Private Placements: Regulators Propose Changes to Key Exemptions

Canadian securities regulators are proposing changes to two of the most commonly used capital-raising exemptions—the accredited investor exemption and the minimum amount investment exemption (also referred to as the "$150,000 exemption"). The changes are designed to address investor protection concerns and are not expected to have a significant impact on the ability of issuers to raise capital in the exempt market.

Changes to the Accredited Investor Exemption

The accredited investor exemption permits sales of securities to institutional investors and high net worth individuals. No changes are being proposed to the income or asset thresholds used in the definition of accredited investor. The exemption will remain available to individual accredited investors¹ ; however, to address concerns that some accredited investors may not understand the risks associated with exempt market investments or may not qualify as accredited investors, if the changes are adopted, issuers relying on the exemption will be required to obtain a signed risk acknowledgement form from individuals who are not permitted clients.² In Ontario, the definition of accredited investor will be extended to allow fully managed accounts to purchase investment fund securities, as permitted in other provinces.

Changes to the Minimum Amount Investment Exemption

The most significant change being proposed is that the minimum amount investment exemption, which provides an exemption for sales if the cash purchase price for the securities is at least $150,000, will no longer be available for distributions to individual investors. Regulators are concerned that individuals who do not meet accredited investor thresholds may be encouraged to borrow money or feel pressure to invest $150,000 when these individuals would prefer to invest less. Restricting the minimum investment amount exemption to distributions to non-individuals is not expected to have a significant impact on capital raising, because individuals investing under the exemption represent a very small percentage of the total amount invested by Canadians in the exempt market.

Due Diligence and Supporting Documentation

In addition to the requirement for a risk acknowledgement form where a private placement is made to an individual accredited investor, the Canadian securities regulators have reiterated their expectation that issuers and dealers must exercise due diligence in assessing a prospective investor’s status as an accredited investor. Supporting documentation establishing accredited investor status must be requested and updated periodically.

Other Revisions

Although the proposed changes will be applicable in all jurisdictions, the Province of Ontario has continued an unfortunate trend of incorporating certain provisions in the provincial Securities Act, and others in the harmonized private placement rule, National Instrument 45-106. This approach increases the risk of confusion among market participants, and makes the regime less understandable to individual investors and others.

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¹ Individual accredited investors are individuals that:

• 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; ;
• own financial assets, alone or with a spouse, in excess of $1 million; or ;
• own net assets of at least $5 million.

² Individual permitted clients are individuals that own financial assets in excess of $5 million.