The Canadian Securities Administrators and the Ontario Securities Commission Adopt Amendments to National Instrument 45-106 Prospectus and Registration Exemptions
The Canadian Securities Administrators (the “CSA”) recently announced amendments to National Instrument 45-106 Prospectus and Registration Exemptions (which will be retitled Prospectus Exemptions) (“NI 45-106”) relating to the accredited investor prospectus exemption (the “AI Exemption”) and the $150,000 minimum amount investor exemption (the “MA Exemption”). Companion Policy 45-106CP Prospectus and Registration Exemptions (which will be retitled Prospectus Exemptions) (the “Companion Policy”) will also be modified to provide more guidance on how to verify whether potential purchasers satisfy the conditions of particular prospectus exemptions. In addition, the Ontario Securities Commission (the “OSC”) recently adopted a new family, friends and business associates prospectus exemption (the “Ontario FFBA Exemption”) which, once in force, will replace the OSC’s existing founder, control person and family prospectus exemption. The Ontario FFBA Exemption is substantially harmonized with the family, friends and business associates exemption that is currently available in other CSA jurisdictions.
Provided all necessary ministerial approvals are obtained, the above amendments will come into force on May 5, 2015, except that, in Ontario, the amendments to the AI Exemption and the MA Exemption will come into force on the later of May 5, 2015 and the date certain provisions of the Budget Measures Act, 2009 are proclaimed into force.
The AI Exemption
Under the current version of the AI Exemption, securities can be sold to a purchaser in any amount without providing the purchaser with a prospectus, provided that the purchaser fits into one of the categories of “accredited investor”, which, for individuals, means those: (i) who, either alone or with a spouse, have at least $1 million in financial assets; (ii) those whose net income before taxes exceeds $200,000 (or $300,000 combined income with a spouse) in each of the two most recent years and who reasonably expects to exceed that net income in the current year; and (iii) who, either alone or with a spouse, has at least $5 million in net assets.
A summary of the amendments to the AI Exemption is set out below. Note that the amendments to the AI Exemption do not include changes to the net income, net financial assets or net asset thresholds that must be satisfied for an individual to qualify as an accredited investor.
Key Elements of the Amendments to the AI Exemption
Risk Acknowledgement Form
Individual accredited investors (other than those who alone own financial assets exceeding $5 million) will be required to sign a new risk acknowledgement form in Form 45-109F9 Form for Individual Accredited Investors (the “Risk Acknowledgment Form”) that describes, in plain language, the categories of individual accredited investors and identifies key risks associated with purchasing securities in the exempt market. The Risk Acknowledgment Form must be signed at the same time or before the individual signs the subscription agreement to purchase securities, and the completed and signed Risk Acknowledgment Form must be retained by the issuer or other seller of securities (collectively, “seller”) for eight years following the distribution of securities in reliance on the AI Exemption.
Verifying Accredited Investor Status
Sellers relying on the accredited investor exemption are responsible for determining whether a purchaser meets the definition of “accredited investor”. The Companion Policy will provide more guidance on how to verify whether potential purchasers satisfy the conditions of particular prospectus exemptions, including the “accredited investor” exemption. For example, to assess whether a purchaser is an accredited investor, a seller should ask questions about the purchaser’s net income, financial assets or net assets or other questions regarding the purchaser’s financial circumstances. If the seller has concerns regarding the purchaser’s eligibility, the seller could request documentation confirming the purchaser’s claims. Refer to the discussion below under the heading “Key Elements of the Amendments to the Companion Policy – Verifying Purchaser Status” for additional information.
A trust established by an accredited investor for the benefit of the accredited investor’s family members will be included in the definition of “accredited investor”, provided that a majority of the trustees are accredited investors and all of the beneficiaries are the accredited investor’s spouse, a former spouse of the accredited investor or a parent, grandparent, brother, sister, child or grandchild of that accredited investor, of that accredited investor’s spouse or of that accredited investor’s former spouse.
The MA Exemption
Under the current version of the MA Exemption, securities can be sold to anyone without providing a prospectus, provided that the purchaser buys at least $150,000 worth of securities in cash. A summary of the amendments to the MA Exemption is set out below.
Key Elements to the Amendments to the MA Exemption
Not Available for Distributions to Individuals
The MI Exemption will no longer be available for distributions of securities to individuals (i.e., natural persons). The CSA has proposed this amendment in order to address investor protection concerns. Specifically, the CSA are of the view that the threshold of $150,000 for the MA Exemption may not be a proxy for sophistication.
Key Elements of the Amendments to the Companion Policy
Verifying Purchaser Status
The Companion Policy will provide additional guidance on what a seller should do when determining whether the terms and conditions of a prospectus exemption have been met, including the following:
- before discussing the details of an investment with a prospective purchaser, the seller should obtain information that confirms the purchaser meets the criteria set out in an exemption from the prospectus requirement. It would not be sufficient for a seller to rely solely on a form of subscription agreement or other document that only states: “I am an accredited investor” or “I am a friend of a director”. The CSA would also have concerns if the seller only accepted detailed representations or an initial beside a category on a Risk Acknowledgement Form from the purchaser. The seller should take additional steps to confirm that the purchaser understood the meaning of what the purchaser was signing or initialing and that the purchaser was truthful in making the representation or initialing the category;
- setting out procedures that a seller could implement in order to reasonably confirm that the purchaser meets the conditions of a particular exemption, including:
- how the seller identified or located the potential purchaser;
- what category of accredited investor the purchaser claims to meet;
- what type of relationship the purchaser claims to have and with which director, executive officer, founder or control person of the issuer;
- how much and what type of background information is known about the purchaser; and
- whether the person who meets with, or provides information to, the purchaser is registered;
- the seller should fully understand the terms and conditions of the exemption being relied on, meaning the seller should be able to explain the terms and conditions of the particular exemption to a purchaser and should be able to apply the specific facts of the purchaser to the terms and conditions;
- sellers will be expected to establish appropriate policies and procedures to confirm that all parties acting on behalf of the seller (i.e., employees, officers, directors, agents, finders, etc.) understand the exemption being relied on, are able to describe the terms of the exemption to purchasers and know what information and documentation must be obtained from purchasers to confirm the conditions of the exemption have been met; and
- the seller should retain all necessary documents to demonstrate that they properly relied on the exemption (generally for eight years, which reflects the longest limitation period under securities legislation in Canada).
Adoption of Family, Friends and Business Associates Exemption in Ontario
The Ontario FFBA Exemption will permit issuers (other than investment funds) to distribute securities in Ontario to the issuer’s directors, executive officers, control persons and founders as well as certain family members, close personal friends and close business associates of such persons, subject to certain conditions. The OSC will be repealing the existing founder, control person and family exemption in Ontario with the introduction of the Ontario FFBA Exemption.
As a condition to the Ontario FFBA Exemption, a signed risk acknowledgment form in Form 45-106F12 Risk Acknowledgment Form for Family, Friends and Business Associate Investors (the “Ontario FFBA Risk Acknowledgment Form”) must be obtained, setting out the key risks related to the investment and confirming how the investor qualifies to make the investment. The Ontario FFBA Risk Acknowledgment Form must be signed by (i) the investor, (ii) if applicable, the director, executive officer, control person or founder of the issuer with whom the investor has asserted the relationship, and (iii) the issuer. The Ontario FFBA Risk Acknowledgment Form must be retained by the seller for a period of eight years after the distribution of securities in reliance on the Ontario FFBA Exemption.
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