Two recent British Columbia Securities Commission (“BCSC”) cases demonstrate the standard required of an issuer that wishes to rely on an exemption from the prospectus requirement when undertaking a private placement financing. In Cinnabar Explorations Inc. (2013 BCSECCOM 361) and Photo Violation Technologies Corp. (2012 BCSECCOM 284; 2013 BCSECCOM 276), the BCSC found that the issuers did not properly rely on exemptions from the prospectus requirements under National Instrument 45-106.
Companion Policy 45-106CP provides some guidance on proper compliance:
A person distributing or trading securities is responsible for determining when an exemption is available. In determining whether an exemption is available, a person may rely on factual representations by a purchaser, provided that the person has no reasonable grounds to believe that those representations are false. However, the person distributing or trading securities is responsible for determining whether, given the facts available, the exemption is available. Generally, a person distributing or trading securities under an exemption should retain all necessary documents that show the person properly relied upon the exemption.
For example, an issuer distributing securities to a close personal friend of a director could require that the purchaser provide a signed statement describing the purchaser’s relationship with the director. On the basis of that factual information, the issuer could determine whether the purchaser is a close personal friend of the director for the purposes of a family, friends and business associates exemption. The issuer should not rely merely on a representation: “I am a close personal friend of a director”. Likewise, under the accredited investor exemptions, the seller must have a reasonable belief that the purchaser understands the meaning of the definition of “accredited investor”. Prior to discussing the particulars of the investment with the purchaser, the seller should discuss with the purchaser the various criteria for qualifying as an accredited investor and whether the purchaser meets any of the criteria.
It is not appropriate for a person to assume an exemption is available. For instance a seller should not accept a form of subscription agreement that only states that the purchaser is an accredited investor. Rather the seller should request that the purchaser provide the details on how they fit within the accredited investor definition.
In Photo Violation Technologies Corp., the BCSC stated that “the definition of ‘accredited investor’ for the purposes of the exemption is technical and excludes assets that would, in other contexts, be included in an individual’s net worth – for example, the individual’s personal residence. Investors who indicated on their subscription forms that they were accredited were not provided with the definition of accredited investor nor with the appropriate interpretation of the exemption. In these circumstances, it has not been established that any of them were, in fact, accredited investors.”
To summarize, a mere representation (or a “tick of the box” on an accredited investor questionnaire) on a private placement subscription agreement is not sufficient to make a determination whether an exemption is available. The issuer must take additional steps to establish and document facts that demonstrate the exemption.