– *updated August 31, 2015 –
In the Canada, who is an accredited investor is defined in Subsection 1.1 of National Instrument 45-106 Prospectus and Registration Exemptions (“NI 45-106“) The definition sets the standards for accredited investor status under certain exemptive provisions for private and other limited offerings under NI 45-106 in Canada.
The accredited investor exemption was amended in the spring of 2015 . The new rule now requires a risk acknowledgement be acquired from investors when an issuer relying on the accredited investor exemption to sell its securities.
The accredited investor definition under NI 45-106 is provided below for your convenience.
“accredited investor” means
- except in Ontario, a Canadian financial institution, or a Schedule III bank,
- except in Ontario, the Business Development Bank of Canada incorporated under the
Business Development Bank of Canada Act (Canada),
- except in Ontario, a subsidiary of any person referred to in paragraphs (a) or (b), if the person owns all of the voting securities of the subsidiary, except the voting securities required by law to be owned by directors of that subsidiary,
- except in Ontario, a person registered under the securities legislation of a jurisdiction of Canada as an adviser or dealer,
- an individual registered under the securities legislation of a jurisdiction of Canada as a representative of a person referred to in paragraph (d), an individual formerly registered under the securities legislation of a jurisdiction of Canada, other than an individual formerly registered solely as a representative of a limited market dealer under one or both of the Securities Act (Ontario) or the Securities Act (Newfoundland and Labrador), except in Ontario, the Government of Canada or a jurisdiction of Canada, or any crown corporation, agency or wholly owned entity of the Government of Canada or a jurisdiction of Canada,
- except in Ontario, a municipality, public board or commission in Canada and a
metropolitan community, school board, the Comité de gestion de la taxe scolaire de l’île de Montréal or an intermunicipal management board in Québec,
- except in Ontario, any national, federal, state, provincial, territorial or municipal government of or in any foreign jurisdiction, or any agency of that government,
- except in Ontario, a pension fund that is regulated by the Office of the Superintendent of Financial Institutions (Canada), a pension commission or similar regulatory authority of a jurisdiction of Canada,
- an individual who, either alone or with a spouse, beneficially owns financial assets
having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $1,000,000,
- an individual who beneficially owns financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $5 000 000,
- an individual whose net income before taxes exceeded $200 000 in each of the 2 most recent calendar years or whose net income before taxes combined with that of a spouse exceeded $300 000 in each of the 2 most recent calendar years and who, in either case, reasonably expects to exceed that net income level in the current calendar year,
- an individual who, either alone or with a spouse, has net assets of at least $5,000,000,
- a person, other than an individual or investment fund, that has net assets of at least $5, 000,000 as shown on its most recently prepared financial statements,
- an investment fund that distributes or has distributed its securities only to
- a person that is or was an accredited investor at the time of the distribution,
- a person that acquires or acquired securities in the circumstances referred to in sections 2.10 [Minimum amount investment], or 2.19 [Additional investment in investment funds], or
- a person described in paragraph (i) or (ii) that acquires or acquired securities under section 2.18 [Investment fund reinvestment],
- an investment fund that distributes or has distributed securities under a prospectus in a jurisdiction of Canada for which the regulator or, in Québec, the securities regulatory authority, has issued a receipt,
- a trust company or trust corporation registered or authorized to carry on business under the Trust and Loan Companies Act (Canada) or under comparable legislation in a jurisdiction of Canada or a foreign jurisdiction, acting on behalf of a fully managed account managed by the trust company or trust corporation, as the case may be, a person acting on behalf of a fully managed account managed by that person, if that person is registered or authorized to carry on business as an adviser or the equivalent under the securities legislation of a jurisdiction of Canada or a foreign jurisdiction, a registered charity under the Income Tax Act (Canada) that, in regard to the trade, has obtained advice from an eligibility adviser or an adviser registered under the securities legislation of the jurisdiction of the registered charity to give advice on the securities being traded,
- an entity organized in a foreign jurisdiction that is analogous to any of the entities referred to in paragraphs (a) to (d) or paragraph (i) in form and function,
- a person in respect of which all of the owners of interests, direct, indirect or beneficial, except the voting securities required by law to be owned by directors, are persons that are accredited investors,
- an investment fund that is advised by a person registered as an adviser or a person that is exempt from registration as an adviser,
- a person that is recognized or designated by the securities regulatory authority or, except in Ontario and Québec, the regulator as an accredited investor, or (w) a trust established by an accredited investor for the benefit of the accredited investor’s family members of which a majority of the trustees are accredited investors and all of the beneficiaries are the accredited investor’s spouse, a former spouse of the accredited investor or a parent, grandparent, brother, sister, child or grandchild of that accredited investor, of that accredited investor’s spouse or of that accredited investor’s former spouse;
Subsection 3.5 of the Companion Policy to National Instrument 45-106 Prospectus and Registration Exemptions provides clarification as to how individuals determine whether they meet the income or net asset requirements of an “accredited investor” .
