Investors with specified financial education or experience would be permitted to purchase securities on a prospectus exempt basis under the proposed exemption.
On November 20, 2020, the Alberta Securities Commission (ASC) and the Financial and Consumer Affairs Authority of Saskatchewan (FCAA) published for comment CSA Multilateral Notice 45-327 Proposed Prospectus Exemption for Self-Certified Investors, which proposes a new prospectus exemption for issuers distributing securities in Alberta and/or Saskatchewan.
Among myriad other exemptions, the current regulatory regime permits issuers to issue securities on a prospectus exempt basis to certain wealthy individuals, institutions and governments (called "accredited investors"). The accredited investor exemption has long been a popular mechanism for issuers to raise private capital. However, in view of recent economic realities in Alberta and Saskatchewan, the ASC and FCAA have been considering alternatives that might facilitate better access to capital for issuers, while creating the opportunity for enhanced participation in such capital raising opportunities for investors that cannot otherwise clear the financial hurdles to be considered an accredited investor. The new proposed exemption (the Self-Certified Investor Exemption) is thus an attempt to allow knowledge and experience to substitute for financial assets as the metric for suitability. While the accredited investor exemption uses financial resources as a proxy for an implied level of financial sophistication, the proposed Self-Certified Investor Exemption directly targets an investor's actual level of financial sophistication.
In order to rely on the Self-Certified Investor Exemption, an investor would be required to provide a statutory declaration that the purchaser (collectively the Self-Certified Investor Criteria):
- holds a CFA designation;
- holds a CPA designation in a jurisdiction of Canada;
- was admitted to practice law in a jurisdiction of Canada and the purchaser's practice has involved being significantly engaged in providing advice respecting public or private financings or mergers and acquisitions transactions; or
- holds from an accredited university an MBA with a focus on finance or a degree in finance.
Non-individual purchasers would also be able to qualify for the Self-Certified Investor Exemption if they provide that the majority of owners of interests of the purchaser meet the Self-Certified Investor Criteria, the majority of the directors of the purchaser meet the Self-Certified Investor Criteria, or the purchaser is a trust established or settled by an individual who meets the Self-Certified Investor Criteria.
Purchasers using the Self-Certified Investor Exemption would be limited to a maximum investment of $10,000 in one issuer in a twelve-month period, and aggregate investments in all issuers of up to $30,000 in a twelve-month period.
Over the past number of years, whenever the prospect of improving the current prospectus exempt distribution regime is discussed, the expansion of the accredited investor exemption to contemplate those with an appropriate level of financial sophistication is among the more obvious suggestions. Education and experience are arguably the clearest and most accurate predictors of an investor's ability to understand the risks associated with a particular investment and their suitability for it. Financial assets or income, in contrast, may reflect only inherited wealth, a successful occupation entirely unrelated to investing or even a lottery win, and therefore don't necessarily answer to suitability. While such financially sound investors might be able to withstand the loss of their investment better than the financially sophisticated; deeper pockets do not necessarily equate with suitability.
It is therefore encouraging that the ASC and FCAA have taken this first step towards introducing true investor competence as a determinant of eligibility to participate in the prospectus exempt market, potentially opening the door to a new cohort of highly educated but not (yet) wealthy individuals.
Given that the Canadian Securities Administrators have "expressed interest in being kept apprised" of the comment process and of the use of the exemption, the ASC/FCAA's initiative might in the future manifest itself in the widespread adoption of this exemption, perhaps even by way of amendments to the accredited investor exemption itself.
The proposed blanket order is open for comment until December 23, 2020. We are pleased to assist with facilitating your comments, if any, to the ASC and FCAA regarding this new exemption, and going forward, to assist with accessing any enacted prospectus exemption.
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