Selling to Accredited Investor – You Better Get It Right!
Source: Originally published in Exempt Market Update, Issue 3 - the leading national magazine for the exempt market professionals.
By: Brian Koscak, EMDA Chairman and Partner, Cassels Brock & Blackwell LLPHow many times have you seen this situation? You have an attractive investment opportunity that you would like to bring to the attention of a potential investor but they are reluctant to provide you with the details of their full financial picture. You believe they are an accredited investor (AI) but you are not sure. You need to get this right since you can only do the private placement in reliance on the accredited investor exemption (the AI exemption) set out in section 2.3 of National Instrument 45-106 – Prospectus and Registration Exemptions (NI 45-106). What do you do? Does it matter if you get it wrong?
Afzal Hasan, Associate, Cassels Brock & Blackwell LLP
Canadian securities regulators are increasingly concerned that issuers and exempt market dealers (EMDs) are getting it wrong and selling exempt securities to non-AIs – the public. Moreover, issuers and EMDs that complete transaction with investors who are not AIs in reliance on the AI exemption may be exposing themselves to regulatory risks and potential civil liability.
This article explores the AI exemption under Canadian securities law, examines recent developments in the United States involving the verification of AIs under U.S. securities law, and poses several survey questions seeking input on how we can increase compliance with the AI exemption in Canada.
Why is the AI exemption important?
The AI exemption is an important prospectus exemption in Canada since the most capital is raised under it. For example, Ontario Securities Commission (OSC) Notice 45-705 (1) states that:
"The exempt market in Canada has become increasingly important for investors and issuers. The total amount of capital raised through exempt distributions reported to the OSC in 2011 was approximately $142.9 billion. Approximately $86.5 billion of that amount was raised in Ontario. In 2011, approximately $72.8 billion was raised under the accredited investor prospectus exemption in Ontario.”Misuse of the AI exemption
The OSC and other Canadian securities regulators are concerned that issuers and/or EMDs are failing to comply with the requirements of the AI exemption by selling exempt securities to investors who do not meet the definition of an AI. Specifically, the OSC is concerned with:
- individuals who are purchasing exempt securities as AIs (2) that do not meet the minimum income or asset thresholds;
- issuers and dealers who are incorrectly interpreting the definition of "financial assets” by including non-financial assets such as precious metals, the investor’s primary residence and other real estate as "financial assets”;
- failing to collect adequate know-your-client (KYC) information to reasonably determine whether an investor is in fact an AI; and
- EMDs simply relying on a statement that an investor is an AI (e.g., self-certification) without collecting any supporting information.
- Examples of recent OSC decisions illustrating the consequences of an EMD’s failure to comply with the AI exemption include Re Morgan Dragon Development Corp. et al (3) and Re Blueport and Hare (4), which are available on the OSC’s website. (5)
The AI exemption – what is it?The AI exemption states that the prospectus requirement does not apply to a distribution of securities if the purchaser purchases the security as principal and is an AI.
The definition of who is an AI is set out in the definitions section of NI 45-106. It includes 22 categories of investors who qualify as an AI including, specified governments, financial institutions and individuals who qualify based on certain income and asset tests.
The AI exemption - tests for AIs who are individualsThere are three ways an individual may qualify under the AI exemption based on financial thresholds, which are discussed below. The Canadian securities regulators view these thresholds as "bright-line” standards for determining whether an individual is or is not an AI. These financial
thresholds are to be applied at the time of the distribution of, or trade in, the exempt security.
(a) Financial Asset TestUnder the financial asset test, an AI is an individual, alone or with a spouse, who beneficially owns "financial assets” with an aggregate realizable value, before taxes but net of any related liabilities, of $1 million. (6)
Financial assets means (a) cash, (b) securities or (c) a contract of insurance, a deposit or an evidence of a deposit that is not a security for the purposes of securities legislation, but does not include real property such as a personal residence.
The test permits individuals to include the value of any financial assets they "beneficially” own. (7)
(b) Net Asset TestSome individuals make use of the broader net asset test to qualify as an AI where the individual, either alone or with a spouse, has net assets of at least $5 million. (8) Net assets are determined by subtracting the total amount of the individual’s liabilities from the total value of the individual’s
assets. The dollar amounts assigned to assets and liabilities must be fair estimates of value.
