Legal Brief: Prospectus and Registration Exemption Changes

PROSPECTUS AND REGISTRATION EXEMPTION CHANGES

If you are a private company in British Columbia that is relying on accredited investor exemptions to raise capital, or alternatively, if you are an investor that relies on those exemptions to contribute capital to private companies in British Columbia, then this update is for you.

Effective May 5, 2015, there will be significant changes to the National Instrument that defines and provides the prospectus and registration exemptions, National Instrument 45-106 (“NI 45-106”). Below are the two most significant changes to highlight:

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1.  RISK ACKNOWLEDGMENT FORM

The definition of “accredited investor” includes:

• 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 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; and
• An individual who, either alone or with a spouse, has net assets of at least $5,000,000.

As of May 5, 2015, a person distributing securities with reliance on the accredited investor exemption must obtain a signed risk acknowledgement form at the same time or before signing the agreement to purchase the security. The distributing person must retain this risk acknowledgment form for at least 8 years after the distribution.

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2.  MINIMUM AMOUNT INVESTMENT

Previously, one of the prospectus and registration exemptions available was the “minimum amount investment” exemption. Under this exemption, the prospectus and registration requirements did not apply to persons that make a minimum investment of $150,000 to a single private issuer.

As of May 5, 2015, this exemption will only be available to persons that are not individuals. In other words, companies can no longer rely on this exemption when raising capital from individuals.

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Here are two simple takeaways from the above changes that will be taking affect on May 5, 2015:

1. If you are a private company in British Columbia that is relying on the accredited investor exemption, ensure that your standard form subscription agreement, convertible loan agreement, and any other standard form security instrument you use, is updated to reflect the new requirement for extended risk acknowledgments. Speak with your lawyer to ensure that this is done properly.

2. If you, as an individual, rely on the minimum amount investment exemption to make investments in private companies here in British Columbia, or if you, as a private issuer, rely on that exemption to bring in investment from individuals, you can no longer do so. You will need to evaluate other exemptions available (such as the accredited investor exemption) in order to safely complete your transactions.

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To discuss these amendments and their implications with your business, contact us at Segev LLP.