The Canadian Securities Administrators (CSA) announced yesterday that they are undertaking a review of the “$150,000 minimum investment amount” and the “accredited investor” exemptions that are commonly used to raise financing on a prospectus exempt basis. The publication of CSA Staff Consultation Note 45-401 (Consultation Note) commenced a public consultation process intended to solicit feedback from investors, issuers and others on a number of possible changes to these exemptions.
The Consultation Note raises a number of questions, including whether these exemptions should be premised on financial resources (ability to withstand financial loss or obtain expert advice), access to financial and other key information about the issuer, educational background, work experience, investment experience, or some other criteria, and whether the involvement of a registrant (who has an obligation to recommend only suitable investments) addresses any concerns.
Some issues cited with the $150,000 minimum investment amount exemption include that:
- the size of investment alone does not assure investor sophistication or access to information, particularly where the exemption is used to sell novel or complex products without accompanying disclosure;
- the $150,000 threshold was set in 1987 and has not been changed or adjusted for inflation since (and would be $265,000 in 2011 dollars); and
- investors may resort to investing more or investing all upfront in order to meet the threshold even if business or investment considerations may call for a lower amount or staggered investments.
Similarly, issues cited with the accredited investor exemption include that:
- the current thresholds for the income and asset tests have not been changed or adjusted since they were set in the early 2000s;
- the thresholds may be too low and allow unsophisticated, retail investors to participate in the exempt market; and
- the income and asset thresholds may not be adequate proxies for sophistication.
The CSA also reiterate a concern raised in OSC Staff Notice 33-735, that some individuals purchasing securities under the exemption are not, in fact, accredited investors. One option proposed to address this issue is to require an investor’s accredited investor status to be certified by an independent third party, such as a lawyer or qualified accountant.
Definitive proposals for amendments will be made after feedback is received. Depending on the feedback, possible options include keeping the status quo, retaining the exemptions with adjusted thresholds, limiting the use to certain investors (such as institutional investors), using alternative qualification criteria or imposing other investment limitations.
The CSA also specifically ask whether stakeholders’ views on possible changes to these exemptions would be affected by factors such as the provision of disclosure (including risk factor disclosure), involvement of registrant and whether the security is novel or complex or the issuer is a reporting issuer.
With respect to the accredited investor exemption specifically, the Consultation Note asks whether alternative qualification criteria should be required for individual investors, such as investment experience (citing the example of an investor who has carried out transactions of a significant size in securities markets at a given frequency), investment portfolio size, work experience and / or education (such as having completed the Canadian Securities Course, achieved a CFA designation or received an advanced degree in business or finance).
While highlighting their concerns, the CSA also acknowledge that these exemptions are widely used and any that repeal or limitation could affect capital raising, especially by small and medium sized enterprises. The Consultation Note also includes the terms and a background discussion of these exemptions along with a summary of comparable exemptions available outside of Canada. Citing their recent Notice of Proposed National Instrument 41-103, the CSA also state in the Consultation Note that while that proposal is focused on the distribution of securitized products, they will consider the comments received in response to that notice as part of their general review of the minimum amount exemption and the accredited investor exemption.
The consultation period ends on February 29, 2012.