As we have previously discussed, the CSA recently proposed amendments to the “accredited investor” prospectus exemption to require that individual accredited investors complete a Risk Acknowledgment Form (RAF) at the same time or before signing the purchase agreement in order for the accredited investor exemption to apply to a distribution.

Under the proposal, the RAF would include specific disclosure advising purchasers of the risks of investing in securities under the accredited investor exemption, having them acknowledge exactly how they satisfy the exemption and confirming the type and value of the securities they are purchasing. A salesperson involved in selling the securities would also have to sign and date the form, including particulars as to how they may be contacted and their registration status.

Risk Acknowledgment Form

In providing comments to the CSA on their proposal, we identified a number of concerns with the RAF. First, we anticipate that the RAF requirement will place an administrative burden on issuers, as the RAF must be presented to purchasers in physical form on one double-sided page and two copies of the form are required to be physically signed. In keeping with developing practices, the bulk of document execution and delivery now takes place electronically. The additional administrative burden may also create a disincentive for foreign issuers, in particular, to extend exempt offerings to Canadian-resident individuals who otherwise qualify as accredited investors. The proposal would also require that the issuer keep a copy of the RAF for eight years following the distribution. This requirement is not consistent with most record-retention requirements, and it is unclear from the proposal whether the RAF would have to be retained in physical form.

Further, most of the information included in the RAF is information that would typically already be included in subscription materials. Imposing the RAF requirement could create issues with respect to the validity of representations made in subscription agreements and the ability to rely on them. The RAF requirement would also effectively impose a due diligence obligation as to the basis of subscriber representations where, typically, unless a party is aware of a reason to question a particular representation, that party is entitled to rely on the representation without further investigation.

Finally, in respect of concerns regarding investors investing in inappropriate products or products that the investor does not understand, the proper avenue to address these concerns is through dealer “know your client”, “know your product” and suitability obligations. Mandating the use of a RAF will not address any investor knowledge gap. While these investor protections would not be available in cases of an investor purchasing securities directly from the issuer, these concerns could be addressed by requiring the issuer to disclose to the investor that the issuer is not a registrant and therefore is not subject to the same obligations vis-à-vis the investor as a dealer is.