The CSA announced last week the adoption of amendments to the "accredited investor" and "minimum amount investment" prospectus exemptions that will, among other things, result in significant changes when selling securities to individual investors, including the requirement to obtain a written Risk Acknowledgment Form (RAF) from individual accredited investors (AIs) and the elimination of the $150,000 minimum investment amount (MI) exemption when selling to individuals.
As we discussed last year, the CSA first proposed the amendments in February 2014. These included proposals to require the RAF for certain investors purchasing as AIs as well as significant changes to the form of exempt trade report that is filed with the regulators. The final version of the amendments announced last week retain the RAF requirement but have deferred changes to the report of trade to a future point in time. They also make other revisions, including those made to reflect comments received from stakeholders on the initial proposal published in March of 2014.
Risk Acknowledgement Form
Despite concerns that the new obligations would impose unnecessary administrative burdens on issuers, the final amendments have retained the RAF requirement. Persons relying on the AI exemption will be required to obtain a completed and signed RAF when distributing securities to individual AIs who qualify as AIs under the existing income or the asset tests. The RAF is in a prescribed form and includes specific disclosure advising purchasers of the risks of investing in securities and has them acknowledge exactly how they satisfy the AI test. It also requires identification of any relevant “salesperson” that meets with or provides information to the purchaser with respect to the investment. This includes representatives of the issuer, selling security holder, registrant or registration exempt firm or individual, as applicable. The RAF must be completed and signed at the same time as the individual signs the agreement to purchase the security and retained for a period of 8 years from the distribution.
Notably, the RAF will not be required in respect of a new category of individual AIs, being an individual who owns financial assets having an aggregate realizable value net of liabilities of $5,000,000. This additional category will be familiar as it forms part of the “permitted client” category under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations and allows for the waiver of “know your client” and suitability obligations of registered dealer and advisers.
While revisions have been made to the earlier proposals (including by revising the RAF so that persons who meet with or provide information to the purchaser would no longer be required to sign the form, and clarifying that the form may be executed and retained in electronic form), the changes are considered non-material. According to the CSA, the RAF will improve investor protection "by itemizing the risks associated with products sold under prospectus exemptions".
Changes to prospectus exemptions
The MI exemption, being available to purchasers investing a minimum amount of $150,000 at the time of distribution, will no longer be available to individual investors. However, in their response to specific comments, the CSA have clarified that it will be available to holding companies provided they have not been created or used solely to purchase securities under the exemption.
With respect to the AI exemption, a new category of AI has been added, being a trust established by an AI for the benefit of the AIs family members provided all of the trustees are AIs and all of the beneficiaries fall within the prescribed classes of family members. Further, in Ontario, fully managed accounts will also now be permitted to purchase investment fund securities under the managed account category of the AI exemption, harmonizing with the rest of the CSA.
Determining when the exemption is available
When relying on the AI exemption or any other exemption that is based on the characteristics of the purchasers, it has generally been the case that the issuer or seller relying on the exemption was responsible for determining whether the exemption was available, typically done through representations or certification as to a purchaser’s status. Revised guidance in the Companion Policy to NI 45-106 has now been enhanced to indicate that it may not be sufficient to accept standard representations from the purchasers and that additional steps may be required to verify that the investor in fact meets the required status. This may include, in the least, enhanced or more detailed questions that aim to ensure the purchaser understands the requisite test and to elicit details that allow the seller to be satisfied that the test is met. Beyond the new RAF requirement, the proposals released last year also included significant changes to the form of report required to be filed following a private placement, including a new requirement to identify each category of purchaser under a prospectus exemption. Ultimately, however, the CSA have decided against making these proposed changes at this time, and will address any potential changes as a separate project. In considering future changes, the CSA state that they will consider stakeholder comments on the proposals, including concerns that Canada has two separate forms for reporting exempt distributions (Form 45-106F6 in B.C. and Form 45-106F1 in all other jurisdictions) and in respect of additional information requirements.
The amendments also result in consequential amendments to a number of other rules and policies and assuming Ministerial approvals, will come into force on May 5, 2015. Concurrently, amendments were also announced to the short-term debt and short-term securitized products prospectus exemptions and to make the “family, friend and business associates” exemption available in Ontario which we have separately written about.