On February 19, 2015, the Canadian Securities Administrators ("CSA") published CSA Notice of Amendments (the "Notice") to National Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106") relating to the accredited investor prospectus exemption ("AI Exemption"), the minimum amount investment prospectus exemption ("MA Exemption") and various consequential amendments (collectively, the "Amendments"). The consequential amendments reflect the repeal of Part 3 – Registration Exemptions of NI 45-106, the change in title of NI 45-106 from "Prospectus and Registration Exemptions" to "Prospectus Exemptions" and consequential changes to a number of policies to reflect the change in title in NI 45-106. As a result, the title of the current companion policy will be replaced with Companion Policy 45-106CP Prospectus Exemptions(the "Companion Policy"). It is anticipated that the Amendments will come into force on May 5, 2015, subject to receipt of all necessary ministerial approval. In Ontario, it is anticipated that the Amendments will come into force on the later of May 5, 2015 and the day on which subsection 12(2) of Schedule 26 of theBudget Measures Act, 2009 is proclaimed in force.
The intent of the Amendments is to enhance investor protection by addressing concerns that:
- some individual investors may not understand the risks involved in investing under the AI Exemption or may not actually qualify as accredited investors; and
- the threshold of $150,000 in the MA Exemption may not be a proxy for sophistication or ability to withstand financial loss for individual investors and may result in an over-concentration in one investment for an investor who is an individual, especially if that individual does not qualify for another exemption.
In addition, the definition of accredited investor in Ontario will be amended to allow fully managed accounts to purchase investment fund securities under the managed account category of the AI Exemption, to harmonize with other Canadian jurisdictions.
We previously reported about the changes proposed by the CSA in their February 27, 2014 notice in our article "Proposed Amendments to the Accredited Investor and $150,000 Minimum Amount Exemptions in National Instrument 45-106". As set out in the Notice, these proposed amendments included:
- The MA Exemption would be available only for distributions to non-individuals.
- The AI Exemption would be amended to:
- require individual accredited investors, except those who meet the permitted client test under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, to complete and sign a new risk acknowledgement form;
- require any salesperson or finder to complete and sign the new risk acknowledgement form;
- include family trusts established by an accredited investor for his or her family in the definition of accredited investor; and
- in Ontario, allow fully managed accounts to purchase investment fund securities under the managed account category of the AI Exemption, corresponding with the rest of the CSA.
- The Companion Policy would be modified to provide additional guidance on steps persons relying on the AI Exemption should take to verify accredited investor status.
- The report of exempt distribution (Form 45-106F1 and, in BC, Form 45-106F6) would be amended to require additional information from issuers, including identifying the category of accredited investor of each purchaser and providing more information on any person being compensated in connection with the distribution.
- Housekeeping amendments resulting from the removal of the dealer registration exemptions in Part 3 of NI 45-106 effective March 27, 2010.
These proposed amendments were open for comments until May 28, 2014. After considering the comments received, some non-material revisions were made to the proposed amendments. The Notice sets out the key changes from the proposed amendments, whereby the CSA has:
- clarified that the categories of individual accredited investor who must sign the risk acknowledgement form are those individuals set out in paragraphs (j), (k) and (l) of the definition of "accredited investor".
- revised Form 45-106F9 Form for Individual Accredited Investors to make it easier for persons using the AI Exemption to complete and for investors to understand.
- removed the requirement for salespersons and finders to sign Form 45-106F9.
- clarified and reorganized the guidance in the Companion Policy on practices for verifying whether purchasers meet the conditions of certain exemptions, including the AI Exemption, the private issuer prospectus exemption, the family, friends and business associates prospectus exemption and, in some jurisdictions and the eligible investor definition under the offering memorandum prospectus exemption.
- provided additional guidance in the modified Companion Policy on the meaning of close personal friend and close business associate.
- deferred making amendments to the report of exempt distribution, as these changes will be addressed in a separate CSA project.