Canadian securities regulators are proposing changes to two of
the most commonly used capital-raising exemptions—the
accredited investor exemption and the minimum amount investment
exemption (also referred to as the "$150,000 exemption").
The changes are designed to address investor protection concerns
and are not expected to have a significant impact on the ability of
issuers to raise capital in the exempt market.
Changes to the Accredited Investor Exemption
The accredited investor exemption permits sales of securities to
institutional investors and high net worth individuals. No changes
are being proposed to the income or asset thresholds used in the
definition of accredited investor. The exemption will remain
available to individual accredited investors1 ; however,
to address concerns that some accredited investors may not
understand the risks associated with exempt market investments or
may not qualify as accredited investors, if the changes are
adopted, issuers relying on the exemption will be required to
obtain a signed risk acknowledgement form from individuals who are
not permitted clients.2 In Ontario, the definition of
accredited investor will be extended to allow fully managed
accounts to purchase investment fund securities, as permitted in
Changes to the Minimum Amount Investment Exemption
The most significant change being proposed is that the minimum
amount investment exemption, which provides an exemption for sales
if the cash purchase price for the securities is at least $150,000,
will no longer be available for distributions to individual
investors. Regulators are concerned that individuals who do not
meet accredited investor thresholds may be encouraged to borrow
money or feel pressure to invest $150,000 when these individuals
would prefer to invest less. Restricting the minimum investment
amount exemption to distributions to non-individuals is not
expected to have a significant impact on capital raising, because
individuals investing under the exemption represent a very small
percentage of the total amount invested by Canadians in the exempt
Due Diligence and Supporting Documentation
In addition to the requirement for a risk acknowledgement form
where a private placement is made to an individual accredited
investor, the Canadian securities regulators have reiterated their
expectation that issuers and dealers must exercise due diligence in
assessing a prospective investor's status as an accredited
investor. Supporting documentation establishing accredited investor
status must be requested and updated periodically.
Although the proposed changes will be applicable in all
jurisdictions, the Province of Ontario has continued an unfortunate
trend of incorporating certain provisions in the provincial
Securities Act, and others in the harmonized private
placement rule, National Instrument 45-106. This approach increases
the risk of confusion among market participants, and makes the
regime less understandable to individual investors and others.
1 Individual accredited investors are individuals
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
own financial assets, alone or with a spouse, in excess
of $1 million; or
own net assets of at least $5 million.
2 Individual permitted clients are individuals that own
financial assets in excess of $5 million.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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