Canada: The Canadian Securities Administrators Announce Significant Amendments To The Accredited Investor And Minimum Amount Exemptions Contained In National Instrument 45-106 – Prospectus And Registration Exemptions

Last Updated: May 21 2015
Article by Todd Thomson

The Canadian Securities Administrators (CSA) have announced certain amendments to National Instrument 45-106 (NI 45-106) that will result in significant changes to whom and how issuers sell securities to individual investors. The amendments are anticipated to come into force on May 5, 2015.

Noteworthy amongst the amendments are stricter compliance and vetting requirements in connection with the accredited investor exemption, and restriction of the availability of the minimum amount exemption to non-individual entities.

Amendments to the Accredited Investor Exemption

Enhanced Vetting of Investor Qualifications

The CSA squarely places the onus upon the issuer to ensure the terms and conditions of the accredited investor exemption are met. In the past, it has been common practice among issuers to rely on representations from investors as to their exempt status contained in a subscription agreement. Based on the amended NI 45-106 and the associated amended Companion Policy (which is intended to help users understand the application of the instrument), this common practice is not sufficient.

The CSA's position is that issuers must clearly understand the terms and conditions of the exemption and must take "reasonable steps" to verify representations of the investor as to his, her or its status as an accredited investor, which may include asking questions designed to elicit details about the investor's financial circumstances and even asking for documentation that independently confirms the investor's claims if there are concerns. The Companion Policy advises that "[i]f the seller has any reservations about whether the purchaser qualifies under the exemption, the seller should not sell securities to the purchaser in reliance upon the exemption". Issuers are encouraged to keep records and other evidence sufficient to satisfy regulators that they have taken reasonable steps to verify the representations made by the investor.

Requirement to Obtain a Risk Acknowledgement

Issuers must also now obtain and retain a signed "Risk Acknowledgment Form" (RAF) in the prescribed form from individual (i.e. a natural person) investors who intend to qualify under the existing income or asset tests under the exemption. The RAF includes a bold warning of the potential risk associated with the investment, together with a plain language explanation of the accredited investor exemption categories, a written acknowledgement by the individual investor of the specific category under which they qualify, and disclosure of the name of any representative of the issuer or broker who provided investment information to the investor. For record-keeping purposes, all RAFs must be retained by the issuer for a period of 8 years. Of note is the fact that the Companion Policy indicates that it is not sufficient for the issuer to simply rely on the investor initialling beside the appropriate category in the RAF as to his or her status as an accredited investor unless it has also taken "reasonable steps" to verify the representations made by the investor, the implication being that that there is additional work to be done by the issuer in satisfying itself as to the status of the investor's eligibility rather than simply relying on the RAF, as noted above.

Other Noteworthy Changes to the Accredited Investor Exemption

  • Individual investors with net financial assets of at least $5 million will be exempt from the requirement to receive and complete a RAF.
  • The definition of "accredited investor" is expanded to include a family trust created by an accredited investor, provided that the majority of trustees are also accredited investors and the beneficiaries include individuals within the following prescribed class of family members: a spouse or former spouse, parent, grandparent, sibling, child or grandchild of the accredited investor.

Amendments to the Minimum Amount Exemption

Previously, an individual investor could purchase securities on a prospectus-exempt basis provided that the investment made by the individual was not less than $150,000. Following adoption of the amendments to NI 45-106, the minimum amount exemption will no longer be available to individuals. The CSA has clarified that the minimum amount exemption will remain available to holding corporations, provided that they are not being used solely to purchase securities under the exemption.

Going Forward

The amendments to NI 45-106 and the associated Companion Policy are evidence of a growing investor protection mandate of the CSA and a shift towards increased accountability on the part of issuers and advisors in the exempt market. In light of these changes, it is necessary for all issuers to give consideration to their current distribution and due diligence practices and procedures and consider whether updated procedures, policies, agreements, forms and other documentation need to be prepared prior to any future exempt securities offerings.

Visit CSA/ACVM for more information on the amendments.

Todd would like to thank Bradley Zander and Melissa Cattini of Aikins Law for their contributions to this article.

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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