On October 25, 2022, the Ontario Securities Commission (OSC) published Ontario Instrument 45-507, being a temporary exemption to the prospectus requirement for the distribution of securities to “Self-Certified Investors” (the Order). The OSC noted in the Order that such investors “possess the necessary business knowledge, through their education or experience, to make an informed investment decision” despite not meeting the financial criteria to qualify as an accredited investor.

Background

In February 2020, the Ontario Government established the Capital Markets Modernization Taskforce (the Taskforce). In its final report published in January 2021, the Taskforce recommended, among other things, the introduction of additional accredited investor categories, including individuals that have completed and passed relevant proficiency requirements, such as the Canadian Securities Course or CFA Charter exams. In making its recommendations, the Taskforce highlighted the importance of facilitating capital formation for businesses and noted that, in 2019, 90.5% per cent of capital raised under prospectus exemptions was raised using the accredited investor exemption.

The Taskforce also noted that the U.S. Securities and Exchange Commission updated the definition of “accredited investor” under its rules in August 2020 to add new categories, including one for individuals with professional knowledge, experience or certifications.

The OSC’s Order was ultimately published in response to the Taskforce recommendations.

The OSC also noted in the text of the Order that, on March 31, 2021, the securities regulatory authorities in Alberta and Saskatchewan adopted a similar prospectus exemption for Self-Certified Investors. However, there are some key distinctions between the two exemptions, which are discussed further below.

What is a “Self-Certified Investor”?

To qualify as a “Self-Certified Investor” a purchaser must, at the time of execution of the subscription agreement, deliver to the issuer:

1. a completed “Confirmation of Qualifying Criteria”, confirming that the Self-Certified Investor meets the Qualifying Criteria; and
2. a completed “Acknowledgement of Risks”, confirming that the Self-Certified Investor has read and understood each of the statements of risks relating to the investment.

In total, there are 16 categories of Qualifying Criteria for a “Self-Certified Investor”. These categories include, for example, holders of an MBA degree with a focus in finance, an undergraduate degree in finance, a Chartered Business Valuator designation, a Chartered Professional Accountant designation, and Chartered Financial Analyst Charter. In addition, persons that have passed the Canadian Securities Course Exam also qualify.

In defining the scope of “Self-Certified Investor” to include holders of professional and academic qualifications in business and finance, the Order: (i) provides greater access to investments for individuals that have a requisite level of financial knowledge to invest in exempt market securities; and (ii) expands the universe of potential investors for an issuer contemplating an exempt market offering.

Additional Requirements for Issuers

In order to avail itself of the exemption, an issuer must have its head office in Ontario, must not be an investment fund, and must obtain a representation from the purchaser that the aggregate acquisition cost of the securities of all issuers acquired by the Self-Certified Investor in the calendar year does not exceed $30,000.

In addition, the issuer must file on or before the 10th day after the closing of the distribution, a completed Form 45-106F1 Report of Exempt Distribution, together with the completed Confirmation of Qualifying Criteria and the applicable fee.

Distinctions from Alberta and Saskatchewan

While the OSC’s Order and the Self-Certified Investor Prospectus Exemption adopted by the Alberta and Saskatchewan securities regulatory authorities are similar in principal, there are certain differences, including:

1. In Alberta and Saskatchewan, the exemption applies to both distributions by an issuer and by an existing security holder. The OSC’s Order applies only to the distribution by an issuer of its own securities.
2. In Alberta and Saskatchewan, the exemption provides that qualifying special purposes vehicles (SPVs) are not subject to certain investment limits. The OSC’s Order does not have a similar carve-out for SPVs.
3. In Alberta and Saskatchewan, the exemption requires there be a concurrent distribution to accredited investor(s). The OSC’s Order does not impose such requirement.

As previously discussed, the first and second distinctions noted above were added by the Alberta and Saskatchewan securities regulatory authorities by way of amendment following initial adoption. These amendments were made to address inefficiencies identified through stakeholder feedback.

It remains to be seen whether the OSC’s Order will be amended as a result of stakeholder feedback and/or to expand the application of the exemption. Ultimately, any amendments or additions to further align the OSC Order with the exemption in Alberta and Saskatchewan would bolster the likelihood of a unified approach among these (and potentially other) provinces through the adoption of a multi-lateral instrument or amendment to the national instrument.

Expiry of the Order

The Order will remain in effect until the earlier of (i) April 25, 2024, unless extended by the OSC; and (ii) the effective date of an amendment to National Instrument 45-106 Prospectus Exemptions that addresses substantially the same subject matter as the Order.

For more information, see Ontario Instrument 45-507 Self-Certified Investor Prospectus Exemption (Interim Class Order).

The Stikeman Elliott Capital Markets Group will continue to keep its clients and readers appraised of these important market developments as they unfold.