The Canadian Securities Administrators (CSA) recently published final amendments to National Instrument 45-106 Prospectus and Registration Exemptions (to be renamed Prospectus Exemptions) (NI 45-106) relating to the accredited investor and minimum amount investment prospectus exemptions. Subject to Ministerial approval, the amendments will come into force on May 5, 2015.
From a fund manager/dealer’s perspective, the key changes are as follows:
- The minimum amount exemption (MA Exemption) is no longer available to individuals;
- The accredited investor exemption (AI Exemption) is amended to :
- in Ontario, allow fully managed accounts to purchase investment fund securities as an accredited investor, as is already permitted in other Canadian jurisdictions;
- add trusts established by accredited investors for their family members as a category of accredited investor;
- add a requirement to obtain a new “plain language” risk acknowledgement form (Form 45-106F9) from “individual” accredited investors;
In addition, the CSA provides additional guidance relating to practices for verifying if purchasers meet the conditions for relying on a prospectus exemption in amendments to Companion Policy 45-106CP Prospectus and Registration Exemptions (to be renamed Prospectus Exemptions) (CP 45-106).
The $150,000 threshold of the MA Exemption has not been changed. However, the MA Exemption will no longer be available to individual investors, as the CSA does not believe the threshold to be a proxy for sophistication or the ability to withstand financial loss for individual investors.
It should be noted that holdings companies of individual investors will be able to rely on the MA Exemption, unless these holding companies were created solely to purchase or hold securities under the MA Exemption. Holding companies created for tax and estate planning purposes or to ensure limited liability are considered by the CSA as being able to rely on the MA Exemption.
Fully Managed Accounts
The definition of “accredited investor” in Ontario will now allow fully managed accounts to purchase investment fund securities under the managed account category of the AI Exemption, as is already permitted in other Canadian jurisdictions.
The definition of “accredited investor” will now include family trusts established by an accredited investor for his or her family. It is important to note that a majority of the trustees of such family trusts will themselves need to be accredited investors and the beneficiaries of the trust must be limited to the accredited investor’s spouse, a former spouse of the accredited investor or a parent, grandparent, brother, sister, child or grandchild of that accredited investor, of that accredited investor’s spouse or of that accredited investor’s former spouse.
Risk Acknowledgement Form
For the AI Exemption to be available when distributing securities to individual accredited investors who are not permitted clients (as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103)), the fund manager/dealer will now be required to obtain a signed risk acknowledgment form (Form 45-106F9) from the individual at the same time or before they sign the agreement to purchase the securities. Form 45-106F9 must be received by investors as a separate document; it is not sufficient to simply include the information found in Form 45-106F9 in the subscription agreement.
This new requirement applies only in respect of individuals set out in paragraphs (j) (financial assets in excess of $1M), (k) (net income in excess of $200K or combined net income in excess of $300K) and (l) (net assets of at least $5M) of the “accredited investor” definition.
It does not apply in respect of individuals set out in paragraph (j.1) (financial assets in excess of $5M) of the “accredited investor” definition which are permitted clients under NI 31-103.
Prior to Form 45-106F9 being completed and signed by an investor, the information found in sections 1 (About your investment), 5 (Salesperson information) and 6 (For more information about this investment) must be completed by the fund manager/dealer.
Additional Guidance on Verifying Purchaser Status
CP 45-106 now contains additional guidance at section 1.9 on what steps the CSA expect issuers and dealers will carry out to determine they are able to rely on the various prospectus exemptions contained in NI 45-106. We encourage you to read this additional guidance prior to the coming into force of the recent amendments.
Coming into Force
It is anticipated that the amendments discussed above will come into force on May 5, 2015.
We encourage fund managers/dealers to familiarize themselves with these new amendments and to make appropriate changes to their disclosure documents (offering memorandum, subscription agreements, etc.) in order to be ready once the amendments come into force. Fund Managers/dealers should also make sure that your Forms 45-106F9 are prepared for subscriptions made by individual accredited investors on or after May 5, 105.
Conference and Assistance with Implementation
The Montreal office will hold a conference on April 16, 2015, specifically addressed to fund managers and dealers to go through some of the practical implication of the above changes.