On February 27, 2014, the Canadian Securities Administrators (CSA) published for a 90-day comment period proposed amendments (Proposed Amendments) to National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106). The Proposed Amendments are intended to address the following concerns:
- some individual investors may not understand the risks of investing under the accredited investor exemption (AI Exemption) in NI 45-106 or may not actually qualify as accredited investors; and
- the $150,000 threshold for the minimum investment amount exemption (MA Exemption) in NI 45-106 may not be a good gauge of sophistication or ability to withstand financial loss for individual investors and may encourage over-concentration in one investment for individual investors.
The AI Exemption is the most relied on capital raising exemption for all issuers, and the MA Exemption raises the second highest amount of capital after the AI Exemption. The AI Exemption and the MA Exemption are premised on the investor having a certain level of sophistication, the ability to withstand financial loss, the financial resources to obtain expert advice and/or the incentive to carefully evaluate the investment given its size. While the dollar thresholds for the AI Exemption and MA Exemption have not changed in many years, the CSA is not proposing to increase the dollar thresholds based on the conclusion that an increase would not address the above concerns.
To address the CSA’s concerns that some individual investors may not understand the risks associated with exempt market investments or may not actually qualify as accredited investors, the Proposed Amendments contain numerous amendments to the AI Exemption. Specifically, the Proposed Amendments include:
- Individual accredited investors must complete and sign a new risk acknowledgement form, Form 45-106F9 Risk Acknowledgement Form for Individual Accredited Investors. Form 45-106F9 describes, in plain language, the categories of individual accredited investors and the protections an investor is renouncing by purchasing under the exemption. However, individual accredited investors who qualify as “permitted clients” would not be required to complete and sign the Form 45-106F9. To be a permitted client, an individual must own financial assets in excess of $5 million.
- Any salesperson or finder involved with the trade, whether registered or not, would be required to complete and sign the Form 45-106F9.
- Issuers would be required to identify the category of accredited investor of each purchaser in the report of exempt distribution (Form 45-106F1 and, in BC, Form 45-106F6).
To address the CSA’s concerns regarding the MA Exemption, the Proposed Amendments would amend the MA Exemption so that it is only available for distributions to non-individuals.
How to Comment
The deadline for submitting comments is May 28, 2014. Comments must be submitted in writing to the three addresses below:
Senior Legal Counsel, Corporate Finance
British Columbia Securities Commission
P.O. Box 10142, Pacific Centre
701 West Georgia Street
Vancouver, British Columbia, V7Y 1L2
Ontario Securities Commission
20 Queen Street West
Toronto, Ontario, M5H 3S8
Autorité des marchés financiers
800, square Victoria, 22e étage
C.P. 246, tour de la Bourse
Montréal (Québec) H4Z 1G3
If you have any questions about the proposed amendments, contact any member of Clark Wilson’s Corporate Finance & Securities Group.