On February 19, 2015, the Canadian Securities Administrators (“CSA”) announced the adoption of certain amendments to National Instrument 45-106 – Prospectus and Registration Exemptions (“NI 45-106”) that affect the following private placement or prospectus exemptions:
- the accredited investor exemption,
- the minimum amount or $150,000 prospectus exemption,
- the short term debt prospectus exemption, and
- the family, friends and business associates prospectus exemption.
In addition, the Ontario Securities Commission (the “OSC”) is introducing a “family, friends and business associates” prospectus exemption, which brings Ontario in line with other Canadian jurisdictions.
The amendments are expected to come into force on May 5, 2015. Each of these is discussed in more detail below.
A. Accredited Investor Prospectus Exemption
The amendments to the accredited investor prospectus exemption (the “Accredited Investor Exemption”):
- introduce a new risk acknowledgement form for many individual accredited investors (individuals with net financial assets of more than $5,000,000 do not need to sign the form) that describes, in plain language, the categories of individual accredited investors and identifies the key risks associated with purchasing securities in the exempt market,
- provide expanded guidance on the steps a seller should take to verify the status of purchasers acquiring securities under prospectus exemptions, including the Accredited Investor Exemption,
- allow fully managed accounts to purchase investment fund securities using the managed account category of the Accredited Investor Exemption in Ontario, as currently permitted in all other Canadian jurisdictions, and
- make certain family trusts accredited investors.
The amendments to the Accredited Investor Exemption do not make changes to the net income, net financial asset or net asset thresholds for an individual to qualify as an accredited investor. Nor has any form of annual indexing been introduced. The amendments aim to enhance investor protection instead through greater use of “health warnings” and greater emphasis on ensuring investors are in fact qualified to purchase. The enhanced guidance on steps that a seller must take to ensure an investor is qualified, while arguably being simply more explicit about current compliance responsibilities and liability in a private placement, does make some statements to suggest that the current market practice may no longer be adequate. The guidance refers to the seller obtaining information from the purchaser in order to determine whether an investor has the requisite income, assets or relationship to meet the terms of the exemption, reliance on standard representations in a subscription agreement being potentially insufficient without additional steps, and being able to explain to the regulators why steps were or were not taken to verify status. Combined with a statement that the regulators expect that issuers will have policies and procedures with respect to reliance on prospectus exemptions, future private placements to individuals could be more intrusive and burdensome than is currently the case.
B. $150,000 Minimum Amount Prospectus Exemption
Currently, no prospectus is required for a distribution of securities provided that the purchaser invests a minimum of $150,000 (the “Minimum Amount Exemption”). However, the CSA has determined that this threshold may not be a proxy for sophistication or the ability to withstand financial loss for individual investors, and may encourage individual investors to over-concentrate in a single investment, especially in some cases where leverage is involved. As a result, the amendments will no longer permit an individual investor to utilize the Minimum Amount Exemption.
The Minimum Amount Exemption will, however, remain available for trades made by non-individual investors.
C. Short-Term Debt Prospectus Exemption
The amendments to the short-term debt prospectus exemption (the “Short-Term Debt Exemption”) are intended to address investor protection and systemic risk concerns. The amendments will modify the credit ratings required to distribute short-term debt, primarily corporate commercial paper, under the Short-Term Debt Exemption, so as to (i) remove a regulatory disincentive for some commercial paper issuers to obtain an additional credit rating; (ii) provide consistent treatment of commercial paper issuers with similar credit risk; and (iii) maintain the current credit quality of commercial paper distributed under the Short Term Debt Exemption.
In addition, the amendments make the Short-Term Debt Exemption unavailable for short-term securitized products, which are primarily asset-backed commercial paper, and create a new prospectus exemption for the distribution of short-term securitized products (the “Short-Term Securitized Products Exemption”). The creation of the Short-Term Securitized Product Exemption is intended to support improved practices in the asset-backed commercial paper market and ensure its continued stability through the implementation of conditions relating to credit ratings, liquidity, underlying asset pools and initial and ongoing disclosure.
