Canadian securities regulators are proposing reforms to a couple of the primary prospectus exemptions — the accredited investor exemption, and the minimum amount exemption (also known as the $150,000 exemption) — in an effort to bolster investor protection and to make the exemption regime more useful.
The Canadian Securities Administrators (CSA) published proposed amendments to the accredited investor (AI) and minimum amount (MA) exemptions for comment today. Among other things, the minimum amount exemption would no longer be available to individual investors; and, investors relying on the AI exemption would have to sign a new, plain language, risk acknowledgement form.
The CSA says that the proposed amendments aim to address concerns that retail investors may not understand the risks of investing under the AI exemption, or may not properly qualify as accredited investors; and, to address concerns that the $150,000 threshold in the MA exemption may not be a good proxy for investor sophistication, or the ability to withstand financial loss, and that it may encourage over-concentration in one investment.
The proposed new risk acknowledgement for prospective accredited investors would detail the categories of individual accredited investor, and explain the protections an investor will not receive by purchasing under the exemption. Investors who meet the permitted client test (financial assets of at least $5 million) won’t have to sign the risk acknowledgement.
The regulators are not proposing to alter any of the financial thresholds in either exemption, as they have concluded that this would not address their concerns with the existing regime.
Additionally, the proposals would amend the definition of accredited investor to include family trusts established by an accredited investor, provided the majority of trustees of the family trust are accredited investors. And, in Ontario, the definition of an accredited investor will be amended to allow fully managed accounts to purchase investment funds, which is allowed in other jurisdictions.
The CSA is also proposing additional guidance on the steps issuers should take to verify accredited investor status. Issuers would be required to identify the category of accredited investor of each purchaser in their exempt distribution reports, in order to help the regulators’ compliance and enforcement departments when reviewing adherence to the exemption.
“These amendments are intended to address investor protection concerns, while balancing the capital raising challenges facing issuers,” said Bill Rice, chair of the CSA and chair and CEO of the Alberta Securities Commission (ASC). “Concerns include individual investors not understanding the risks of investing under the AI exemption, and individuals investing more than they can afford to meet the requirements of the MA exemption.”
The proposals are out for comment until May 28.
In addition to the amendments proposed today by the CSA, the Ontario Securities Commission (OSC) is planning to propose several new prospectus exemptions — including a crowdfunding exemption, an offering memorandum (OM) exemption, family and friends exemption, and, an exemption for existing shareholders — by the end of March.