On November 10, 2011, CSA staff issued a consultation notice advising that they are reviewing the minimum amount and accredited investor prospectus exemptions contained in National Instrument 45-106 Prospectus and Registration Exemptions, which review will include looking at various alternatives for such exemptions.

CSA staff is seeking comment on the issues raised in CSA Staff Consultation Note 45-401 Review of Minimum Amount and Accredited Investor Exemptions – Public Consultation until February 29, 2012.

Following the consultation, CSA staff may recommend either retaining the exemptions in their current form or proposing changes.

The consultation note includes several detailed and specific questions regarding each exemption. In particular, CSA staff is seeking comment on issues such as whether:

  • the monetary thresholds of the exemptions should be increased;
  • disclosure should be required in connection with the use of these exemptions;
  • individuals should be able to rely on these exemptions;
  • novel or complex securities should be issuable pursuant to these exemptions;
  • these exemptions should be limited to reporting issuers;
  • the involvement of a registered dealer alleviates any concerns;
  • the minimum amount exemption should be repealed.

The CSA review of these exemptions does not come as a complete surprise. The CSA raised concerns regarding the use of these exemptions in CSA Consultation Paper 11-405 Securities Regulatory Proposals Stemming from the 2007-08 Credit Market Turmoil and its Effect on the ABCP Market in Canada. In addition, the CSA proposals regarding securitized products released in March 2011 envision limiting the availability of prospectus exemptions for securitized products and mandating disclosure obligations for non-reporting issuers who issue such products in the exempt market.

The consultation note identifies the reason for the review as: "The global financial crisis and recent international regulatory developments have raised questions about the use of the minimum amount exemption and the AI [accredited investor] exemption." Although no specific problems with these exemptions in Canada are identified in the consultation note, this consultation should be considered in the context of the global harmonized regulatory initiatives through the G-20 and other international bodies to reduce systemic risk in the financial markets. It is telling that the consultation note includes comparative information regarding the status in other countries of exemptions based on a minimum amount invested or the nature of qualified purchasers.

Many of the questions appear to be based on the CSA staff's assumptions that investors – and in particular, individual investors (as opposed to institutional investors) – are acquiring securities from issuers relying on these exemptions in circumstances that the CSA staff consider inappropriate for those investors.

It will be interesting to see whether the CSA provides an empirical basis for any rule amendments proposed as a result of these consultations. Howard Wetston, the Chair of the Ontario Securities Commission, at the recent OSC Dialogue 2011 acknowledged the importance of evidence-based policy making as "key to better financial market regulation" and the growing significance of the exempt market in Canada:

The exempt market has become increasingly important for investors and issuers. The total exempt market in Canada is valued around $83 billion and Ontario's share of that market is 53%. In this province, Ontario-based issuers raised approximately $44 billion in 2010. New equity issues in 2010 across Canada were approximately $41 billion. It is clear that there has been a significant migration from public to private markets. What implications does this have for policymaking? Fact-based research will assist us in answering that question.

We expect that any changes to these exemptions will have a significant impact on capital-raising in Canada, as well as on the universe of investing options available to investors and their advisers (dealers and portfolio managers). Managers of investment funds offered to qualified investors on a private placement basis will need to pay particular attention to these proposals, given that the CSA staff does not acknowledge the reasons why pooled investment funds, as alternatives to separately managed accounts and public mutual funds, may be beneficial to investors, including individuals and institutions.

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