Canada: Shake-Up Coming For Canadian Private Placement Regime?

Last Updated: February 2 2009
Article by Gregory Hogan

In response to the seizure of the market for asset-backed commercial paper (ABCP) in Canada, the Canadian Securities Administrators formed a working group to consider certain regulatory issues arising out of this seizure. The working group prepared a consultation paper (the ABCP Paper), the purpose of which was to propose responses to the causes of the turbulence in the credit markets for which regulatory action may be necessary or appropriate and to seek public comment thereon. While the bulk of the ABCP Paper was focussed on the matters specific to the ABCP market, the working group concluded that the existing private placement regime applicable for all securities may require changes.

In direct response to the ABCP crisis, the working group proposed that the existing prospectus and registration exemption for short-term debt be made unavailable for asset-backed short-term debt. While this may have significant effects on that particular market, the working group went further, calling into question the income and net financial asset tests used to qualify individuals as accredited investors for any private placement. As a result of numerous retail investors having significant assets invested in ABCP, the working group is questioning whether these thresholds for accredited investor status appropriately identify those persons able to withstand the loss of their investment. Additionally, the working group is questioning whether the $150,000 minimum amount exemption is at all justifiable.

The working group has not suggested in what manner the private placement regime might be changed (other than by implying that the thresholds are too low or, in the case of the minimum amount exemption, not appropriate), but has called for a separate review of the specific exemptions noted above and an overall review of the regime, the rationale for all exemptions and whether some form of disclosure in connection with private placements should be mandated.

While it is premature to speculate as to the outcome of any review of specific exemptions or of the regime generally, the income and net financial asset thresholds are clearly important to the exempt market, with significant numbers of accredited investors in more widely marketed private placements qualifying under these tests. Significant changes to these tests could impact issuers' ability to access capital and non-institutional investors through the exempt market. Equally important, the minimum amount exemption has proven to be very useful in facilitating private placements where, for example, accredited investor status is unable to be confirmed prior to closing and in private placements and other transactions where a party may not have technical accredited investor status. The difficulty of relying on the "private issuer" exemption has made the minimum amount exemption especially useful.

Generally, exemptions from the prospectus and registration requirements of securities laws are premised on there being no need for the disclosure and protections provided by a prospectus (e.g., due to information being available in another way, due to the sophistication of the investor or due to close connections with the issuer), on the ability to withstand a loss (measured by the financial tests in accredited investor definitions or by minimum amount) or on the nature of the securities (e.g., highly rated commercial paper). Other reasons may include encouraging small business financing or to facilitate certain capital markets transactions.

The problems with ABCP have shown that some safe securities may not be as safe as thought. The reaction by regulators - that a modification to this exemption may be necessary - is not unexpected. However, it is not as clear that because some accredited investors and others investing large amounts have suffered losses that the related exemptions are broken.

The problems with ABCP seem to stem, as the working group has noted, from an overreliance on ratings as a measure of overall safety and from failures in the "know your client" and "know your product" duties of those selling ABCP leading to purchases of, or quantities of, ABCP that may not have been suitable for particular investors.

The financial tests in the prospectus and registration exemptions can be viewed as proxies for the ability to withstand loss. The working group appears to be of the opinion that the ability to withstand a loss may not be assured by the current financial tests. It is not being suggested that all persons should be protected from losses, but it is suggested that certain persons should not be allowed to participate in certain financings due to their financial situation.

The question that will be considered if the review is undertaken is, basically, who should be permitted to forgo the protections afforded by prospectus-level disclosure and issuer liability. It has not yet been suggested that a class of sophisticated persons that should be able to forgo these protections is inappropriate. Membership in that class may see changes though.

With the focus on ability to withstand loss in the consultation paper, the issue of whether protecting only certain persons from losses that are not caused by misrepresentations, fraud or the like is either an appropriate goal for securities legislation or whether arbitrary financial tests will help achieve that goal is highlighted. On the former, securities legislation does not purport, in general, to protect persons from their own bad investment decisions in the secondary market, where they are free to invest their money and lose it all. The only check is the role of an individual's investment adviser or other dealer representative, if any, who is intended to ensure that the risk is understood and that the risk is consistent with the investors risk profile and objectives. With respect to the latter, a financial test that measures the ability to withstand a loss would have to take into consideration all other investments, all other potential liabilities, other business interests, the relative size of an investment against the person's overall portfolio and net worth and likely numerous other criteria - any fixed threshold could not assess this ability in isolation.

The issue ultimately may be how one measures the sophistication of the investor. Alternatives to financial tests include greater reliance on clear and voluntary assumptions of risk by persons with sufficient investment experience (the assessment of which may involve similar quantitative proxies) and greater reliance on advice from registered dealers and advisers who comply with "know-your-client" and "know-your-product" obligations (e.g., by limiting the registration exemption only). Securities legislation contemplates a buyer beware approach in many instances and the recent fair dealing initiative from the OSC specifically contemplated continuing a buyer beware system for certain investors. The private placement regime should likewise accommodate such an approach.

We would expect that proposals, if any, to change the private placement regime will be given due deliberation by regulators before being formally put out for comment, and that any significant changes will be appropriately considered for their impact on the exempt market by all participants. Past experience has shown that changes to exemptions take some time to be adjusted to. We will be monitoring any proposals and will keep our e-lert subscribers advised.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Gregory Hogan
In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions