– *updated February 14, 2022 –
The securities regulators in Alberta, Saskatchewan, Manitoba, Ontario, Québec, Northwest Territories, Nunavut, Yukon, Prince Edward Island, New Brunswick and Nova Scotia require investors purchasing more than $10,000 in securities under the offering memorandum exemption to be “eligible investors“. The term eligible investor is defined in Subsection 1.1 of National Instrument 45-106 Prospectus and Registration Exemptions (“NI 45-106“). The definition is a combination of certain income and asset tests and a relationship requirement.
Issuers must take reasonable steps beyond a check the box approach to verify an investor meets the eligibility requirements of the definition. This means asking questions about a purchaser’s net income, financial assets, or net financial assets and other related questions. Issuers should document the steps taken and the answers provide by potential purchasers and keep these documents in a file in case a regulator every makes any inquiries about the investment.
Below is the eligible investor definition under NI 45-106.
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Subsection 1.1 of NI 45-106 defines an “eligible investor” as follows:
“eligible investor” means
“eligible investor” means
(a) a person whose
(i) net assets, alone or with a spouse, in the case of an individual, exceed $400,000,
(ii) net income before taxes exceeded $75,000 in each of the 2 most recent calendar years and who reasonably expects to exceed that income level in the current calendar year, or
(iii) net income before taxes, alone or with a spouse, in the case of an individual, exceeded $125,000 in each of the 2 most recent calendar years and who reasonably expects to exceed that income level in the current calendar year,
(b) a person of which a majority of the voting securities are beneficially owned by eligible investors or a majority of the directors are eligible investors,
(c) a general partnership of which all of the partners are eligible investors,
(d) a limited partnership of which the majority of the general partners are eligible investors,
(e) a trust or estate in which all of the beneficiaries or a majority of the trustees or executors are eligible investors,
(f) an accredited investor,
(g) a person described in section 2.5 [Family, friends and business associates], or
(h) in Manitoba, Northwest Territories, Nunavut, Prince Edward Island and Yukon, a person that has obtained advice regarding the suitability of the investment and, if the person is resident in a jurisdiction of Canada, that advice has been obtained from an eligibility adviser;;
Subsection 3.8 of the Companion Policy to National Instrument 45-106 Prospectus and Registration Exemptions clarifies how individuals determine whether they meet the income or net asset requirements of an “eligible investor”
3.8 Offering memorandum
(1) Eligibility criteria – Manitoba, Northwest Territories, Nunavut and Prince Edward Island
Manitoba, Northwest Territories, Nunavut, Prince Edward Island and Yukon impose eligibility criteria on persons investing under the offering memorandum exemption. In these jurisdictions, the purchaser must be an eligible investor if the purchaser’s acquisition cost is more than $10 000.
In determining the acquisition cost to a purchaser who is not an eligible investor, include any future payments that the purchaser will be required to make. Proceeds that may be obtained on exercise of warrants or other rights, or on conversion of convertible securities, are not considered to be part of the acquisition cost unless the purchaser is legally obligated to exercise or convert the securities. The $10,000 maximum acquisition cost is calculated per distribution of security. Nevertheless, concurrent and consecutive, closely-timed offerings to the same purchaser will usually constitute one distribution of a security. Consequently, when calculating the acquisition cost, all of these offerings by or on behalf of the issuer to the same purchaser who is not an eligible investor would be included. It would be inappropriate for an issuer to try to circumvent the $10,000 threshold by dividing a subscription in excess of $10 000 by one purchaser into a number of smaller subscriptions of $10,000 or less that are made directly or indirectly by the same purchaser.
A purchaser can qualify as an eligible investor under various categories of the definition, including if the purchaser has and has had in prior years either $75,000 pre-tax net income or profit or has $400,000 worth of net assets. In calculating a purchaser’s net assets, subtract the purchaser’s total liabilities from the purchaser’s total assets. The value 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 a security.
Another way a purchaser can qualify as an eligible investor is to obtain advice from an eligibility adviser. An eligibility adviser is a person registered as an investment dealer (or in an equivalent category of unrestricted dealer in the purchaser’s jurisdiction) that is authorized to give advice with respect to the type of security being distributed. In Manitoba, certain lawyers and public accountants may also act as eligibility advisers.
A registered investment dealer providing advice to a purchaser in these circumstances is expected to comply with the “know your client” and suitability requirements under applicable securities legislation and SRO rules and policies. Some dealers have obtained exemptions from the “know your client” and suitability requirements because they do not provide advice. An assessment of suitability by these dealers is not sufficient to qualify a purchaser as an eligible investor.
(1.1) Eligibility criteria and investment limits – Alberta, New Brunswick, Nova Scotia, Ontario, Québec and Saskatchewan
(a) Eligibility criteria
Alberta, New Brunswick, Nova Scotia, Ontario, Québec and Saskatchewan impose eligibility criteria on persons investing under the offering memorandum exemption.
