This resource has been prepared by Nicholas dePencier Wright of Wright Business Law for educational purposes. This information is current as of the date of writing and does not constitute legal advice, which should be obtained prior to relying on anything herein.
Book a telephone consultation here: https://wrightbusinesslaw.cliogrow.com/book
_______________________________________________________________________________________
The Ontario Accredited Investor Exemption is one of the most important provisions under Ontario securities law, enabling certain individuals and entities with sufficient financial resources to participate in investments not typically available to the general public. This exemption allows qualified investors to purchase securities without the protection of a prospectus, which reduces regulatory barriers for companies raising capital but also increases risk for investors. This article provides an overview of the Ontario Accredited Investor Exemption, outlines eligibility criteria, and discusses the benefits and risks associated with this investment approach.
- What Is the Ontario Accredited Investor Exemption?
The Ontario Accredited Investor Exemption is established under National Instrument 45-106 – Prospectus Exemptions (NI 45-106), which governs securities exemptions across Canada. In Ontario, securities offerings generally require a prospectus – a detailed disclosure document meant to protect investors by providing comprehensive information about the investment. However, the accredited investor exemption allows qualified investors to purchase securities without a prospectus, streamlining the capital-raising process for issuers.
The rationale behind the exemption is that accredited investors – who are presumed to have the financial experience or resources necessary to assess high-risk investments – may not require the same protections as general investors. This exemption can benefit both investors, by providing access to unique opportunities, and companies, by simplifying the regulatory process of raising capital.
- Who Qualifies as an Accredited Investor in Ontario?
Under NI 45-106, individuals and entities must meet specific financial thresholds or criteria to be considered accredited investors. Here are the primary categories:
Individual Investors:
• Income Test: An individual is considered accredited if they have earned a minimum of $200,000 in each of the past two years (or $300,000 when combined with a spouse) and reasonably expect to maintain the same income level in the current year.
• Financial Asset Test: Individuals qualify if they hold financial assets (cash, securities, etc.) worth at least $1 million, excluding the value of their primary residence.
• Net Worth Test: Individuals or couples with a combined net worth of at least $5 million (including real estate, assets, etc.) qualify under this test.
Institutional Investors: Various entities, including banks, insurance companies, pension funds, and government agencies, qualify automatically as accredited investors. In addition, entities with net assets of at least $5 million are generally eligible.
Corporations and Trusts: Corporations, partnerships, and trusts are eligible if all of their owners or beneficiaries qualify as accredited investors. Additionally, an investment fund that is managed by a registered adviser or dealer qualifies for the exemption.
Accredited investors must sign a Risk Acknowledgement Form in Ontario, as per OSC Rule 45-501 to confirm their understanding of the risks involved in purchasing exempt securities.
- How the Accredited Investor Exemption Works
For companies, the exemption provides a streamlined path to raising capital. By focusing on accredited investors, issuers can bypass the complex and costly prospectus requirement. This exemption is often used by startups, private companies, and certain investment funds looking to raise capital quickly and efficiently. Here’s how it typically works:
Issuer Selection: Companies identify and approach potential accredited investors directly or through an Exempt Market Dealer (EMD).
Risk Disclosure: Although a prospectus isn’t required, issuers often provide an offering memorandum or similar disclosure document to accredited investors. This helps inform investors of potential risks, even if it doesn’t carry the same detailed information as a prospectus.
Subscription Agreement: Accredited investors sign a subscription agreement and, in Ontario, complete the Risk Acknowledgement Form to formally confirm their understanding of the investment risks.
Exempt Market Dealer (EMD) Role: In many cases, an EMD will facilitate the sale of securities to accredited investors, providing additional oversight and helping to ensure compliance with Ontario Securities Commission (OSC) requirements.
The OSC does not automatically review these transactions but retains the right to conduct audits or reviews if necessary to ensure compliance with securities regulations.
- Benefits of the Accredited Investor Exemption
For Investors:
• Access to Exclusive Opportunities: Accredited investors can participate in early-stage and high-growth opportunities that are typically not available to the public, including private placements, venture capital, and hedge funds.
• Potential for High Returns: By participating in the exempt market, accredited investors have access to potentially high-yield investments that may offer returns beyond those available in public markets.
For Issuers:
Reduced Regulatory Burden: By utilizing the accredited investor exemption, companies can raise capital without the time and cost of preparing a prospectus. This makes it easier for startups and small businesses to secure financing.
Greater Flexibility: Issuers can approach a smaller pool of investors who are knowledgeable or capable of bearing the risk, which can streamline negotiations and potentially foster longer-term investment relationships.
- Risks and Considerations
For Investors:
High Risk: The exempt market often includes investments with high-risk profiles, such as startups, private equity, or speculative ventures. These securities may lack liquidity, transparency, and regulatory oversight, making it difficult for investors to assess or sell their investments.
Limited Disclosure: Without a prospectus, accredited investors receive limited information about the issuer’s business model, financials, and risk factors, which can increase the risk of loss. Due diligence becomes even more crucial in these cases.
For Issuers:
Reputational Risk: Companies operating in the exempt market may be perceived as riskier, which could impact their credibility. It’s important for issuers to provide honest, thorough disclosures to maintain investor trust.
Investor Suitability and KYC Obligations: Issuers and dealers must ensure that they are compliant with Know-Your-Client (KYC) requirements and other regulations to avoid legal consequences or regulatory actions.
- Regulatory Compliance and Reporting
Even though the accredited investor exemption reduces certain regulatory requirements, issuers and Exempt Market Dealers must still ensure compliance with Ontario securities laws. Below are some key requirements:
• Filing Obligations: Issuers relying on the accredited investor exemption must file a report with the OSC within 10 days of the distribution of securities, as required under Form 45-106F1.
• Record-Keeping: Detailed records of exempt distributions, including investor information and completed Risk Acknowledgement Forms, must be maintained to demonstrate compliance with securities regulations.
• Potential for OSC Review: Although the OSC does not review every exempt distribution, it has the authority to conduct audits, investigate complaints, or impose sanctions if regulatory violations are found.
7. Conclusion
The Ontario Accredited Investor Exemption provides a unique opportunity for eligible investors to access private market investments and for companies to raise capital more efficiently. However, the exemption comes with significant risks for investors and compliance obligations for issuers.
For accredited investors, understanding the risks and conducting thorough due diligence is essential to ensure they make informed investment decisions. Issuers should work with legal and financial professionals to ensure compliance with OSC regulations and protect the integrity of their offerings in the exempt market.
By understanding the nuances of the Ontario Accredited Investor Exemption, investors and issuers can make the most of this exemption while managing risks and responsibilities in the Ontario exempt market.
Sources
NI 45-106 – Prospectus Exemptions
Canadian Securities Administrators
Private Capital Markets Association of Canada