On February 27, 2014, the Canadian Securities Administrators (CSA) published for comment proposed amendments to National Instrument 45-106 Prospectus and Registration Exemptions. The proposed amendments, if adopted, would require individuals relying on the accredited investor prospectus exemption in section 2.3 of NI 45-106 and section 73.3 of the Securities Act (Ontario) (the AI Exemption) to obtain a signed risk acknowledgement form in Form 45-106F9 Risk Acknowledgement Form for Individual Accredited Investors from certain individual accredited investors who are not permitted clients, and restrict the minimum amount investment prospectus exemption in section 2.10 of NI 45-106 (the MA Exemption) to distributions to non-individual investors.
The CSA has indicated the proposed amendments are intended to address concerns that some individual investors may not understand the risks associated with investing under the AI Exemption, or may not in fact qualify as accredited investors, and the threshold of $150,000 under the MA Exemption may not be a proxy for sophistication or ability to withstand financial loss for individual investors and may encourage over-concentration in one investment for an individual investor.
The AI Exemption and the MA Exemption are premised on the investor having one or more of:
- a certain level of sophistication;
- the ability to withstand financial loss;
- the financial resources to obtain expert advice; and
- the incentive to carefully evaluate the investment given its size.
The AI Exemption and the MA Exemption have traditionally provided cost-effective objective measures for issuers to distribute securities to raise capital or for other purposes. However, the thresholds for individuals to qualify as accredited investors were originally set by the Securities and Exchange Commission in the United States in 1982, and subsequently adopted by the CSA in the early 2000s. The current $150,000 threshold for the MA Exemption was set in 1987. Each of the AI Exemption and the MA Exemption have not been changed or adjusted for inflation since their initial adoption.
Due to investor protection concerns which were highlighted by the financial crisis in 2007-08, the CSA conducted a broad review of the AI Exemption and the MA Exemption. On November 10, 2011, as a result of its findings, the CSA published CSA Staff Consultation Note 45-101 Review of Minimum Amount and Accredited Investor Exemptions. The consultation note provided information on the AI Exemption and the MA Exemption under review and set out 31 consultation questions regarding each exemption. On June 7, 2012, the CSA published CSA Staff Notice 45-310 Update on CSA Staff Consultation Note 45-401 Review of Minimum Amount and Accredited Investor Exemptions.
The Proposed Amendments
Individual accredited investors will be required to complete and sign a new Form 45-106F9, which describes in plain language the categories of individual accredited investor and the protections an investor is renouncing by purchasing under the accredited investor exemption. An individual will also be required to confirm what category of accredited investor they satisfy. This requirement would apply to all existing categories of individual accredited investor, namely individuals that:
- earned net income of $200,000, or $300,000 with a spouse, in each of the two most recent calendar years, with a reasonable expectation to exceed that level in the current calendar year;
- own financial assets (cash and securities – no real estate), alone or with a spouse, in excess of $1 million; or
- own net assets of at least $5 million.
Individual accredited investors who meet the permitted client test under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, being an individual who owns financial assets in excess of $5 million, would not be required to complete and sign Form 45-106F9.
Issuers would also be required to identify the category of accredited investor of each purchaser in the report of exempt distribution (Form 45-106F1 and, in British Columbia, Form 45-106F6) to assist the compliance and enforcement departments when reviewing adherence to the AI Exemption.
The definition of accredited investor would also be amended 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. The Ontario Securities Commission also proposes to amend the definition of accredited investor under the Securities Act (Ontario) to permit fully managed accounts to purchase investment fund securities in Ontario.
The CSA proposes to amend the MA Exemption so that it is only available for distributions to non-individuals to address investor protection concerns associated with the use of the exemption to distribute securities to individual investors.
The CSA’s comment period closes on May 21, 2014.