PCMA Comment Letter to Proposed CSA Changes to Accredited Investor and Minimum Amount Exemptions

PCMA_New_Logo_final_vert_2014As Chair of the Private Capital Markets Association of Canada (PCMA), I am pleased to have contributed to the preparation and submission of the PCMA’s comment letter to the Canadian Securities Administrators (the CSA) about proposed changes to the accredited investor exemption (theAI exemption) and the minimum amount exemption (the MA exemption) as set out in s. 2.3 and 2.10 of National Instrument 45-106 Prospectus and Registration Exemptions. Our comments are set out below.

Accredited Investor Exemption

1. We support the CSA’s decision that it will not change or index the income or asset thresholds within the AI exemption. As you know, any such change or indexing would have materially affected the use of the exemption and adversely impacted capital raising since approximately 90% of all capital raised in Canada is under the AI exemption.

2. The CSA proposes introducing Form 45-106F9 Risk Acknowledgement Form for Individual Accredited Investors (Form 45-106F9). It is not clear why the CSA believes the information in Form 45-106F9 cannot be included in a subscription agreement. Nevertheless, we are pleased that the CSA proposes a single form that is nationalized and harmonized across Canada. However, we are concerned that the CSA will require investors to sign two original copies of Form 45-106F9 when a digital copy or electronic signature should suffice. We ask the CSA to reconsider this requirement and ensure it reflects current industry practices and does not unnecessarily inconvenience the very investors for whom it is intended.

3. We believe that a reasonable balance has been achieved in requiring individual AIs to sign Form 45-106F9 and agree that it should not be required for permitted clients who are able to waive suitability under subsection 13.3(4) of NI 31-103.

4. We are pleased the CSA has provided additional guidance on the AI verification requirements in the Companion Policy. However, we request additional guidance on the CSA’s expectations involving the verification of AIs when there are multiple parties involved in a transaction (e.g., an issuer and a dealer). We believe additional clarification is required by the CSA that discusses when, and if, an issuer can rely on a registrant’s/dealer’s KYC and suitability determinations.

For example, an issuer commonly does not receive specific information sufficient to determine that an investor is an AI, absent self certification in a subscription agreement, or any verification/representation by a dealer/registrant that a particular trade is suitable for an investor. Accordingly, we are concerned about the potential liability of an issuer for verifying that an investor is an AI when a dealer has assumed that role and is paid a commission for providing such services. If an issuer reasonably relies on a dealer to determine an investor’s qualifications under a prospectus exemption, the issuer should not be liable under securities law for an illegal trade if the dealer was incorrect or their work was deficient. We submit that generally, reliance on a dealer by an issuer should be confirmed as reasonable reliance on behalf of the issuer. Accordingly, we respectfully request clarification of such matters in the Companion Policy.

5. There has been industry concern on whether, and how, family trusts established by an AI could qualify under the AI exemption. We agree with the CSA’s amendments to the definition of AI to specifically include family trusts as a type of AI.

6. We strongly support the Ontario Securities Commission’s proposal to allow fully managed accounts to purchase investment fund securities in Ontario. We believe this harmonization is important to the efficiency and effectiveness of our capital markets for both dealers and portfolio managers.

7. We are concerned with the proliferation of multiple forms for reporting exempt distributions in Canada. We strongly encourage the CSA to adopt a single harmonized report of exempt distribution form across Canada. Having multiple versions of the form by jurisdiction imposes a significant cost and complexity burden on issuers and dealers that is unnecessary and not in the public interest.

8. Item 8 of Form 45-106F1 Report of Exempt Distribution and Item 9 of Form 45-106F6 Report of Exempt Distribution requires disclosure of commissions and finder’s fees. We ask the CSA to clarify whether it requires the disclosure of the fees paid by an issuer to a registrant or unregistered party directly and indirectly, when part of that compensation and/or fee is paid to another registrant and/or unregistered finder who shares in that compensation. For example, if an issuer pays 8% commission to a dealer, that amount would typically be reported on the F1 or F6 report of exempt distribution. However, if 2% of that 8% is subsequently paid by the dealer to an unregistered finder, it is not clear if that amount also has to be reported. If so, we request that the CSA advise on the type of due diligence it expects an issuer to undertake to obtain this information from a registrant and/or unregistered finder and how it should be reported on the F1 and/or F6.

9. We continue to be very concerned that there is no central database that compiles statistical data on the information provided to CSA members through the various report of exempt distribution forms. The CSA’s desire for evidence-based regulation would be significantly strengthened by ensuring access to a centralized database that is accessible, transparent and available across all jurisdictions. We note that only some CSA members publish annual capital raising reports of exempt distributions in their respective jurisdictions. We believe it is in the public interest for such information to be readily available and searchable by all capital markets participants as well as the public. We appreciate there are cost concerns with implementing such a centralized database but, if necessary, we believe this could be mitigated by allowing the private sector to provide this service in co-operation with the CSA.

Minimum Amount Exemption

1. We have no objection to the CSA’s proposal to amend the MI exemption to restrict it to non-individual investors only. We believe this is a reasonable balance to address investor protection concerns associated with potentially unsuitable uses of the exemption to distribute securities to individual investors.

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Koscak_bBrian Koscak is a Partner at Cassels Brock & Blackwell LLP located in Toronto, Ontario and Chair of the Private Capital Markets Association of Canada (formerly, the Exempt Market Dealers Association of Canada). Brian is also a member of the Ontario Securities Commission’s Exempt Market Advisory Committee and Co-Chair of the Equity Crowdfunding Alliance of Canada. Brian can be reached by phone at 416-860-2955, by e-mail at bkoscak@casselsbrock.com or on twitter @briankoscak. Brian also regularly writes about Canadian securities law matters on his personal blog at www.briankoscak.com.