The OSC today released a staff notice expressing concern that issuers and dealers are relying on the accredited investor exemption to sell exempt securities to individual investors who do not meet the applicable requirements of the exemption. According to the OSC, many dealers are failing to collect adequate know-your-client (KYC) information to reasonably determine whether the investor is an accredited investor, and today's notice is intended to set out the OSC's expectations for issuers and dealers selling securities to accredited investors.
The notice focuses on the $1,000,000 financial asset and $5,000,000 net asset tests that apply to individual investors under the definition of "accredited investor" in National Instrument 45-106 Prospectus and Registration Exemptions. Staff have expressed concern that the two concepts are being confused. The higher threshold test based on "net assets" could include an investor's personal residence or other real estate (minus liabilities) whereas the lower test based on "financial assets" does not. According to staff, some dealers are not making it clear to clients that a personal residence or other real estate cannot be included for the purposes of determining financial assets.
The notice also provides a non-exhaustive list of steps that dealers should take when selling exempt securities, including:
- reading and understanding the definition of accredited investor;
- developing an accurate form for collecting KYC information;
- explaining the accredited investor definition to clients and ensuring that the KYC forms are properly completed;
- not selling an exempt security unless there is sufficient information to determine whether the client qualifies;
- ensuring the exempt security is suitable for the client;
- reviewing the KYC form;
- retaining applicable documentation;
- establishing appropriate policies and procedures; and
- reporting the sale of exempt securities.
Notably, with respect to the issue of sufficient information, the notice states that it is not sufficient for issuers and their dealers to simply rely on a client initialling or checking off a box on an accredited investor certificate and that the information contained in the client's completed KYC form or other documentation must also demonstrate that the investor meets the test. Verbal representations, according to OSC staff, are also not sufficient to support that an investor meets the definition.
For more information, see Staff Notice 33-735.
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