On February 27, 2014, the Canadian Securities Administrators ("CSA") published the proposed amendments to National Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106").1 The proposed amendments primarily address the accredited investor prospectus exemption (the "AI Exemption") and the minimum amount investment prospectus exemption (the "MA Exemption"), alongside a number of housekeeping and information-gathering changes. The CSA is accepting comments on the proposed amendments until May 28, 2014.
AI & MA Proposed Amendments
Currently, section 2.3 of NI 45-106 allows accredited investors, purchasing securities as principals, to be exempt from the prospectus requirement.2 Under the existing NI 45-106, an individual accredited investor includes:
- An individual who, either alone or with a spouse, beneficially owns financial assets having an aggregate realizable value that before taxes, but net of any related liabilities, exceeds $1,000,000;
- An individual whose net income before taxes exceeded $200,000 in each of the 2 most recent calendar years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of the 2 most recent calendar years and who, in either case, reasonably expects to exceed that net income level in the current calendar year; or,
- An individual who, either alone or with a spouse, has net assets of at least $5,000,000.3
The proposed amendments would require all individual accredited investors, falling under the criteria listed in i) to iii) above, to complete and sign Form 45-106F9 Risk Acknowledgment Form for Individual Accredited Investorsprior to, or concurrent to, the purchase of securities.4 Form 45-106F9 would apply to all salespersons or finders involved in a trade with an individual investor but would not be required for individuals who satisfy the permitted client test under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.5 Furthermore, the CSA's proposed amendments would broaden the definition of accredited investor 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."6
With respect to the current MA Exemption, section 2.10 of the present NI 45-106 states that a person purchasing securities as a principal from a single issuer with an initial acquisition cost of not less than $150,000 is exempt from the prospectus requirements.7 The proposed amendments by the CSA would limit the availability of the MA Exemption to non-individuals only.8
Analysis & Comments
With respect to the AI Exemption, the intent of the CSA's amendments is to "help individual investors understand whether they qualify as accredited investors and the risks of investing in the exempt market."9 While the information contained in Form 45-106F9 may offer individual accredited investors a final sober thought with respect to their investments, it is unclear whether the form will have any appreciable effect on the investment patterns of individual investors. As noted above, the criteria for individual investors remain based solely on the individual investor's financial metrics.
With respect to the MA Exemption, the CSA's proposed amendments would effectively eliminate the MA Exemption for individual investors. While this exemption only represents approximately 1% of the amount invested by Canadians in 2011, it will remove a cost-effective alternative for investors who would not otherwise be able to invest under the AI Exemption or the other exemptions found in NI 45-106.10
It is important to note that the proposed amendments do not affect the investment opportunities for corporate investors. Under the proposed amendments, corporate investors will still be able to take advantage of the AI Exemption and the MA Exemption without any significant changes. On the other hand, individual investors will find that they are more restricted in their ability to invest under NI 45-106. However, individual investors may still be able to access the securities market under NI 45-106 by taking advantage of the following exemptions:
- private issue exemption;
- family, friends and business associates exemption;
- employee, director, officer and consultant exemption; or
- offering memorandum exemption.11
Individuals will need to ensure that they meet all of the conditions to fall under any of these particular exemptions.