3.5 Accredited investor
(1) Individual qualification – financial tests
An individual is an “accredited investor” for the purposes of NI 45-106 if the individual satisfies one of four tests set out in the “accredited investor” definition in section 1.1 of NI 45-106:
- the $1,000,000 financial asset test in paragraph (j)
- the $5,000,000 financial asset test in paragraph (j.1)
- the net income test in paragraph (k)
- the net asset test in paragraph (l)
Three branches of the definition (in paragraphs (j), (k) and (l)) are designed to treat spouses as a single investing unit, so that either spouse qualifies as an “accredited investor” if the combined financial assets of both spouses exceed $1,000,000, the combined net income of both spouses exceeds $300,000, or the combined net assets of both spouses exceeds $5,000,000.
The fourth branch, the $5,000,000 financial asset test, does not treat spouses as a single investing unit. If an individual meets the $5 000 000 financial asset test, they also meet the test to be a “permitted client” under NI 31-103. Permitted clients are entitled to waive the “know your client” and suitability obligations of registered dealers and advisers under NI 31-103. Under subsection 2.3(7) of NI 45-106, an issuer distributing securities under the accredited investor exemption to an individual who meets the $5,000,000 financial asset test in paragraph (j.1) under the definition of “accredited investor” is not required to obtain a signed risk acknowledgement in Form 45-106F9 Form for Individual Accredited Investors from that individual.
For the purposes of the financial asset tests in paragraphs (j) and (j.1), “financial assets” are defined in NI 45-106 to mean cash, securities, or a contract of insurance, a deposit or an evidence of a deposit that is not a security for the purposes of securities legislation. These financial assets are generally liquid or relatively easy to liquidate. The value of a purchaser’s personal residence is not included in a calculation of financial assets.
By comparison, the net asset test under paragraph (l) means all of the purchaser’s total assets
minus all of the purchaser’s total liabilities. Accordingly, for the purposes of the net asset test, the calculation of total assets would include the value of a purchaser’s personal residence and the calculation of total liabilities would include the amount of any liability (such as a mortgage) in respect of the purchaser’s personal residence.
If the combined net income of both spouses does not exceed $300,000, but the net income of one of the spouses exceeds $200,000, only the spouse whose net income exceeds $200,000 qualifies as an accredited investor.
(2) Bright-line standards – individuals
The monetary thresholds in the “accredited investor” definition are intended to create “brightline” standards. Investors who do not satisfy these monetary thresholds do not qualify as
accredited investors under the applicable paragraph.
(3) Beneficial ownership of financial assets
Paragraphs (j) and (j.1) of the “accredited investor” definition refer to the beneficial ownership of financial assets. As a general matter, it should not be difficult to determine whether financial assets are beneficially owned by an individual, an individual’s spouse, or both, in any particular instance. However, in the case where financial assets are held in a trust or in another type of investment vehicle for the benefit of an individual there may be questions as to whether the individual beneficially owns the financial assets. The following factors are indicative of beneficial ownership of financial assets:
- physical or constructive possession of evidence of ownership of the financial
- entitlement to receipt of any income generated by the financial asset;
- risk of loss of the value of the financial asset; and
- the ability to dispose of the financial asset or otherwise deal with it as the
individual sees fit.
