On May 5, 2015, certain changes to the prospectus exemptions under National Instrument 45-106 Prospectus Exemptions (“NI 45-106”) come into force. These changes include amendments to the accredited investor exemption and the minimum amount investment exemption, and in Ontario, a new “family, friends and business associates” exemption (the “FFBA exemption”). Further details are set out below:
- The accredited investor exemption has been amended to include new categories of accredited investors and a new requirement that certain individual accredited investors complete a risk acknowledgement form prior to making an investment have been added to the accredited investor exemption. The new categories of accredited investor include: (i) individuals who have at least $5 million in pre-tax net financial assets; (ii) family trusts established by an accredited investor for his or her family where the majority of the trustees are accredited investors and the beneficiaries fall within a prescribed class of family members; and (iii) in Ontario, fully managed accounts to purchase investment fund securities.
- The minimum amount investment exemption has been amended to apply only to non-individuals to address concerns that the $150,000 threshold does not represent a proxy for sophistication or ability to withstand financial loss. The definition of “individual” under this exemption does however specifically exclude, amongst others, partnerships and trustees; a natural person acting in the capacity of trustee; and holding companies, provided any such holding company was not created solely to rely on this exemption.
- The new Ontario FFBA exemption replaces the former “founder, control person and family” exemption and is largely harmonized with the family, friends and business associates exemptions in other provinces. In Ontario, however, the FFBA exemption is not available to investment funds, and investors purchasing securities under this exemption will now be required to complete a risk acknowledgement form disclosing details of the relationship with whom the investor has asserted a relationship. This risk acknowledgement form must be retained by a seller making the distribution of securities for 8 years after the distribution.
Changes to the Companion Policy to NI 45-106 will also come into force on May 5, 2015. The revised Companion Policy provides new guidance about compliance and verification procedures for sellers when relying on prospectus exemptions to sell securities to investors. The Companion Policy places an onus on the seller relying on the applicable prospectus exemption to ensure the terms of the exemption are met. Certain steps are laid out in the Companion Policy for sellers to follow to reasonably confirm the availability of a prospectus exemption including: (1) understanding the terms and conditions of the exemption; (2) establishing appropriate policies and procedures; (3) verifying the purchaser meets the exemption; and (4) keeping relevant and detailed document to evidence steps taken to establish exemption availability. The Companion Policy also provides guidance about the meaning of a “close personal friend” and a “close business associate”, setting out relevant factors to determine eligibility, including the length and nature of relationship between the close personal friend or close business associate and the seller contact.