The qualification criteria for becoming an eligible investor are substantially the same as in the jurisdictions identified in subsection (1), above. Note, however, that in Alberta, New Brunswick, Nova Scotia, Ontario, Québec and Saskatchewan, it is not possible to qualify as an eligible investor by receiving advice from an “eligibility advisor”.
A purchaser can qualify as an eligible investor under various categories of the definition, including if the purchaser has and has had in prior years either $75,000 pre-tax net income or profit or has $400,000 worth of net assets. In calculating a purchaser’s net assets, subtract the purchaser’s total liabilities from the purchaser’s total assets. The value 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 a security.
(b) Investment limits for individual eligible and non-eligible investors
Both eligible investors and purchasers that do not qualify as eligible investors (non-eligible investors) who are individuals are subject to investment limits under the offering memorandum exemption. In these jurisdictions, non-eligible investors who are individuals are subject to an investment limit of $10,000 and eligible investors who are individuals are subject to an investment limit of $30,000. In both cases, the investment limits apply to all securities acquired by the purchaser under the offering memorandum exemption in the preceding 12 months.
However, an individual purchaser that qualifies as an eligible investor because the investor is an accredited investor or is a person described in the family, friends and business associates exemption, is not subject to an investment limit under the offering memorandum exemption.
The fact that investment limits have been established for eligible and non-eligible investors who are individuals does not mean that these amounts are suitable investments in all cases. If a registrant is involved in a transaction, the registrant must still conduct a suitability assessment to determine that the amount of the investment and the investment itself is suitable for the purchaser. This may result in a lower investment amount for a purchaser.
The $30,000 investment limit may be exceeded by an eligible investor who receives advice from a portfolio manager, investment dealer or exempt market dealer that exceeding the investment limit of $30,000 and the investment itself is suitable for the eligible investor. In this case, the investment limit for all securities acquired by the purchaser under the offering memorandum exemption in the preceding 12 months is $100,000.
In determining the acquisition cost to a purchaser subject to investment limits, include any future payments that the purchaser will be required to make. Proceeds that may be obtained on exercise of warrants or other rights, or on conversion of convertible securities, are not considered to be part of the acquisition cost unless the purchaser is legally obligated to exercise or convert the securities.
“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.
(c) Circumstances when investment limits can be exceeded
The fact that higher investment limits apply to individual eligible investors than individual non-eligible investors does not mean these higher amounts will be suitable in all cases for eligible investors. It is a condition of the offering memorandum exemption that, in order to exceed the $30,000 investment limit, a
registrant must determine that an investment above the $30,000 investment limit is suitable for the purchaser. Unless a registrant determines that exceeding the $30,000 investment limit is suitable for the purchaser, the issuer cannot accept a subscription in excess of $30,000 from the purchaser. In this case, the registrant could also not proceed to take instructions from the purchaser to exceed the $30,000 investment limit.
(d) Investment limits apply over a 12-month period
The investment limits for both individual eligible and non-eligible investors apply to the aggregate of all investments made by a purchaser in distributions by different issuers (or multiple offerings by the same issuer) under the offering memorandum exemption during the preceding 12 months, which may or may not be a calendar year. For example, if a purchaser wishes to acquire securities of an issuer under the offering memorandum exemption on January 15, the issuer must include in the calculation all investments made by the purchaser under the offering memorandum exemption beginning on January 16 of the prior year, up to and including the date of the proposed investment.
On each distribution, the issuer must confirm that the amount invested by a purchaser who is an individual does not exceed the applicable limit and should take reasonable steps to do so. This will require the issuer to first understand whether or not the purchaser is an eligible investor. As described above in section 1.9, the issuer should gather information that confirms the purchaser meets the criteria set out in the exemption. As part of this exercise, the issuer should also discuss with the purchaser the investment limits that apply to the purchaser. In making a determination as to whether a purchaser is within the applicable investment limit, an issuer should obtain appropriate representations from the purchaser that confirm the purchaser has not exceeded the applicable investment limit over the relevant period. Note that we would have concerns if an issuer simply accepted standard representations from a purchaser without taking steps to verify the representations made by the purchaser. For instance, inquiries could be made with respect to other investments made under the offering memorandum exemption during the 12-month period preceding the current investment.
Notwithstanding the representations made by a purchaser in the schedules to the risk acknowledgement form, we expect an issuer to be able to explain what steps were taken to verify the representations made by the purchaser. We recognize that in many circumstances, a registrant may act as agent on behalf of an issuer for this process. In both cases, the guidance in section 1.9 above may also be instructive for this purpose.
(1.2) Role of registrant in providing suitability advice and conflicts of interest
A registrant involved in a distribution of securities pursuant to a prospectus exemption must not only establish that the prospectus exemption is available, it must also comply with its registrant obligations, including know-your-client, know-your-product and suitability. In assessing the level of investment that may be suitable for a purchaser under the offering memorandum exemption, registrants should take into consideration guidance published by the CSA on best practices for conducting a suitability assessment, which includes considering the level of concentration of investments in the client’s portfolio.