Securities and Capital Markets lawyers Alexander Katznelson’s and Zachary Janes’ article “OSC tests new self-certified investor prospectus exemption” was published in The Lawyer’s Daily. The article discusses the new self-certified investor prospectus exemption which was recently announce by the Ontario Securities Commission (OSC).
The article was originally published on November 4, 2022. To read it in The Lawyer’s Daily visit: https://www.thelawyersdaily.ca/articles/41084/osc-tests-new-self-certified-investor-prospectus-exemption?category=analysis (subscription required)
Special thank you to Hayden Wang (Student-at-Law) in his contribution to this article.
OSC tests new self-certified investor prospectus exemption
With Canadian capital markets seeing an extended downturn, securities regulators are under pressure to ensure regulations protect investors without needlessly dampening market activity. To this end, the Ontario Securities Commission (OSC) recently announced a new self-certified investor prospectus exemption under Ontario Instrument 45-507 Self-Certified Investor Prospectus Exemption (Interim Class Order) (Ontario Instrument 45-507), effective for an 18-month trial period from October 25, 2022, to April 25, 2024.
Ontario Instrument 45-507 permits Ontario-based issuers to distribute securities without a prospectus to investors who certify that they have certain prescribed professional designations, levels of education, or industry experience (self-certified investors). The rationale is that self-certified investors should have the requisite knowledge to make informed investment decisions, and should therefore be allowed to invest in private offerings despite not meeting the financial thresholds or other criteria to qualify as an accredited investor.
Ontario Instrument 45-507 aligns the OSC with the Alberta Securities Commission (ASC) and the Financial and Consumer Affairs Authority of Saskatchewan (FCAAS), which began testing a similar prospectus exemption on March 31, 2021, that expires on April 1, 2024. Of note, the ASC and FCAAS amended the exemption on July 28, 2021, in part to permit holders of securities to rely on the amended exemption to resell their securities without a prospectus, whereas Ontario Instrument 45-507 is only available to distributions by an issuer.
The following criteria must be met for Ontario Instrument 45-507 to apply to an issuer’s distribution of its securities:
- the head office of the issuer is located in Ontario;
- the issuer is not an investment fund;
- the purchaser is a self-certified investor or a permitted designate of a self-certified investor;
- the self-certified investor represents in the subscription agreement that the aggregate acquisition cost of all securities acquired by the investor, and any designates, in reliance on Ontario Instrument 45-507 in the calendar year does not exceed $30,000;
- at the time of execution of the subscription agreement, the self-certified investor provides the issuer with a completed Confirmation of Qualifying Criteria and a completed Acknowledgement of Risks, in the forms annexed to Ontario Instrument 45-507; and
- the issuer files a completed Form 45-106F1 Report of Exempt Distribution, together with the completed Confirmation of Qualifying Criteria and applicable fees (generally $500), within 10 calendar days of the distribution.
Qualifying criteria for self-certified investors
To rely on Ontario Instrument 45-507, self-certified investors must confirm that they have met certain educational or designation requirements. Specifically, they must confirm in the Confirmation of Qualifying Criteria that they either:
- hold a CFA Charter, a CIM, CBV, CPA, CIWM or CFP designation, or a financial planner or financial adviser credential in good standing;
- were admitted to practise law in a jurisdiction of Canada and at least one-third of their practice has involved providing advice on financings involving public or private distributions of securities or mergers and acquisitions;
- hold an MBA degree with a focus on finance or an undergraduate degree in finance or in business or commerce with a major or specialization in finance or investment;
- have passed the Canadian Securities Course Exam or the Investment Funds in Canada Course Exam administered by the Canadian Securities Institute, the Exempt Market Products Exam or the Canadian Investment Funds Course Exam administered by the IFSE Institute, Canada, or both the Series 7 Exam administered by the Financial Industry Regulatory Authority in the United States and the New Entrants Course Exam administered by the Canadian Securities Institute; or
- have management, policymaking, engineering, product or other relevant operational experience at a business that operates in the same industry or sector as the issuer and the ability to adequately assess and understand the risk of investment in the issuer.
During the testing period of Ontario Instrument 45-507, Ontario issuers are expected to benefit from an expanded investor pool, which should improve their ability to market deals and raise capital. If this prospectus exemption is successful in Ontario, Alberta and Saskatchewan, we may see an amendment to National Instrument 45-106 Prospectus Exemptions in the future to implement a similar prospectus exemption across Canada. For the time being, financial analysts, accountants, corporate lawyers and other financially savvy investors who seek to invest, but do not meet the prescribed criteria to qualify as an accredited investor, will be able to invest up to $30,000 per year in private offerings by Ontario issuers.
Please contact the authors, Alexander Katznelson at email@example.com and Zachary Janes at firstname.lastname@example.org, for more information on the new prospectus exemption.
Re-printed with permission from The Lawyer's Daily(www.thelawyersdaily.ca), part of LexisNexis Canada Inc. originally published on November 4, 2022.
This article is intended to provide general information only and not legal advice. This information should not be acted upon without prior consultation with legal advisers.