Generally, unless there is an applicable exemption, securities of a company cannot be distributed in Canada unless a prospectus has been filed. One common exemption relied upon by private companies is known as the “private issuer” exemption; however, this exemption is only available to issuers that meet certain criteria, including having less than 50 shareholders (not including employees and former employees) and having constating documents (e.g., articles of incorporation) which restrict the transfer of the company’s shares.
If the criteria of the “private issuer” exemption cannot be met, another commonly used prospectus exemption is the “accredited investor” exemption. On May 5, 2015 previously announced amendments to the accredited investor exemption took effect. Private, as well as public issuers, should take note of these amendments.
According to the Canadian Securities Administrators (a group consisting of securities regulators from each of the 10 provinces and 3 territories in Canada), the recent amendments to the accredited investor exemption are intended to address the concern that some individual investors may not understand the risks of investing under the accredited investor exemption or may not in fact qualify as accredited investors. Therefore, one of the most significant amendments is the requirement that individuals relying on the accredited investor exemption (other than an individual who has financial net assets in excess of $5 million) sign and complete a ‘Risk Acknowledgement Form for Individual Accredited Investors’. In addition to providing a list of eligible accredited investor categories, the form provides the individual with prominent disclaimers regarding the risks involved in the investment, including a prominent disclaimer stating “WARNING! This investment is risky. Don’t invest unless you can afford to lose all the money you pay for this investment.”
Other amendments include: (i) an amendment to the definition of accredited investor in Ontario to allow fully managed accounts to purchase investment fund securities in Ontario; and (ii) a change in the definition of accredited investor to include a family trust established by an accredited investor for his or her family, provided the majority of trustees of the family trust are accredited investors. As well, greater guidance is now provided on the practices of an issuer for verifying accredited investor status and the conditions of certain other exemptions.
Companies issuing securities to investors relying on the accredited investor exemption should review the amendments and seek further guidance from legal counsel to ensure adherence to the new rules.