New Self-Certified Investor Exemption in Effect in Ontario

For a limited time, companies can issue securities to qualifying investors without a prospectus so long as certain conditions are met

The Problem

A corporation can only issue shares to a potential investor if it files a prospectus or the requirements of a prospectus exemption have been met. Filing a prospectus is an onerous process, so issuers often look to rely on a prospectus exemption.

Each prospectus exemption has a bright line test that can sometimes produce arbitrary and unfortunate results. As an example, we have seen situations where a lawyer has worked directly with a client on a securities offering and probably knows more than anyone about the issuer and the securities, but they cannot subscribe for shares because they cannot satisfy any of the prospectus exemption requirements. Two of the more common exemptions might be unavailable: the “accredited investor” definition requires income of more than $200,000 or the satisfaction of other financial tests, and the “close business associate” definition expressly excludes clients.

The Solution

On October 25, 2022, the Ontario Securities Commission made an Order providing that non-investment fund issuers with a head office in Ontario may issue securities to investors (or their designates) without a prospectus if the investor certifies that they have the necessary business knowledge, either through education or experience, to make an informed investment decision.

The Order effectively allows Ontario purchasers who may not otherwise meet the financial thresholds to qualify as an “accredited investor” to invest in companies, so long as such investors can demonstrate financial and investment expertise or relevant industry-specific experience. The aggregate amount of all investments made in reliance on the exemption is capped at $30,000 per investor per year.

The Order is intended to be an interim measure to permit such investments in Ontario only, while the Commission explores expanding the “accredited investor” definition in National Instrument 45-106, which applies nationwide, along similar lines. The Order, which originally was set to last until April 25, 2024 unless the accredited investor definition was amended by then, has been since extended by the OSC for a further 18 months to October 25, 2025.

Who can be a “Self-Certified Investor”?

To qualify as a self-certified investor, an individual must:

• hold a Chartered Financial Analyst Charter from the CFA Institute;
• hold a Chartered Investment Manager designation from the Canadian Securities Institute;
• hold a Chartered Business Valuator destination from the CBV Institute;
• hold a Chartered Professional Accountant designation from CPA Canada;
• hold a Certified International Wealth Manager Designation from the Canadian Securities Institute;
• were admitted to practice law in a jurisdiction of Canada and at least 1/3 of their practice has involved providing advice respecting financings involving public or private distributions or securities or mergers and acquisitions;
• hold a master of Business Administration degree with a focus on finance, from a Canadian university or an accredited foreign university;
• hold an undergraduate degree in finance or an undergraduate degree in commerce or business with a major or specialization in finance or investment, from a Canadian university or an accredited foreign university;
• have passed the Canadian Securities Course administered by the Canadian Securities Institute;
• have passed the Exempt Market Products Exam administered by the IFSE Institute;
• have passed the Canadian Investment Funds Course Exam administered by the IFSE Institute;
• have passed the Investment Funds in Canada Course Exam administered by the Canadian Securities Institute;
• have passed 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;
• hold the Certified Financial Planner designation from FP Canada;
• hold a Financial Planner or Financial Advisor credential, in good standing, from a credentialling body approved by the Financial Services Regulatory Authority of Ontario under the Financial Professionals Title Protection Act, 2019; or
• have management, policy-making, engineering, product or other relevant operational experience at a business that operates in the same industry or sector as the issuer and who, as a result of this experience, is able to adequately assess and understand the risk of investment in the issuer.

Permitted Designees

An individual who qualifies as a Self-Certified Investor may purchase securities personally or through a permitted designate. The list of “permitted designates” includes a holding entity of the individual or their spouse, an RRSP, RRIF, or TFSA of the individual or their spouse, or a trustee, custodian, or administrator acting on behalf of or for the benefit of the individual or their spouse.

Other conditions of the exemption

The Order only applies within Ontario. Issuers and purchasers in other jurisdictions cannot rely on this exemption.

Issuers relying on the exemption must:

• ensure their form of subscription agreement contains a representation from the purchaser that, after giving effect to the distribution, the aggregate acquisition cost of the securities of all issuers acquired by the Self-Certified Investor, and any permitted designates, under the exemption in the calendar year does not exceed $30,000;
• collect from each investor, together with the subscription agreement, an executed “Acknowledgement of Risks” and “Confirmation of Qualifying Criteria” in the prescribed form (more on these below);
• not know, and must not reasonably be expected to know, that the statements made by the Self-Certified Investor in the Confirmation of Qualifying Criteria, the Acknowledgement of Risks, or the representation in the subscription agreement described above are false; and
• file a completed Form 45-106F1, together with each Confirmation of Qualifying Criteria, within 10 days of the distribution of securities.

Securities distributed in reliance on the exemption cannot be resold until at least four months have passed since the issuer became a public company, except in reliance on another prospectus exemption.

Additional forms required

The Order provides for two forms that Self-Certified Investors must complete: the “Acknowledgement of Risks” and the “Confirmation of Qualifying Criteria”. Issuers should take any steps they feel necessary to verify the information they receive from purchasers, and should be prepared for questions from potential investors prompted by the considerations in the forms.

Confirmation of Qualifying Criteria

This form requires the investor to state the nature of their education or expertise. If the investor is relying on relevant operational experience, the form requires them to state the applicable industry, employer, position, and duration of tenure underpinning that expertise.

Acknowledgment of Risks

This form covers a variety of considerations that differentiate the rights of purchasers under the exemption from those who purchase securities issued pursuant to a prospectus. Individuals must initial each of a series of statements confirming, among other things, that the purchaser will need to perform their own due diligence investigations and must independently assess any information they receive, and pointing out the resale restrictions of securities issued under the exemption and certain other risks of making an investment.

Key Take-Aways

For a limited time, an Ontario company’s pool of potential investors has broadened to include professionals with relevant education or experience, even if they do not qualify as an “accredited investor”.

Since other prospectus exemptions already exist to provide for the issuance of securities by a company to its employees and contractors, and to “close business associates” of its directors, executive officers, or founders, this new exemption may find more application in facilitating relatively small investments by finance professionals and industry participants in other companies in their sectors.

However, the combination of an annual cap on the aggregate amount invested per person, the requirement that both issuer and investor be in Ontario, and the requirement for additional forms to collect and post-closing filings to submit, may impact how frequently this exemption is ultimately used.