The Canadian Securities Administrators (CSA) recently published for comment proposed amendments (the Proposed Amendments) to National Instrument 45-106 - Prospectus and Registration Exemptions (NI 45-106).
If adopted, the Proposed Amendments would, among other things:
- require issuers relying on the accredited investor prospectus exemption (the AI Exemption) to obtain a signed risk acknowledgement form (the RA Form) from individual accredited investors who are not “permitted clients”;
- restrict the minimum amount prospectus exemption (the MA Exemption) to non-individual investors; and
- harmonize the definition of accredited investor to allow fully managed accounts to purchase investment fund securities in Ontario.
The CSA believes the Proposed Amendments will enhance protection of individual investors.
It is proposed that the following changes be made to the AI Exemption:
- All individual accredited investors other than “permitted clients” would be required to complete and sign a new RA Form that describes, in plain language, the categories of individual accredited investor and the protections an investor is renouncing by purchasing under the exemption. Individual permitted clients must own financial assets in excess of $5 million.
- Any director, officer or employee of the issuer and any other person involved in meeting with or providing information to the individual accredited investor would be required to complete and sign the RA Form.
- The proposed amendments provide additional guidance in the companion policy on the steps issuers should take to verify accredited investor status. These steps include explaining the different conditions of the exemption and asking questions to obtain factual information from purchasers about their income or assets before discussing the investment. This proposed guidance seems to impose additional compliance requirements on an issuer of privately placed securities, as an issuer is currently permitted to rely on a purchaser’s factual representations regarding accredited investor status provided the issuer has no reasonable grounds to believe those representations are false.
- An issuer would be required to identify the category of accredited investor of each purchaser in the report of exempt distribution the issuer files.
- The definition of accredited investor would be amended to include family trusts established by an accredited investor for his or her family, provided the majority of trustees of the family trust are accredited investors.
Proposed amendment to the MA Exemption
It is proposed that the MA Exemption be amended so it is only available for distributions to non-individuals. The CSA believes the amendment to the MA Exemption will reduce the risk of individual investors over-concentrating their investable assets in one issuer while retaining the efficiency of the exemption for corporate and institutional investors. The amendment also addresses a CSA concern that the amount invested is not a good proxy for individual investors’ sophistication or ability to withstand financial loss.
The Ontario Securities Commission proposes to amend the definition of accredited investor to allow fully managed accounts to purchase investment fund securities in Ontario. This change would harmonize the managed account category of the AI Exemption across Canada.
Request for comments
The CSA welcomes all comments on the Proposed Amendments. Comments must be submitted in writing on or before May 21, 2014.