The Canadian Securities Administrators (CSA) and Ontario Securities Commission (OSC) have finalized significant amendments to National Instrument 45-106 Prospectus Exemptions (NI 45-106) and the Companion Policy 45-106CP Prospectus Exemptions (Companion Policy) (which includes dropping “and Registration” from their names, since they no longer deal with registration). These amendments include changes to the accredited investor prospectus exemption (Accredited Investor Exemption), minimum amount investment prospectus exemption (Minimum Amount Exemption) and the short-term debt prospectus exemption (Short-Term Debt Exemption) contained in NI 45-106 and the introduction of a family, friends and business associates prospectus exemption (Family, Friends and Business Associates Exemption) in Ontario by the OSC.
The extensive additional information changes for reporting private placements, in up to four different forms, originally proposed in March 2014 (see our April 2014 Blakes Bulletin: Haven’t You Heard? It’s All Being Changed – New Proposals to Private Placement Regime), have been deferred pending a separate project. The CSA said it “recognizes the importance of having harmonized forms.”
The other substantive changes to the private placement exemptions proposed in March 2014 will come into effect as proposed.
See our February 2015 Blakes Bulletin: New Securities Rules for ABCP Conduits Coming into Effect May 5, 2015 issued contemporaneously with this bulletin that describes additional amendments to NI 45-106 related to short-term securitized products.
ACCREDITED INVESTOR EXEMPTION
In Ontario, a registered portfolio manager will qualify as an accredited investor when purchasing investment funds for a fully managed account, the same as now in all other jurisdictions of Canada.
Accredited investors will now include family trusts established by an accredited investor for his or her family.
The other amendments to the Accredited Investor Exemption are largely intended to address concerns that some individual investors may not understand the risks of investing under the exemption or may not in fact qualify as accredited investors.
Individual accredited investors must receive and sign back a prescribed risk acknowledgement form before the individual signs an investment purchase agreement, unless the individual beneficially owns net financial assets exceeding C$5-million.
There is expanded detail set out in Companion Policy 45-106 around the steps that distributors must take to verify that a purchaser is actually qualified as an accredited investor. The CSA state: “It will not be sufficient for the seller to accept standard representations in a subscription agreement or an initial beside a category . . . unless the seller has taken reasonable steps to verify the representations made by the purchaser.” For instance, if the category for exemption relies upon income or asset tests, the CSA say the seller should ask questions to elicit details about the purchaser’s financial situation, and if any concerns exist, make further enquiries or ask to see documents that independently confirm the purchaser’s claims.
MINIMUM AMOUNT INVESTMENT
The minimum amount exemption, where an investor acquires securities having a cost of at least C$150,000, will no longer be available if the investor is an individual.
SHORT-TERM DEBT EXEMPTION
The Short-Term Debt Exemption has also been amended to modify the credit ratings required to distribute short-term debt, which is primarily commercial paper. These amendments primarily modify the current split rating condition that short-term debt securities must satisfy in order to qualify for the Short-Term Debt Exemption. The net effect is that short-term debt will have to satisfy the following conditions:
- Rating Threshold Condition (unchanged): The short-term debt has at least one rating at or above DBRS R-1 (low), S&P A-1 (low) (Canada national scale), Moody’s P-1, or Fitch F1.
- Modified Split Rating Condition: The short-term debt has no rating below DBRS R-1 (low), S&P A-1 (low) (Canada national scale) or A-2 (global scale), Moody’s P-2, or Fitch F2.
The amendments to the Short-Term Debt Exemption are intended to remove the regulatory disincentive for some commercial paper issuers to obtain an additional credit rating, provide consistent treatment of commercial paper issuers with similar credit risk and maintain the current credit quality of commercial paper distributed under the Short-Term Debt Exemption.
FAMILY, FRIENDS AND BUSINESS ASSOCIATES EXEMPTION
The OSC’s new Friends, Family and Business Associates Exemption is available to reporting and non-reporting issuers, other than investment funds, to provide a cost-effective way for issuers to raise capital from their networks of family, close personal friends and close business associates.
The Friends, Family and Business Associates Exemption applies to a distribution of any security by an issuer or a selling security holder to directors, executive officers, control persons and founders of an issuer as well as family members, close personal friends and close business associates of directors, executive officers, control persons or founders. The onus is on the issuer or selling-security holder to establish whether a close personal relationship exists. This is generally defined as having known an individual for a sufficient period of time to be in a position to assess their capabilities and trustworthiness.
The Friends, Family and Business Associates Exemption is largely harmonized with an exemption that is currently available in other Canadian jurisdictions. The key differences in Ontario are:
- the exemption is not applicable to investment funds; and
- the exemption requires a risk acknowledgement form unique to Ontario (new Form 45-106F12) to be signed by each of the purchaser, the director, executive officer, control person or founder of the issuer with whom the purchaser has asserted the relationship, if applicable, and the issuer.
The Friends, Family and Business Associates Exemption is the second of four potential new exemptions to be adopted by the OSC as part of its exempt market reform initiative, first published for comment in March 2014. The new exemptions are intended to provide low-cost access to capital for early-stage issuers. The security holder prospectus exemption—the first to be adopted—came into effect on February 11, 2015, and the final two, an offering memorandum prospectus exemption and a crowdfunding prospectus exemption together with a registration regime for online funding portals, remain under consideration.
Provided all necessary ministerial approvals are obtained, the amendments will come into force on May 5, 2015. In Ontario, the amendments to the Accredited Investor and Minimum Amount exemptions will come into force on the later of May 5, 2015 and the date on which subsection 12(2) of Schedule 26 of the Budget Measures Act, 2009 is proclaimed in force.