For example, securities held in a self-directed RRSP, for the sole benefit of an individual, are
beneficially owned by that individual. In general, financial assets in a spousal RRSP would also
be included for the purposes of the $1 000 000 financial asset test in paragraph (j) because it takes into account financial assets owned beneficially by a spouse. However, financial assets in a spousal RRSP would not be included for purposes of the $5 000 000 financial asset test in
paragraph (j.1). Financial assets held in a group RRSP under which the individual does not have the ability to acquire the financial assets and deal with them directly would not meet the
beneficial ownership requirements in either paragraph (j) or paragraph (j.1).
(4) Calculation of an individual purchaser’s net assets
To calculate a purchaser’s net assets under the net asset test in paragraph (l) of the “accredited investor” definition, subtract the purchaser’s total liabilities from the purchaser’s total assets. Thevalue attributed to assets should reasonably reflect their estimated fair value. Income tax should be considered a liability if the obligation to pay it is outstanding at the time of the distribution of the security.
(4.1) Risk acknowledgement from individual investors
Persons relying on the accredited investor exemption in section 2.3 of NI 45-106 and section 73.3 of the Securities Act (Ontario) to distribute securities to individual accredited investors described in paragraphs (j), (k) and (l) of the “accredited investor” definition must obtain a completed and signed risk acknowledgement from that individual accredited investor.
“Individual” is defined in the securities legislation of certain jurisdictions to mean a natural
person. The definition specifically excludes partnerships, unincorporated associations,
unincorporated syndicates, unincorporated organizations and trusts. It also specifically excludes a natural person acting in the capacity of trustee, executor, administrator or personal or other legal representative.
(5) Financial statements
The minimum net asset threshold of $5,000,000 specified in paragraph (m) of the “accredited
investor” definition must, in the case of a non-individual entity, be shown on the entity’s “most recently prepared financial statements”. The financial statements must be prepared in accordance with applicable generally accepted accounting principles.
(6) Time for assessing qualification
The financial tests prescribed in the accredited investor definition are to be applied only at the time of the distribution of the security. The person is not required to monitor the purchaser’s continuing qualification as an accredited investor after the distribution of the security is completed.
(7) Recognition or designation as an “accredited investor”
Paragraph (v) of the “accredited investor” definition in NI 45-106 contemplates that a person may apply to be recognized or designated as an accredited investor by the securities regulatory
authorities or, except in Ontario and Québec, the regulators. The securities regulatory authorities or regulators have not adopted any specific criteria for granting accredited investor recognition or designation to applicants, as the securities regulatory authorities or regulators believe that the “accredited investor” definition generally covers all types of persons that do not require the protection of the prospectus requirement. Accordingly, the securities regulatory authorities or regulators expect that applications for accredited investor recognition or designation will be utilized on a very limited basis. If a securities regulatory authority or regulator considers it appropriate in the circumstances, it may grant accredited investor recognition or designation to a person on terms and conditions, including a requirement that the person apply annually for renewal of accredited investor recognition or designation.
(8) Verifying accredited investor status
Persons relying on the accredited investor exemption are responsible for determining whether a purchaser meets the definition of “accredited investor”. See section 1.9 of this Companion Policy for guidance on how to verify and document purchaser status.
Other Articles You May Find of Interest:
- Accredited Investor Verification Request Form - May 11, 2011
- Definition of Accredited Investor in United States - Aug 24, 2015
- Part Two: Part Two: Relying on the Accredited Investor Exemption to Raise Private Placement Capital - Aug 23, 2015
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DisclaimerThe articles on this website are not intended to create, and do not create, an attorney-client relationship. You should not act or rely on information on this website without first seeking the advice of a lawyer. This material is intended for general information purposes only and does not constitute legal advice. You are advised to contact legal counsel prior to undertaking any securities transaction. Laws change and there are subtle nuances to the rules that may apply in your particular circumstance.
Alixe Cormick is the founder of Venture Law Corporation in Vancouver, British Columbia and a member of Commercialization Advisory Board of the Life Science Institute at the University of British Columbia, the Advisory Board of the National Crowdfunding Association and two private tech companies. She is also a member of the Pacific Northwest Keiretsu Forum, an association of accredited private equity angel investors, venture capitalists and corporate/institutional investors, and Vantech Angel Technology Network, a Vancouver angel group. You can reach Alixe by phone at 604-659-9188, by email at firstname.lastname@example.org, on twitter @AlixeCormick or on Google+.