On February 19, 2015, the Canadian Securities Administrators (CSA) and Ontario Securities Commission (OSC) announced significant amendments to National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106) and the Companion Policy 45-106CP Prospectus and Registration Exemptions (Companion Policy). These amendments include changes to the accredited investor prospectus exemption (Accredited Investor Exemption), minimum amount investment prospectus exemption (Minimum Amount Exemption) and the short-term debt prospectus exemption (Short-TermTerm Debt Exemption) contained in NI 45-106 and the introduction of a family, friends and business associates prospectus exemption (Family, Friends and Business Associates Exemption) in Ontario by the OSC.

See our Blakes Bulletin: New Securities Rules for ABCP Conduits Coming into Effect May 5, 2015 issued contemporaneously with this bulletin that describes additional amendments to NI 45-106 related to short-term securitized products.

Accredited Investor Exemption

The amendments to the Accredited Investor Exemption are largely intended to address concerns that some individual investors may not understand the risks of investing under the exemption or may not in fact qualify as accredited investors.

The amendments provide expanded guidance on the steps a seller should take to verify the status of purchasers acquiring securities under prospectus exemptions and introduce a new Risk Acknowledgement Form for Individual Accredited Investors (Form 45-106F9). The form describes, in plain language, the categories of individual accredited investor, identifies the key risks associated with purchasing securities in the exempt market and requires the person relying on the Accredited Investor Exemption to confirm the basis on which they satisfy the exemption requirements. Any salesperson who meets or provides information to the investor in connection with the investment must be identified in the form. The form is only required to be completed and signed by individual investors who rely on their financial assets, net income or net assets to satisfy the exemption.

In addition, the definition of “accredited investor” in NI 45-106 has been amended to include family trusts established by an accredited investor for his or her family. It also allows fully managed accounts to purchase investment fund securities under the managed account category of the Accredited Investor Exemption in Ontario, harmonizing such allowance with all other Canadian provincial jurisdictions.

The Companion Policy has been amended to provide additional guidance on practices for verifying whether purchasers meet the conditions of certain prospectus exemptions. These exemptions include the Accredited Investor Exemption, the private issuer prospectus exemption, the Friends, Family and Business Associates Exemption and, in some jurisdictions, the eligible investor definition under the offering memorandum exemption.

Minimum Amount Investment

As a result of concerns that the C$150,000 threshold for relying on the Minimum Amount Exemption may not be a sufficient proxy for investor sophistication or ability to withstand financial loss, and may encourage over-concentration in an individual investment, the Minimum Amount Exemption has been amended so that it is limited to distributions to non-individual investors.

Short-Term Debt Exemption

The Short-Term Debt Exemption has also been amended to modify the credit ratings required to distribute short-term debt, which is primarily commercial paper. These amendments primarily modify the current split rating condition that short-term debt securities must satisfy in order to qualify for the Short-Term Debt Exemption. The net effect is that short-term debt will have to satisfy the following conditions:

1. Rating Threshold Condition (unchanged): The short-term debt has at least one rating at or above DBRS R-1 (low), S&P A-1 (low) (Canada national scale), Moody’s P-1, or Fitch F1.
2. Modified Split Rating Condition: The short term debt has no rating below DBRS R-1 (low), S&P A-1 (low) (Canada national scale) or A-2 (global scale), Moody’s P-2, or Fitch F2.

The amendments to the Short-Term Debt Exemption are intended to remove the regulatory disincentive for some commercial paper issuers to obtain an additional credit rating, provide consistent treatment of commercial paper issuers with similar credit risk and maintain the current credit quality of commercial paper distributed under the Short-Term Debt Exemption.

Family, Friends and Business Associates Exemption

The OSC’s new Friends, Family and Business Associates Exemption is available to reporting and non-reporting issuers, other than investment funds, to provide a cost-effective way for issuers to raise capital from their networks of family, close personal friends and close business associates.

The Friends, Family and Business Associates Exemption applies to a distribution of any security by an issuer or a selling security holder to directors, executive officers, control persons and founders of an issuer as well as family members, close personal friends and close business associates of directors, executive officers, control persons or founders. The onus is on the issuer or selling-security holder to establish whether a close personal relationship exists. This is generally defined as having known an individual for a sufficient period of time to be in a position to assess their capabilities and trustworthiness.

The Friends, Family and Business Associates exemption is largely harmonized with an exemption that is currently available in other Canadian jurisdictions. The key differences in Ontario are:

• the exemption is not applicable to investment funds; and
• the exemption requires a risk acknowledgement form (new Form 45-106F12) to be signed by the purchaser, the director, executive officer, control person or founder of the issuer with whom the purchaser has asserted the relationship, if applicable, and the issuer.

Looking Forward

The amendments to the Accredited Investor Exemption and the Minimum Amount Exemption are the result of a review conducted by the CSA that involved stakeholder consultation across Canada, a review of enforcement cases, and a thorough examination of data from exempt distribution reports filed over a 12-month period. The Short-Term Debt Exemption amendments are the result of the CSA’s review and analysis of investor protection and systemic risk concerns in the Canadian short-term credit market.

The CSA believes that “the changes to the [Accredited Investor] and [Minimum Amount] exemptions strengthen investor protection while continuing to provide a cost-effective means for issuers to raise capital,” and, “the changes to the short-term debt exemption enhance market efficiency and fairness in the commercial paper market”.

The Friends, Family and Business Associates Exemption is the second of four potential new exemptions to be adopted by the OSC as part of its exempt market reform initiative. The initiative was initially published for comment by the OSC in March 2014. The new exemptions are intended to provide low-cost access to capital for early-stage issuers. The security holder prospectus exemption, the first to be adopted, came into effect on February 11, 2015 and the final two, an offering memorandum prospectus exemption and a crowdfunding prospectus exemption together with a registration regime for online funding portals, remain under consideration.

Provided all necessary ministerial approvals are obtained, the amendments will come into force on May 5, 2015. In Ontario, the amendments to the Accredited Investor and Minimum Amount exemptions will come into force on the later of May 5, 2015 and the date on which subsection 12(2) of Schedule 26 of the Budget Measures Act, 2009 is proclaimed in force.