D. Family, Friends and Business Associates Prospectus Exemption
On February 19, 2015, the OSC announced the introduction of a family, friends and business associates prospectus exemption (the “FFBA Exemption”), the purpose of which is to provide a cost-effective way for issuers to raise capital from investors who are principals of the business or within the personal networks of the principals of the business.
The FFBA Exemption is premised on investors having a sufficiently close relationship with a principal of the issuer to be in a position to assess the capabilities and trustworthiness of the principals and to access information about their investment. The FFBA Exemption also proposes a requirement for investors to sign a risk acknowledgement form highlighting the key risks associated with the investment and confirming how the investor qualifies to make the investment.
The FFBA Exemption seeks to harmonize in many respects an exemption that is currently available in other Canadian jurisdictions, in an effort to provide early stage issuers with greater access to capital at a critical stage of their development on one hand, while on the other hand providing investors with greater access to opportunities to invest in issuers at the ground level.
Update on Proposed Prospectus Exemptions and Proposed Amendments
A. Existing Security Holder Prospectus Exemption
On February 11, 2015, a new prospectus exemption became effective in Ontario that allows public companies listed on the Toronto Stock Exchange, the TSX Venture Exchange, the Canadian Securities Exchange, or the Aequitas NEO Exchange to raise capital from existing investors in reliance on the issuer’s public disclosure record. The exemption is substantially harmonized with a similar exemption currently permitted in other Canadian jurisdictions, and incorporates important investor protection measures including, among other things, that providing advice regarding the suitability of the investment has not been obtained, an investor will be limited in the amount they are eligible to invest to $15,000 in the previous 12 month period under the exemption.
A copy of the OSC’s Notice of Amendments published on November 27, 2014 is available here.
B. Proposed Offering Memorandum, Crowdfunding, and Rights Offering Prospectus Exemptions
On March 20, 2014, the OSC published for comment proposed amendments that would introduce an offering memorandum prospectus exemption (the “Offering Memorandum Exemption”) and a crowdfunding prospectus exemption along with regulatory requirements applicable to an online crowdfunding portal described in proposed Multilateral Instrument 45-108 – Crowdfunding (collectively, the “Crowdfunding Regime”).
The comment period for the proposed Offering Memorandum Exemption and Crowdfunding Regime ended on June 18, 2014. The OSC is in the process of reviewing the comments and is aiming to publish the Offering Memorandum Exemption and the Crowdfunding Regime either in final form or, if warranted, for a second comment period, in summer 2015.
On November 27, 2014, the CSA published for comment proposed amendments that would streamline the existing rights offering prospectus exemption for non-investment fund reporting issuers, while also addressing compliance and investor protection concerns. The comment period for the proposed amendments to the rights offering prospectus exemption ends on February 25, 2015.
C. Proposed Changes to Report of Trades
On March 20, 2014, the OSC published two proposed new reports of exempt distribution for use in Ontario and certain other jurisdictions:
- Form 45-106F10 Report of Exempt Distribution for Investment Fund Issuers (Alberta, New Brunswick, Ontario and Saskatchewan), and
- Form 45-106F11 Report of Exempt Distribution for Issuers Other Than Investment Funds (Alberta, New Brunswick, Ontario and Saskatchewan).
The comment period ended on June 18, 2014, and in response to comments received regarding the need to harmonize the reports of exempt distribution across the CSA, the OSC is currently working with CSA members to harmonize reporting obligations to the extent possible. A second comment period regarding the proposed reports of exempt distribution is anticipated in spring 2015. The OSC continues to require a Form 45-106F1Report of Exempt Distribution be filed for distributions in CSA jurisdictions other than British Columbia, while issuers are generally required to file a Form 45-106F6 British Columbia Report of Exempt Distribution in British Columbia.