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CSA Multilateral Notice and Request for Comment 45-327 Proposed Prospectus Exemption for Self-Certified Investors
Letter Summary:
The ASC and FCAA (Sask) are proposing a new prospectus exemption for issuers in those provinces who wish to sell securities to investors in those provinces as an alternative to the accredited investor exemption, which is intended to facilitate the growth of the angel investor ecosystem. To use the exemption, an investor would need to complete (and attest to) a Self-Certified Investor Statement and Acknowledgment. The investor would need to certify that they have a CFA designation, a CPA designation (in Canada), are admitted to the practice of law in Canada (focusing on M&A or financings) or hold an MBA with a focus on finance or a degree in finance. Alternative criteria building on the foregoing is proposed for purchasers that are not individuals. The risk statement includes detailed and comprehensive information on the risks of the securities, including that certain information that would otherwise be available in a prospectus (which is described) is not being made available, an extensive description of resale restrictions, notes about the impact of the lack of a public market and the potential inability to get the investment back. The amount that could be invested in reliance on the exemption by any one person is limited to $10K in the last 12 months for the issuer, and $30K in the last 12 months for all issuers. A private placement form would be required to be filed within 10 days of the closing of a distribution. The exemptions would be made available through local blanket orders for three years as a pilot project.
Overview of the Council’s Comments:
The CAC appreciates the opportunity to provide comments on the Proposed Exemption. The notice explaining the Proposed Exemption states that it is not intended that the issuer take steps to independently confirm the education or experience qualification of persons attesting to the foregoing in a statutory declaration. While that is a departure from the usual burden placed on issuers to ensure that an exemption from the prospectus requirement is available, we agree that a statutory declaration could suffice for the time being. However, to the extent that a registrant is involved in the distribution, we believe it is important that it be clearly stated that the statutory declaration does not abrogate the registrant’s KYC, KYP or suitability obligations. Presumably, part of the dealer’s responsibility would be to ensure that the individual qualifies for the exemption under the stated criteria as part of his or her suitability obligations. It is important that the self-certification not become a “check-the-box” exercise on the part of proposed investors, and dealers should bear some responsibility for ensuring the accuracy of the self-certification. If there are ramifications to inaccurate statements, those ramifications should extend to the registrants facilitating the issue. While the investor may have the credentials to make them aware of the general risk characteristics of an investment, that same investor may not have a proven ability to withstand the loss of part or all of their investment in the issuer. Therefore, it will be crucial for registrants to confirm as part of the KYC and suitability assessments that any investor utilizing the Proposed Exemption is not investing using borrowed funds beyond their ability to repay should the investment prove either worthless or illiquid. We anticipate that the Proposed Exemption would be used by start-ups and emerging businesses in Alberta and Saskatchewan to sell securities to professional colleagues, friends and acquaintances of promoters and officers/directors of the issuer who are unable to purchase securities under an existing prospectus exemption. We believe many of these investors might be just shy of the requisite income or financial asset threshold to qualify as accredited investors. We believe the limits on investment are reasonable. We believe that additional disclosure items should be added related to investment illiquidity and potential tax impact. We would be pleased in the future to consider whether there are other educational avenues or areas of study, such as economics, applied mathematics, business strategy or entrepreneurship, coupled with professional experience related to public or private financings or mergers and acquisition transactions, which could be seen as equivalent in specific circumstances. We have some concerns with respect to interpreting the “not the public” prong of the private issuer exemption such that it would automatically include a vehicle that is predominately owned by accredited investors.