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Canadian Securities Administrators adopt Amendments to the Accredited Investor Exemption

By: Grant Duthie | Capital Markets | February 24, 2016 

The Canadian Securities Administrators (the “CSA”) adopted a number of amendments to the accredited investor prospectus exemption (the “AI Exemption”) that became effective on May 5th, 2015. The CSA enacted these amendments to aid individual investors in determining whether they qualify as accredited investors, and to inform them of the risks associated with investing in the exempt market. To achieve this objective, portions of National Instrument 45-106 Prospectus Exemptions (“NI 45-106”), as well as its Companion Policy ("CP 45-106”), dealing with the AI Exemption were amended.

Risk Acknowledgment Form

The amendments to NI 45-106 now require issuers or dealers to obtain a completed Form 45-106F9: Form for Individual Accredited Investors (“Risk Acknowledgment Form”) from individuals that satisfy three of the four income and asset tests that are available to individual investors. The Risk Acknowledgment Form must be signed by the seller and the investor, and it requires the investor to acknowledge the risks associated with the investment, including that that they could lose all of their investment; that they may not be able to sell the investment quickly or at all; and that they may receive little or no information about their investment beyond that which the seller provides. The seller must retain the Risk Acknowledgment Forms for a period of 8 years from the date of the distribution. 

Compliance and Verifying Investor Status

The amendments to CP 45-106 impose a new requirement on issuers and dealers to reasonably confirm that investors purchasing securities under the AI Exemption satisfy the applicable eligibility tests. CP 45-106 cautions issuers and dealers that it is the seller’s responsibility to ensure investor eligibility, and that sellers should not sell securities to an investor if they have doubts as to their eligibility.

In order to reasonably confirm that investors qualify under the AI Exemption, sellers must ensure that they are able to explain the requirements of the AI Exemption to an investor, and are able to evaluate whether an investor meets those requirements. If an issuer relies on dealers to distribute securities under the AI Exemption, then the issuer must develop a program for the parties acting on its behalf in an offering. This program should ensure that those parties understand the AI Exemption and are able to evaluate whether an investor meets its requirements. Finally, sellers are now required to perform certain due diligence on investors to determine their eligibility under the AI Exemption. Sellers must ask questions of the investor to determine their net income, financial assets, net assets, or other financial circumstances.  If the seller has concerns about the investor’s responses, the seller should make further inquiries about the investor’s financial circumstances. If the seller still questions the investor’s eligibility, the seller may ask to see documentation that independently confirms the investor’s claims.

For further information regarding the accredited investor exemption, and private placements in general, please contact any member of our Corporate Finance & Securities Group.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

 

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