– October 31, 2023 –

Under Canadian securities law, companies seeking to raise capital by selling securities must file a prospectus with regulatory authorities or qualify for an exemption. One commonly used exemption is the accredited investor (AI) exemption. This exemption allows issuers to distribute securities to investors who qualify as accredited investors without having to file a prospectus.

The AI exemption is set out in section 2.3 of National Instrument 45-106 –  Prospectus Exemptions (NI 45-106). Section 1.1 of NI 45-106 defines who qualifies as an accredited investor. This article provides an overview of the AI exemption, who can qualify to use it, and how it enables companies to access capital.

Who Qualifies as an Accredited Investor

Under NI 45-106, accredited investors include:

• Individuals who meet certain income or asset thresholds, such as having financial assets of at least $1 million, net assets of at least $5 million, or net income over $200,000 ($300,000 if combined with spouse) in each of the last 2 years (sections 1.1(j), (j.1), (k), and (l))
• Institutional investors like banks, pension funds, and registered dealers/advisers (sections 1.1(a) to (i))
• Other entities like corporate issuers, trusts, or endowment funds (sections 1.1(t), (u), and (w))

Individual investors must meet high financial thresholds intended to establish they have the resources and sophistication to make investment decisions without a prospectus.

Using the AI Exemption to Raise Capital

The AI exemption allows issuers to distribute securities to accredited investors without filing a prospectus. This enables many companies, especially startups and private companies, to access needed capital in a faster and more cost-effective manner.

Key benefits of the AI exemption include:

• No prospectus means lower legal costs for issuers raising capital,
• Quicker access to capital since prospectus filing and review requirements don’t apply, and
• The ability to solicit accredited investors widely can help issuers raise sizeable investment rounds.

Issuers are required to verify that each investor is indeed an accredited investor, as defined in NI 45-106. The issuer must also provide and obtain a risk acknowledgment form (Form 45-106F9) if the investor is an individual relying on the asset, financial or income test to be qualified as an accredited investor.

AI Exemption in Practice

Startups and private companies frequently use the AI exemption to raise seed rounds from angel investors or venture capital. Later-stage funding rounds are also often raised through the exemption.

In 2022, over $26.43 billion or 85% of the capital raised that year in British Columbia (2021: $36.08B – 80%) was raised using the AI exemption according to the BC Capital Market Report 2022 of the British Columbia Securities Commission.

Resale Restrictions

While the AI exemption enables access to capital, securities issued under it are subject to resale restrictions. National Instrument 45-102 – Resale Restrictions sets out these restrictions. Securities issued by private issuers are subject to an indefinite resale restriction, and may only be sold under another prospectus exemption.

Conclusion

In summary, the AI exemption allows entities raising capital to distribute securities to accredited investors without the time and expense of a public offering. This facilitates capital formation while ensuring investor protection. However, issuers must still comply with certain requirements, like verifying purchaser status and providing a risk acknowledgment form (Form 45-106F9). Overall, the AI exemption is a valuable tool for companies seeking to raise investment capital in Canada.