The "managed account"
category of accredited investor is now available in Ontario,
harmonizing this exemption across Canada. This means that all
discretionary accounts managed by a registered portfolio manager or
adviser in Ontario may purchase exempt market securities, including
private investment funds, regardless of whether the beneficial
account holder qualifies for a prospectus exemption. In making this
change, the Ontario Securities Commission recognizes that
registered advisers have sufficient financial expertise and
familiarity with their clients' circumstances to invest in
exempt market securities on behalf of their clients. As a practical
matter, advisers will no longer be required to present subscription
documents to their Ontario clients for completion when investing in
exempt market securities, including investment funds.
A new Risk Acknowledgement Form (RAF)
has been introduced, which must be signed by most individual
accredited investors at the time they purchase securities in
reliance on the exemption. Signed RAFs must be kept by the issuer
or dealer of the securities purchased in reliance on the exemption
for eight years after the trade. The RAF describes, in plain
language, the categories of individual accredited investors and
identifies key risks associated with purchasing exempt market
securities. The RAF is not required for individuals who have at
least $5 million in pre-tax net financial assets, a new category of
accredited investor which matches up with the "permitted
client" definition in National Instrument 31-103 Registrant
Regulation, Exemptions and Ongoing Registrant Obligations (NI
31-103). Permitted clients are entitled to waive their rights to
know-your-client and suitability analyses which advisers and
dealers are otherwise required to complete under NI 31-103 prior to
selling or recommending securities to their clients.
The Companion Policy to NI 45-106 now
clarifies that when distributing securities under the accredited
investor exemption, a dealer or adviser may not simply rely on a
purchaser's representation in its subscription documents.
Rather, the dealer or adviser must take reasonable steps to verify
that each purchaser qualifies as an accredited investor. This
includes providing detailed information to a purchaser regarding
the different categories of accredited investor, for example
explaining how the income and asset tests are applied, eliciting
details regarding a purchaser's financial circumstances and, if
concerns about eligibility remain, requesting independent
documentation to confirm the purchaser's representations.
The "minimum amount"
exemption may no longer be used to distribute exempt market
securities to individuals. The minimum amount exemption allows
purchases of securities with an acquisition cost of not less than
$150,000 cash to be made without a prospectus. However, when used
by individual, this exemption raised concerns that investors who
lack sufficient financial sophistication or net worth (and
therefore do not qualify as accredited investors) could invest an
inappropriate proportion of their assets in exempt market
securities without understanding the associated risks.
NI 45-106 has also been amended to introduce short-term debt and
short-term securitized products prospectus exemptions and to make
the friends, family and business associates exemption available in
Ontario, but not to distributions of investment funds.
Dealers and advisers that recommend or sell exempt market
securities, including private investment funds, will likely need to
update their documentation to reflect these amendments prior to the
May 5, 2015 implementation date. For example, Accredited Investor
Certificates in subscription agreements and account-opening
packages should be amended. Offering Memoranda should be reviewed
to confirm the accuracy of disclosure regarding prospectus
exemptions. In addition, registrants will likely need to update
their policies and procedures to incorporate the collection of
RAFs, if applicable, and the new due diligence steps required to
confirm accredited investor status.
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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