financial loss for individual investors”. Additionally, in those instances where an investor does not qualify for another exemption, the MA Exemption may result in the over concentration in one investment. The proposed amendments are intended to enhance investor protection.
1. As set out in the Notice, the following lists the CSA’s proposed changes to the AI Exemption:Individual accredited investors must execute a new risk acknowledgement form, Form 45-106F9 Risk Acknowledgement Form .for Individual Accredited Investors (“Form 45-109F9”). Form 45-106F9 describes the categories of individual accredited investor and the protections an investor is renouncing by purchasing under the AI Exemption. The investor would be required to indicate on Form 45-106F9 which category of accredited investor they satisfy.
2. The Form 45-106F9 requirement would apply to all existing categories of individual accredited investor, namely individuals that:
- earned net income of $200,000, or $300,000 with a spouse, in each of the two most recent calendar years, with a reasonable expectation to exceed that level in the current calendar year,
- own financial assets (cash and securities — no real estate), alone or with a spouse, in excess of $1 million, or
- own net assets of at least $5 million.
3. Individual accredited investors who meet the permitted client test (an individual owning financial assets in excess of $5 million) under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31- 103”) would not be required to execute Form 45-106F9. As a permitted client, these individuals are able to waive suitability under subsection 13.3(4) of NI 31-103.
4. Any salesperson or finder, whether registered or not, involved in the trade to the individual investor would be required to execute Form 45-106F9.
5. The Companion Policy of NI 45-106 will contain additional guidance on the steps issuers should take to verify accredited investor status, including explaining the different tests and asking questions to obtain factual information from purchasers about their income or assets before discussing the investment.
6. Issuers would be required to identify the category of accredited investor of each purchaser in the report of exempt distribution (Form 45-106F1 and, in BC, Form 45-106F6).
7. The definition of accredited investor would be amended to include family trusts established by an accredited investor for his or her family, provided the majority of trustees of the family trust are accredited investors.
8. The Ontario Securities Commission proposes to amend the definition of accredited investor to allow fully managed accounts to purchase investment fund securities in Ontario. Registered advisers of fully managed accounts have a fiduciary duty to investors. A registered adviser of a fully managed account is an accredited investor under the definition of accredited investor in NI 45-106 and can buy all types of securities for the managed account on an exempt basis except, in Ontario, investment fund securities. The removal of this carve-out was supported for the following reasons:
- a portfolio manager’s proficiency and fiduciary obligation to the investor serve as adequate investor protection,
- managed account clients should have the benefit of the exemption whether investing in securities directly or through an investment fund, and
- it would harmonize the managed account category of the Al Exemption across Canada.
The CSA proposes to amend the MA Exemption so that it is only available for distributions to non-individuals.
Consequently, as set out in the Notice, the forms of the Reports of Exemption Distributions (Form 45-106F1 and in BC, Form 45-106F6) will be amended to require additional disclosure, namely:
- the category of accredited investor for each purchaser;
- updated industry categories; and
- more information on any person being compensated in connection with the distribution including identifying which purchasers the person was compensated for.
These proposed amendments are expected to assist the CSA in its compliance and data gathering functions.
As a result of the adoption of NI 33-103, the CSA will rename NI 45-106 from “Prospectus and Registration Exemptions” to “Prospectus Exemptions.”
The CSA accepted comments on these proposals until May 28, 2014.
For more information, see CSA Notice and Request for Comment Proposed Amendments to National Instrument 45-106 Prospectus and Registration Exemptions Relating to the Accredited Investor and Minimum Amount Investment Prospectus Exemptions.