While recent proposals to add new prospectus exemptions for things like crowdfunding and rights offerings have received much attention, other changes have also been concurrently proposed that would have an impact on the existing exempt distribution regime – so-called "private placements."
The Canadian regulators have been examining the entire concept of exempt distributions and have arrived at somewhat different positions on some of the basics of ordinary private placements. These include changes for placements to portfolio managers and individuals, and more frequent reporting by investment funds. Under these proposals, the current national private placement reporting system would become more detailed and further divided, with Ontario and three other provinces requiring significantly more information on new forms about the issuer and investors, including publicly disclosing such diverse items as the issuer's and underwriter's CEOs' email addresses, an issuer's number of employees and the total aggregate redemptions of an investment fund since inception.
CHANGES PROPOSED TO EXISTING PROSPECTUS EXEMPTIONS
Portfolio manager is accredited investor to purchase investment funds
One welcome proposal is that in Ontario a registered portfolio manager would qualify as an accredited investor when purchasing investment funds for a fully managed account, the same as now in all other jurisdictions of Canada. Currently, Ontario does not allow a portfolio manager to qualify as an accredited investor if purchasing investment funds for their managed accounts.
No minimum amount exemption for individuals
The existing minimum amount exemption, where an investor acquires securities having a cost of at least C$150,000, would continue but no longer be available if the investor is an individual. It could still be used by holding companies, trusts and partnerships.
Individual accredited investors must sign risk acknowledgement form
Speaking of individuals, they could still qualify as accredited investors without change in the financial thresholds, but it is proposed that the person distributing the security must obtain from that individual a signed prescribed risk acknowledgement form when or before that individual signs the investment purchase agreement and must retain that form for eight years after the distribution. This particular risk acknowledgement requirement would, however, not apply if the individual meets the standard for a "permitted client," i.e., having more than C$5 million in net financial assets.
Distributors must verify accredited investor qualification
Proposed Companion Policy 45-106 goes into considerable detail around the verification steps that the regulators feel distributors must take before being satisfied that the purchaser is actually qualified as an accredited investor. They state: "A seller cannot rely on a form of subscription agreement that only states: 'I am an accredited investor.' Rather, the seller must request that the purchaser provide the details on how they fit within the accredited investor definition . . . It will not be sufficient to accept standard representations in a subscription agreement or an initial beside a category . . . unless the person relying on the exemption has taken reasonable steps to verify the representation."
EXPANDED REPORTING REQUIREMENTS PROPOSED
New report forms
There are two sets of proposed changes to exempt distribution reporting. Under proposals published on February 27, 2014 by all of the Canadian Securities Administrators, changes are proposed to the report forms currently used across Canada: Form 45-106F1 and (in British Columbia) Form 45-106F6. Then on March 20, 2014, the jurisdictions of Ontario, Alberta, Saskatchewan and New Brunswick published a further proposal, in which they would replace Form 45-106F1 with two new forms: Form 45-106F10 for exempt distributions by investment fund issuers and Form 45-106F11 for issuers other than investment funds. For simplicity, we'll refer to them as Forms 1, 6, 10 and 11.
A common theme across all new forms is significantly increased information required to be collected and reported. Only investors' information would be on a schedule withheld from the public file.
Portfolio manager must disclose beneficial owner of managed account
One significant change proposed in all new report forms would be that if a trust company or registered adviser has purchased on behalf of a fully managed account, the purchaser's information disclosed in the report must include not only the trust company or adviser itself, but also the same information for the beneficial owner of the managed account.
Four different reports to file
If the proposed forms are all adopted, the report process for private placements made across Canada would split so that issuers or their underwriters would: (1) report sales to British Columbia on Form 6 in electronic form, subject to certain British Columbia exemptions; (2) report on Form 10 or 11, as applicable, electronically in Ontario; (3) report on Form 10 or 11 in Alberta, Saskatchewan and New Brunswick in paper form; and (4) report on Form 1 in paper form in the remaining jurisdictions of Canada.
Form 45-106F11 – issuers other than investment funds
The enhanced reporting proposed in Form 10 and 11 is not limited to crowdfunding or other new exemptions. The other jurisdictions that have proposed crowdfunding – British Columbia, Manitoba, Quebec, New Brunswick and Nova Scotia – are not proposing Forms 10 or 11.
We will deal first with issuers that are not investment funds. The new information requirements proposed in Form 11 include:
- Business email address of the issuer's CEO and the underwriter's CEO
- Year the issuer was formed and its approximate number of employees
- Names of all marketplaces on which any securities of the issuer are traded
- Name, title and jurisdiction of residence of each director, executive officer, control person and promoter of the issuer
- For each investor, their age range if an individual and specific paragraph of the category of accredited investor exemption relied upon
- Filing copies of not only offering memoranda, but also copies of all presentations or other marketing materials that had been provided to investors in connection with the distribution
Form 45-106F10 – investment fund issuers
In addition to the reporting obligations required under Form 11, issuers that are investment funds would face further new information requirements proposed in Form 10, including:
- Legal structure and type of fund
- NAV of the fund as of the date of the report
- Full details of the investment fund manager, including the business email address of the investment fund manager's CEO
- Name, title and jurisdiction of residence of all directors and executive officers of the fund and its investment fund manager
- Fund's trustee, portfolio manager, sub-portfolio managers, custodian, registrar/transfer agent and auditor
- Total dollar value of redemptions since the last report filed, or if this is the first report, all redemptions since the fund was created
Investment funds, which are currently allowed to report annually, would be required to report on Form 10 quarterly, within 30 days after the end of each quarter in which any reportable distributions took place.
COMMENT PERIODS
The proposed changes to the definition of accredited investor and changes to the minimum amount exemption, as well as the changes to Form 45-106F1 and 45-106F6, are open for comment until May 28, 2014. The proposed new Forms 45-106F10 and 45-106F11 are open for comment until June 18, 2014.
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