OSC introduces temporary exemption for self-certified investors from OSA prospectus requirement
On October 25, 2022, the Ontario Securities Commission (“OSC”) introduced a new exemption (the “Temporary Exemption”) from the prospectus requirement in respect of a distribution of securities in Ontario by an Ontario issuer to financially literate "self-certified investors" (“SCIs”).
On January 21, 2021, the Capital Markets Modernization Taskforce published a report recommending the expansion of the Accredited Investor exemption under section 2.3 (1) of the National Instrument 45-106 Prospectus Exemptions (“NI 45-106”) to include SCIs. The report focused on reducing the regulatory burden on capital markets participants. On March 31, 2021, the securities regulatory authorities in Alberta and Saskatchewan adopted temporary SCI exemptions.
With the passage of Ontario Instrument 45-507 - Self Certified Prospectus Exemption (Interim Class Order) (“OI 45-507”) on October 25, 2022, the OSC follows the initiatives of Alberta and Saskatchewan. The OSC has indicated that the pilot project will address the fact that certain individuals possess the necessary business education or experience to make informed investment decisions, but do not meet the financial thresholds or other criteria to qualify as an Accredited Investor. The Temporary Exemption came into force on October 25, 2022 and will remain in force until April 25, 2024 unless the Order is extended by the OSC.
The Temporary Exemption
Under section 53(1), all persons or companies are prohibited from distributing a security unless a preliminary prospectus and prospectus have been filed and the Director has provided the issuer with a receipt. Under section 12 of OI 45-507, an issuer is exempt from the prospectus requirements if certain conditions are met, as follows:
- the head office of the issuer is located in Ontario;
- the issuer is not an investment fund;
- the purchaser is an SCI or permitted designate of an SCI;
- in the subscription agreement, the purchaser represents to the issuer that the aggregate acquisition cost under the Temporary Exemption does not exceed $30,000 in a given calendar year;
- when executing the subscription agreement, the SCI completes and provides to the issuer (i) a completed Confirmation of Qualifying Criteria, confirming that the SCI meets such criteria; and (ii) a completed Acknowledgement of Risks, confirming that the SCI has read and understood each acknowledgement;
- the issuer does not know and would not reasonably be expected to know that the statements made by the SCI in (d) or (e) are false; and
- on or before the 10th day after completing the distribution, the issuer files a completed Form 45-106F1 - Report of Exempt Distribution with the completed Confirmation of Qualifying Criteria and applicable fee.
The purpose of the Temporary Exemption is to permit persons who meet the threshold demonstrated financial and investment knowledge to purchase securities on an exempt basis. Section 1 of OI 45-507 defines an SCI as someone who has completed the Confirmation of Qualifying Criteria (Annex 1 to OI 45-507) and the Acknowledgement of Risks (Annex 2 to OI 45-507).
Persons or companies can qualify as SCIs if the individual has one of the following experiences or qualifications:
- Chartered Financial Analysis designation;
- Chartered Investment Manager designation;
- Chartered Business Valuator designation;
- Chartered Professional Accountant designation;
- Certified International Wealth Manager Designation;
- Canadian licence to practice law where at least one-third of the individual’s practice involves advice regarding financings or mergers and acquisitions;
- Master of Business Administration with a focus on finance;
- undergraduate degree in Finance or Business or Commerce with Finance major or specialization;
- certificate from the Canadian Securities Course Exam;
- certificate from the Exempt Market Products Exam;
- certificate from the Canadian Investment Funds Course Exam;
- certificate from the Investment Funds in Canada Course Exam;
- certificate in both the Series 7 Exam by the US Financial Industry Regulatory Authority and the New Entrants Course Exam by the Canadian Securities Institute;
- Certified Financial Planner designation;
- Financial Planner or Financial Advisor credential from a body approved to credential by the Ontario Financial Services Regulatory Authority; and
- has management, policy-making, engineering, product or other relevant operational experience at a business that operates in the same industry as the issuer, which renders the investor adequately able to assess and understand the risk involved in the investment.
The Temporary Exemptions will permit the OSC to evaluate the appropriateness of the eligibility criteria and identify any potential public interest concerns or operational considerations that should be addressed in establishing a permanent exemption.
For further details, please see the Ontario Instrument 45-507 entitled “Self-Certified Investor Prospectus Exemption (Interim Class Order)”.