Key Prospectus and Registration Exemptions for Private Placements to be Amended

This post was written prior to our January 2017 merger, under our previous firm name, MacPherson Leslie & Tyerman LLP.

The Canadian Securities Administrators (“CSA”) recently announced the adoption of amendments to two commonly used exemptions in National Instrument 45-106 Prospectus and Registration Exemptions (“NI 45-106″). The affected exemptions are the accredited investment exemption (“AI exemption”) and the minimum amount investment exemption (“MA exemption”). The amendments are intended to address individual investor protection concerns, for the AI exemption, that some individuals may not understand the risks of investing under the AI exemption or may not in fact qualify as accredited investors and, for the MA exemption, that the $150,000 minimum investment threshold may not be an appropriate indication of investment sophistication or the ability to withstand financial loss and may encourage over-concentration in one investment for an investor who is an individual.

Amendments to AI Exemption

One of the more significant changes to the AI Exemption is the requirement that individuals who qualify as accredited investors because they:

  • own cash and securities, alone or with a spouse, in excess of $1,000,000,
  • earned net income of $200,000, or $300,000 with a spouse, in each of the two most recently completed calendar years and expect to exceed that level of income in the current year, or
  • own, alone or with a spouse, net assets of at least $5,000,000

must complete and sign a new risk acknowledgement form. The purpose of the risk acknowledgement form is to describe in plain language the criteria under which an individual qualifies as an accredited investor and the risks that the investor is assuming by investing under the AI exemption.

The CSA has also published guidance concerning the steps issuers should take to verify the accredited investor status of individuals to whom they are selling securities in reliance upon the AI exemption. These include: (i) understanding the terms and conditions of the exemption and being able to explain them to the individual purchaser; (ii) verifying, by asking questions, that the purchaser meets the requirements of the exemption before discussing the details of the investment; and (iii) keeping relevant and detailed documentation evidencing the steps followed to determine whether the purchaser meets the conditions of the exemption.

Amendments to the MA Exemption

The MA exemption has been amended to restrict its availability to distributions of securities to non-individuals (ie. corporations) and will no longer be available for distributions to individual investors. The intention of the amendment is to reduce the risk associated with individuals concentrating their investable assets into one investment while retaining the availability of the exemption for corporate and institutional investors. The CSA has indicated, however, that an individual would be able to invest under the MA exemption through a holding company as long as that company was not created solely for the purpose of purchasing securities under the MA exemption.