CSA Propose Amendments to Accredited Investor and Minimum Amount Investment Exemptions

On February 27, 2014, the Canadian Securities Administrators published for comment proposed amendments to National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106). If adopted, the proposed amendments would, among other things:

• require persons relying on the accredited investor prospectus exemption in section 2.3 of NI 45-106 and section 73.3 of Securities Act (Ontario) to obtain a signed risk acknowledgement form from certain individual accredited investors who are not permitted clients;
• restrict the minimum amount investment prospectus exemption ($150,000) in section 2.10 of NI 45-106 to distributions to non-individual investors; and
• amend the definition of accredited investor in Ontario to allow fully managed accounts to purchase investment fund securities, as is permitted in other Canadian jurisdictions.

The CSA have indicated that the proposed amendments are intended to address concerns that individual investors may not appreciate the risks of investing under the accredited investor exemption, and that the minimum amount investment prospectus exemption may not provide an adequate proxy for sophistication or the ability to withstand loss.

Accredited Investor Exemption

The proposed amendments include the following changes to the accredited investor exemption:

• Individual accredited investors (other than individuals who meet the “permitted client” test (financial assets in excess of $5 million) under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations) will have to complete and sign a new risk acknowledgement form, Form 45-106F9, indicating, the categories of individual accredited investor and the protections an investor is renouncing by purchasing under the exemption. The investor would be required to indicate on the Form 45-106F9 which category of accredited investor they satisfy.
• The Form 45-106F9 requirement would apply to all existing categories of individual accredited investor, namely individuals that: (i) 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, (ii) own financial assets (cash and securities, no real estate), alone or with a spouse, in excess of $1 million, or (iii) own net assets of at least $5 million.
• Any salesperson or finder, whether registered or not, involved in the trade to the individual investor would also be required to complete and sign Form 45-106F9.
• The definition of accredited investor would 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. In addition, the Ontario Securities Commission would amend the definition of accredited investor to allow fully managed accounts to purchase investment fund securities in Ontario.

The proposed amendments also include additional guidance on the steps issuers should take to verify accredited investor status, including explaining the different tests and asking questions to obtain factual information from purchasers about their income or assets before discussing the investment.

Minimum Amount Exemption

The CSA have proposed that the minimum amount exemption ($150,000) be amended so that it is only available for distributions to non-individuals.

Other Proposed Amendments

The CSA are also proposing to amend the form of report of exempt distribution (Form 45-106F1 and, in BC, Form 45-106F6) to gather additional information, particularly:

• the category of accredited investor for each purchaser;
• updated industry categories; and
• more information on any person being compensated in connection with the distribution, including identifying which purchasers the person was compensated for.

Request for Comments

The CSA have invited market participants to provide input on the proposed amendments. Comments are to be submitted by May 28, 2014.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.