Canada: Amendments To Canada’s Exempt Market Rules

The Canadian Securities Administrators (CSA) have published amendments to National Instrument 45-106 – Prospectus and Registration Exemptions (NI 45-106), which will take effect May 5, 2015, and are intended to enhance the protection of investors. The amendments will;

  • require issuers relying on the accredited investor prospectus exemption (the AI Exemption) to obtain a signed risk acknowledgement form (the RA Form) from individual accredited investors who are not "permitted clients";
  • restrict the minimum amount prospectus exemption (the MA Exemption) to non-individual investors;
  • harmonize the definition of accredited investor to allow fully managed accounts to purchase investment fund securities in Ontario;
  • modify the existing short-term debt prospectus exemptions relating to commercial paper; and
  • introduce a new prospectus exemption for distributions of short-term securitized products, primarily asset-backed commercial paper (ABCP).

In addition, the Ontario Securities Commission (the OSC) has adopted a new family, friends and business associates prospectus exemption, which is anticipated to provide a cost-effective way for issuers, other than investment funds, to raise capital from their business and personal networks.  

AI Exemption

The following changes will be made to the AI Exemption:

  • individual accredited investors who qualify under the income and asset tests must complete and sign a new RA Form that describes, in plain language, the categories of individual accredited investors and the risks involved in investment. An RA Form will not be required where an individual has financial net assets in excess of $5 million. All RA Forms must be retained for 8 years;
  • any person involved in meeting with or providing information to the individual accredited investor must be disclosed in the RA Form;
  • additional guidance is provided in the companion policy on the practices for verifying accredited investor status and the conditions of certain other exemptions. These steps include explaining the terms and conditions of the exemption and obtaining factual information from purchasers about their income or assets before discussing the investment. This guidance seems to impose additional compliance requirements on a seller of privately placed securities. Issuers were previously permitted to rely on a purchaser's factual representations regarding accredited investor status provided the seller had no reasonable grounds to believe those representations are false. It is no longer permissible to rely on a representation as to status contained in a subscription agreement unless the seller has taken reasonable steps to verify the representations made by the purchaser;
  • an issuer must identify the category of accredited investor of each purchaser in the report of exempt distribution the issuer files;
  • the definition of accredited investor will be amended in Ontario to allow fully managed accounts to purchase investment fund securities in Ontario. This change harmonizes the managed account category of the AI Exemption across Canada; and
  • the definition of accredited investor will include a family trust established by an accredited investor for his or her family, provided the majority of trustees of the family trust are accredited investors.

The minimum amount exemption

In order to address investor protection concerns, the MA Exemption will only be available for distributions to non-individuals. The amendment addresses CSA concerns that the amount invested is not a good proxy for individual investors' sophistication or ability to withstand financial loss and may lead to over-concentrating investment in one issuer.

Short-term debt exemption

The amendments modify the short-term debt prospectus exemption by modifying the credit rating requirements of the exemption. The revised exemption requires an issuer to have only one credit rating from a designated rating agency in the highest category; however, no other credit ratings may be below a prescribed rating. The exemption will no longer be available for the issuance of ABCP and other short-term securitized products.

Short-term securitized product exemption

Due to the restriction on use of the short-term debt prospectus exemption, a new exemption is being introduced that will be available for distributions of securitized products.   

The new exemption requires the issuer to, among other things:

  • have two prescribed credit ratings from designated rating agencies and no credit rating below a prescribed level;
  • have entered into liquidity arrangements with deposit-taking institutions regulated by OSFI or a government department or regulatory authority of Canada or a province or territory of Canada responsible for regulating deposit-taking institutions;
  • have certain prescribed asset pools; and
  • make prescribed disclosure upon the occurrence of certain circumstances.

Family, friends and business associates

The OSC will also adopt a family, friends and business associates exemption on May 5, 2015. The exemption is proposed as a cost-effective way for early-stage issuers, other than investment funds, to raise capital from their networks of family, close personal friends and business associates. The new Ontario exemption is largely harmonized with existing exemptions in other provinces. 

The exemption will allow selling security holders or an issuer to raise capital from directors, executive officers, control persons and founders of the issuer (principals) as well as from family members and close personal friends and business associates of such principals without preparing a prospectus. The basis of the exemption is that there is a sufficiently close relationship between the principal and the investor such that an investor is able to assess capabilities and trustworthiness of the principal, the issuer and access information about his or her proposed investment.  

The key features of the exemption are:

  • it is available to both reporting and non-reporting issuers;
  • there is no requirement to provide disclosure to investors, but if an offering memorandum is provided to an investor that contains a misrepresentation such investor will have an action for damages or recession against the issuer;
  • there are no ongoing disclosure requirements, but reporting issuers will obviously be subject to the continuous disclosure requirements of securities laws;
  • investors must sign an RA Form that sets out key risks of the investment, which must be acknowledged by the investor, and details of the relevant principal with whom they have a relationship, the category of relationship asserted by the investor and how long the investor has known the relevant principal. The RA Form must be signed by the purchaser, an executive officer of the issuer and the relevant principal;
  • there are no limits on the amount of the offering nor are there limits on the amount of the investment;
  • commissions or finders fee to any principal are prohibited;
  • the exemption may not be used for short-term securitized products.

Guidance accompanying the new exemption sets out the OSC's view that using registrants, finders or advertising to locate investors who would rely on the exemption is inconsistent with the use of the exemption. In addition, the companion policy provides guidance as to the meaning of the terms "close personal friend" and "close business associate." The existing founder, control persons and family exemption will be repealed upon introduction of this new exemption.

Anticipated future changes

Additional changes to the prospectus exemption regime are still being considered by the CSA and OSC. These include the introduction in Ontario of an offering memorandum exemption and the amendment of the offering memorandum exemptions in other CSA jurisdictions. Crowd-funding exemptions are being proposed in certain CSA jurisdictions, including Ontario and Quebec. In addition the CSA has proposed amendments to streamline the existing rights offering prospectus exemption for non-investment fund reporting issuers. A new prospectus exemption for offering securities of TSX-, TSX-V-, CSE- and Aequitas NEO Exchange-listed issuers to existing security holders was introduced in Ontario in February 2015 and brings Ontario in line with the other Canadian jurisdictions.

The Amendments

The amendments can be accessed here. To review updates on other changes to the exempt market visit

Norton Rose Fulbright Canada LLP

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