The Canadian Securities Administrators (CSA) have published amendments to National Instrument 45-106 – Prospectus and Registration Exemptions (NI 45-106), which will come into force May 5, 2015. The amendments will, among other things:
- require pooled funds and private equity funds relying on the accredited investor prospectus exemption (the AI Exemption) to obtain a signed risk acknowledgement form (the Risk Acknowledgement Form) from individual accredited investors who are not "permitted clients";
- revise the definition of "accredited investor" to allow fully managed accounts in Ontario to purchase securities of pooled funds regardless of whether the underlying managed account client qualifies as an accredited investor, which revision will harmonize across Canada the ability of fully managed accounts to purchase securities of pooled funds;
- create a new family, friends and business associates prospectus exemption in Ontario, which is not available for pooled funds but may be used by founders of private equity funds to raise capital from their close business and personal networks; and
- restrict the minimum amount ($150,000) prospectus exemption to investors who are not individuals.
Process points regarding the AI Exemption
Managers should focus on the CSA's increased emphasis on procedural elements associated with reliance on the AI Exemption:
- all individual accredited investors other than "permitted clients" must complete and sign a new Risk Acknowledgement Form that describes, in plain language, the categories of individual accredited investor and the protections an investor is renouncing by purchasing under the exemption;
- any person involved in meeting with or providing information to the individual accredited investors must be disclosed in the Risk Acknowledgement Form;
- additional guidance is provided in the Companion Policy to NI
45-106 on the steps pooled funds and private equity funds should
take to verify accredited investor status. This guidance imposes
additional compliance requirements on the funds than was previously
the case. Pooled funds and private equity funds are currently
permitted to rely on a purchaser's factual representations
regarding accredited investor status provided the funds have no
reasonable grounds to believe those representations are false. In
the revised Companion Policy, the CSA recommends that sellers:
- obtain information that confirms the prospective purchaser meets the criteria set out in the exemption before discussing the details of an investment with the prospective purchaser;
- explain to a purchaser the meaning of the terms and conditions of the exemption, including the difference between alternative qualification criteria for the exemption (for example, income-based or asset-based criteria);
- take "reasonable steps" to verify the representations made by a purchaser in an accredited investor certificate (as opposed to simply relying on the purchaser's initial beside a category of accredited investor on such a certificate). The CSA has not prescribed specific steps that must be followed to verify that an investor is eligible to rely on the accredited investor exemption so managers will need to exercise judgement. The guidance notes that what steps are reasonable will depend on the particular facts and circumstances of the purchaser and the offering, including: (i) how the seller identified or located the potential purchaser; (ii) what category of accredited investor or eligible investor the purchaser claims to satisfy; (iii) how much and what type of background information is known about the purchaser; and (iv) whether the person who meets with, or provides information to, the purchaser is registered;
- adopt or enhance policies and procedures to address their obligations arising from relying on the AI Exemption; and
- retain, for eight years, all necessary documents to demonstrate they have properly relied on the exemption.
- where a fund is sold through a registered dealer, the fund nevertheless retains ultimate responsibility for ensuring that a purchaser qualifies as an accredited investor. Thus, a manager's policies and procedures should address the relationship between the manager and the dealer in this respect and should outline the manager's approach to verifying accredited investor status and the dealer's role in that process.
- a pooled fund or private equity fund must identify the category of accredited investor of each purchaser in the report of exempt distribution the fund files.
Steps managers should take as a result of the amendments
Managers should adopt policies and procedures (as described above), including to the extent their funds are sold through dealers.
Managers should review their offering documents and subscription agreements as revisions to those documents will likely be required as a result of the amendments.
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