The securitized product rules proposed by the Canadian Securities Administrators (CSA) seek to, among other things, narrow the class of investors who can buy securitized products on an exempt basis. In subsequent blog pieces, we will investigate the disclosure that is required for exempt offering under the new regulatory regime at the time of issuance as well as on a continuous basis post-issuance.
Item 3 of the proposed CSA rules deals with the various amendments to the current prospectus and registration exemption regime in now found in National Instrument 45-106 Prospectus and Registration Exemptions(NI 45-106), as well as the proposed new exemption which is specific to securitized products. In the following, we highlight the changes likely to have the largest impact on the Canadian securitized products market.
The proposal makes a number of prospectus exemptions currently in NI 45-106 unavailable for distributions of securitized products, specifically:
- accredited investor (section 2.3);
- private issuer (section 2.4);
- offering memorandum (section 2.9);
- minimum amount investment (section 2.10);
- financial institution or Schedule III bank specified debt (subsections 2.34(2)(d) and (d.1)); and
- short-term debt (section 2.35).
These above-listed exemptions would be replaced with a three-part exemption requiring that each investor (i) purchases the securitized product as principal, (ii) fits into the newly proposed definition of an “eligible securitized product investor” and (iii) is delivered an information memorandum on or before their purchase.
An “eligible securitized product investor” is similar in large part to the old definition of “accredited investor” in NI 45-106 and is essentially the same as the definition of “permitted client” in NI 31-03 Registration Requirements and Exemptions, the main differences being the deletion or modification of the asset and income tests applicable to individuals and small investors. Whereas previously, such investors were often able to rely in items (j) through (m) in the definition of “accredited investor” (as set out below), items (k) and (l) have been deleted, and the thresholds in items (j) and (m) have been drastically increased to $5,000,000 and $25,000,000 respectively.
(j) an individual who, either alone or with a spouse, beneficially owns, directly or indirectly, financial assets having an aggregate realizable value that before taxes, but net of any related liabilities, exceeds $1,000,000;
(k) an individual whose net income before taxes exceeded $200,000 in each of the two most recent calendar years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of the two most recent calendar years and who, in either case, reasonably expects to exceed that net income level in the current calendar year;
(l) an individual who, either alone or with a spouse, has net assets of at least $5,000,000;
(m) a person, other than an individual or investment fund, that has net assets of at least $5,000,000 as shown on its most recently prepared financial statements, and has not been created or used solely to purchase or hold securities as an accredited investor;
Additional amendments have been proposed to the parts of the “accredited investor” definition which are applicable to investment funds. In particular, under the proposed regime investments funds would have to be managed by a person registered as an investment fund manager under the securities legislation of a jurisdiction in Canada, or advised by a person authorized to act as an adviser under the securities legislation of a jurisdiction in Canada. So, for instance, the creation of an investment product by a foreign non-registered entity or even a sophisticated market participant to issue ABS where the investment manager and/or an investment adviser does not have the appropriate securities registrations could be problematic in the exempt space.
The practical implications of narrowing the scope of exempt investors in securitized products remains to be seen. It is possible that the exempt investor rules may not have a material impact on the actual scope of the investor base for securitized products, but time will tell whether that is true. Please contact either of the authors to share your own thoughts on the proposed new regulatory regime for exempt distributions of securitized products.