On November 10, 2011, the Canadian Securities Administrators (the "CSA") announced that they are reviewing the $150,000 minimum amount prospectus exemption and the accredited investor prospectus exemption.
The review has been initiated as a result of the global financial crisis and recent international regulatory developments. The CSA is engaging in the consultation to identify any issues that stakeholders may have about the use of the exemptions and to obtain information that will assist in deciding whether changes to the exemptions are necessary or appropriate.
Both of the minimum amount and accredited investor exemptions are premised on an investor having one or more of (i) a certain level of sophistication, (ii) the ability to withstand financial loss, (iii) the financial resources to obtain expert advice, and (iv) the incentive to carefully evaluate the investment given its size.
Minimum Amount Exemption
Some of the factors being considered by the CSA in determining whether changes to the minimum amount exemption are warranted include:
- No assurance of sophistication.
The size of investment alone does not assure investor sophistication or access to information, particularly where the minimum amount exemption is used to sell novel or complex products without any accompanying disclosure. At most, the size of the investment is an indicator only of the investor's ability to withstand financial loss.
- Current threshold for the minimum
The current $150,000 threshold for the minimum amount exemption was set in 1987 and has not been changed or adjusted for inflation since. The $150,000 threshold is equivalent to over $265,000 in 2011 dollars. Some stakeholders have suggested that the $150,000 threshold is too low and allows unsophisticated, retail investors to participate in the exempt market. Conversely, if the threshold is increased, the exemption may not be available to investors who do not need the protections provided by a prospectus offering.
- Impact of a minimum amount concept on investment
An exemption based on a minimum amount invested may cause an investor to invest more than business or investment considerations may dictate solely to meet the threshold; for example, by investing $150,000 when it may have made more sense to invest only $50,000. Similarly, a higher minimum threshold may cause an investor to make a single investment of $150,000 or more when a staged investment in smaller increments may better protect the investor's interests.
- Use of the exemption to raise capital.
The minimum amount exemption is widely used by issuers to raise capital in some jurisdictions. If the investment threshold was increased or the minimum investment exemption was repealed, this could affect capital raising, especially by small and medium sized enterprises.
Accredited Investor Exemption
Some of the factors being considered by the CSA in determining whether changes to the accredited investor exemption are warranted include:
- Current thresholds for income and
The thresholds for individuals to qualify as accredited investors were originally set by the Securities and Exchange Commission (SEC) in 1982, and subsequently adopted by the CSA in the early 2000s. The thresholds have not been changed or adjusted for inflation since. Some stakeholders submit that these thresholds are too low by today's standards. The current threshold for an individual's income is $200,000; in 2011 dollars, the threshold would be over $443,000 based on 1982 dollars (the year of SEC adoption) or $245,000 based on 2001 dollars (the year the Ontario Securities Commission first adopted the exemption). As with the minimum amount exemption, some say these thresholds are too low and allow unsophisticated, retail investors to participate in the exempt market, yet an increase in the thresholds may exclude investors who do not need the protections provided by a prospectus offering.
- Qualification criteria.
Some stakeholders have suggested that income and asset thresholds are not adequate proxies for sophistication. Individuals may have significant wealth, but may lack investment or other experience that enables them to make an investment decision without the protections afforded by a prospectus offering.
- Use of the exemption to raise capital.
The accredited investor exemption is widely used by issuers to raise capital. If the exemption was changed or repealed, this could affect capital raising, especially for small and medium sized enterprises.
- Compliance with qualification criteria.
Regulators have concerns that some individuals purchasing securities under the accredited investor exemption are not, in fact, accredited investors.
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