The CSA has recently announced refinements to some of the most commonly used prospectus exemption rules that Canadian companies use to raise money in Canada. The CSA also provided expanded guidance on the steps a seller should take to verify the status of purchasers acquiring securities under prospectus exemptions.

Refinements to Prospectus Exemption Rules

The Canadian Securities Administrators (CSA) and the Ontario Securities Commission (OSC) have recently refined the prospectus exemption rules in Canada to:

  1. Require sellers using the accredited investor exemption to obtain a new risk acknowledgement form for individual accredited investors that describes, in plain language, the categories of individual accredited investor and identifies the key risks associated with purchasing securities in the exempt market (effective May 5, 2015);
  2. Restrict the minimum amount investment prospectus exemption (i.e. $150,000 minimum purchase) to distributions to non-individual investors (effective May 5, 2015);
  3. In Ontario, harmonize the definition of “accredited investor” in Ontario with that used in other provinces (effective May 5, 2015);
  4. In Ontario, adopt a family, friends and business associates exemption that is substantially harmonized with a similar exemption that has been in place in the other CSA jurisdictions for a number of years (effective May 5, 2015); and
  5. In Ontario, adopt an exemption for public issuers whose securities are listed on certain exchanges (i.e. TSX, TSX-V, etc.) to raise capital from existing investors, also substantially harmonized with a similar exemption that has been available in the other CSA jurisdictions for a while (effective February 11, 2015).

Onus on Seller to Confirm Purchaser Meets Exemption Criteria

The CSA also provided expanded guidance on the steps a seller should take to verify the status of purchasers acquiring securities under prospectus exemptions, including the accredited investor exemption, the offering memorandum exemption (i.e. for eligible investors) and the family, friends and business associates exemption.

When distributing securities under these exemptions, the seller will have to obtain information from the purchaser in order to determine whether the purchaser has the requisite income, assets or relationship to meet the terms of the exemption. The CSA has stated that it will not be sufficient for the seller to accept standard representations in a subscription agreement or an initial beside a category on Form 45-106F9 Form for Individual Accredited Investors unless the seller has taken reasonable steps to verify the representations made by the purchaser.

The types of steps that will be considered reasonable will depend on the particular facts and circumstances of the purchaser, the offering and the exemption being relied on, including:

  • How the seller identified or located the potential purchaser;
  • What category of accredited investor or eligible 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 under applicable securities legislation.

The CSA expects a seller to be in a position to explain why certain steps were not taken or to be able to explain how alternative steps were reasonable in the circumstances. It is the seller that is relying on the prospectus exemption and it is the seller that is responsible to ensure the terms of the exemption are met. If the seller has any reservations about whether the purchaser qualifies under the exemption, the seller should not sell securities to the purchaser in reliance on that exemption.

The CSA further suggests that sellers:

  • Ensure the purchaser understands the criteria for the relevant exemption, such as the specific assets and liabilities used to determine if an income or asset threshold is met.
  • Establish internal policies and procedures to ensure all parties acting for an issuer or other seller understand the exemption criteria and can accurately explain them to purchasers.
  • Confirm the purchaser meets the applicable exemption category before discussing the details of an investment, by, for example, in the case of a purchaser relying on an income or asset threshold category of the accredited investor exemption, asking about a purchaser’s income or assets (which may include requesting supporting financial records) or, in the case of a purchaser relying on the friends, family and business associates exemption or the corresponding relationship categories of the private issuer exemption, by asking about the nature and length of a relationship, frequency of contact and level of trust.
  • Keep documentation evidencing such steps (including risk acknowledgements signed by purchasers) for eight years.

Invitation for Discussion:

If you would like to discuss this blog in greater detail, or any other business, contract or securities law related matter, please do not hesitate to contact one of the lawyers in the Business Law group at Linmac LLP.


Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.