On February 27, the Canadian Securities Administrators published for comment proposed amendments to prospectus exemption rules, including the "accredited investor" (AI) and "$150,000 minimum investment" ($150K) exemptions. These proposals follow a comprehensive public consultation process and are intended to address the CSA's concerns that individual investors may not appreciate the risks of investing under the AI exemption, and that the $150K threshold may not provide an adequate proxy for sophistication or the ability to withstand loss.
As such, the CSA's proposed amendments to the AI exemption would require that individual investors be presented with, and complete and sign, a new risk acknowledgement form (RAF). However, the income and asset thresholds used in the definition of accredited investor would not be changed, with the CSA specifically noting that many responses to its earlier consultation expressed concerns that potential changes to the exemption could limit access to capital. Meanwhile, proposed changes to the $150K exemption would allow only non-individuals to use the exemption. According to the CSA, while this exemption is relied on in respect to less than 1% of distributions, it provides an inexpensive alternative to non-accredited investors and works well in certain circumstances, such as in respect of real estate securities.
Risk Acknowledgment Form
Under the proposed amendments, the new RAF would have to be completed by all categories of individual accredited investors, being those qualifying under the net income, financial assets or net assets tests. However, it would not apply to those individuals qualifying under a new "permitted client" category, which would require that an individual have over $5 million in his or her own financial assets. This is in contrast to the existing $5 million category, which applies to an individual who alone, or together with a spouse, has net assets of at least $5 million, and the $1 million category, which applies to a person or couple who beneficially own financial assets of over $1 million. Notably, the "permitted client" category of investors are also entitled to waive suitability requirements under dealer registration rules.
The RAF is proposed to include specific sections advising purchasers of the risks of investing in prospectus exempt securities, having them acknowledge exactly how they satisfy the AI exemption and confirming what they are purchasing, including the amount of their investment that is being paid as a fee or commission. Any person involved in selling the securities must also sign and date the form, including particulars as to how they may be contacted and their registration status. The form further advises investors that they can check for the seller's registration status and history at www.aretheyregistered.ca. The RAF is strictly required to be presented on one double-sided page, with each of the purchaser, issuer and salesperson (if any) required to sign two copies to be retained by the purchaser and the issuer (and in the case of the issuer, for eight years). It remains to be seen what modifications may be made by the CSA to facilitate the use of electronic communications, including signature and retention, to satisfy these requirements.
On a related note, the CSA have launched www.aretheyregistered.ca as a coordinated website where registration status can be searched across all Canadian jurisdictions. This search was fragmented for many years with investors being forced to search Ontario separately from other CSA jurisdictions, and with search parameters not available for all categories of registration.
The definition of accredited investor would also be amended to include family trusts established by an accredited investor, provided that the majority of trustees were accredited investors. As set out above, availability of the $150K would also be narrowed such that it would no longer be available to individuals.
Exempt Trade Reports
Significant amendments are also proposed to the form of report required to be filed following a private placement (the Exempt Trade Report). These amendments include having to specifically identify each category of purchaser under a prospectus exemption (for example, the specific category of AI for each purchaser). The stated purpose of the CSA in asking for such additional information is to assist CSA members with compliance and enforcement.
Correspondingly, the CSA state in proposed new companion policy guidance that it will not be sufficient to accept standard representations in a subscription agreement or RAF regarding a purchaser's exempt status, unless the person relying in the exemption has taken reasonable steps to verify the representation. While appropriate procedures will be fact specific, the CSA underscore that the focus should be ensuring that both the seller and prospective purchaser understand the relevant financial tests, and where necessary, the purchaser is asked additional questions to verify how they satisfy the exemption. The CSA also suggest that persons relying on the exemption may need to take further steps to collect additional information depending on the circumstances, including asking for confirmatory documentation such as income tax and bank statements and appraisal reports.
The Exempt Trade Report is proposed to be amended to clarify that each Canadian and foreign jurisdiction where purchasers reside must be identified and that purchasers must be listed by jurisdiction. However, the CSA have not taken the opportunity to provide any additional clarification on when a distribution is deemed to be taking place in a province when the purchaser does not reside in that province. While this issue was been clarified under local rules in certain provinces, such as Alberta and British Columbia, that is not the case for all CSA jurisdictions. In Ontario, for example, market participants have relied primarily on an interpretation note based on former Policy 1.5, which goes back more than twenty years and is often difficult to apply and is arguably outdated given, among other things, developments in technology and capital markets activity generally.
As we previously discussed, the CSA initiated a consultation on proposed changes to these exemptions in November 2011, and provided an update on progress in June 2012.
The CSA are accepting comments on the proposed amendments until May 28, 2014.
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