Unlike the financial asset test, an individual can include the value of their primary residence in their net asset test; however, they must also deduct the amount of any associated mortgage on the property. The calculation does not require a deduction for any future income taxes, but any taxes that are outstanding and payable at the time of the trade must be included.
(c) Income TestAn individual may also qualify as an AI based on income if: (a) their net income before taxes exceeded $200,000 in each of the two most recent calendar years; or (b) their net income before taxes combined with that of a spouse exceeded $300,000, in each of the two most recent calendar years and who, in either case, reasonably expects to exceed that net income level in the current calendar year. (9)
Who is responsible for determining AI Status?
Securities regulators have stated that a person distributing or trading in securities is responsible for determining whether the AI exemption is available for an investor. (10)
Some market participants may believe they can solely rely on the self-certification of an investor who has ticked a box in a subscription agreement that they are an AI or otherwise factually represented that they are an AI (i.e., self-certification), assuming that the market participant has no reasonable grounds to believe those representations are false. However, this in itself may not be good enough. Prudent issuers and EMDs require additional information that supports a self-certification and shows that the AI exemption was properly relied upon.
The verification standard for determining AI status
The Companion Policy to NI 45-106 states that the verification standard for determining AI status must be reasonable, after careful consideration of the facts. (11)
Decisions by Canadian securities authorities and courts have confirmed this reasonable verification standard.For example:
If an issuer or an EMD can demonstrate they have made a reasonable, serious effort, or taken whatever steps were reasonably necessary, to satisfy itself that the AI exemption was available, it is unlikely that Canadian securities regulators would take issue with the issuer’s or dealer’s conduct.
- in a British Columbia Securities Commission decision, the Commission stated that "after making the appropriate inquiries, the issuer must have a reasonable belief that the facts are true and that the legal requirements for use of the exemption have been met”; (12)
- in an Alberta Securities Commission decision, the Commission noted that "[a]n issuer relying on an exemption in trading or distributing securities must have made a reasonable, serious effort, or taken whatever steps were reasonably necessary, to satisfy itself that the exemption was available to make the trade or distribution at the time of the trade or distribution” (13);
- in a Saskatchewan Court of Appeal decision, the Court stated that the Saskatchewan Financial Securities Commission could not sanction an issuer "if they acted with reasonable diligence to ensure the Saskatchewan purchasers of [securities] were accredited investors and had no reasonable basis to disbelieve the representations of purchasers to the effect that they were accredited investors” (14); and
- in an Ontario Court of Justice decision, the Court referenced the decision of the Saskatchewan Court of Appeal above as well as a previous Ontario Court of Justice case (15) as "clearly [outlining] the duties of sellers to take reasonable steps to ensure that investors fall within exemptions to the Regulations and Rules of the Securities Act” (16).
However, although compliance with the AI exemption does not have to be perfect from a securities regulatory perspective, this may not the case for a civil action by a disgruntled investor who wants their money back in circumstances where the issuer/EMD improperly relied upon the AI exemption. In such a situation, a disgruntled investor may have a cause of action against both the issuer and the EMD where the remedy sought would be to declare the sale of the securities sold either void or voidable. "Void” means treating the sale as if it never happened while "voidable” means giving the investor the option to decide whether or not they want their money back.
Arguably, if an investor is suing to get their investment back, such a distinction is irrelevant to an issuer or EMD; the investor wants their money back. Accordingly, issuers and EMDs should take every precaution necessary to ensure an investor understands and is in fact an AI when relying on the AI exemption. Lets’ examine two examples below.
Assume the following:
- an issuer raised $5 million, through an EMD, relying on investors qualifying under the AI exemption;
- the proceeds raised were used by the issuer to acquire income-producing properties;
- the issuer has been regularly paying investors monthly dividends for over two years;
- a field review by a securities regulatory authority determined that $2 million of the proceeds raised was improperly sold to investors who were not AIs in reliance on the AI exemption and no other prospectus exemption was available;
- the securities regulatory authority is requiring the issuer to return the $2 million to the non-AIs;
- the issuer has no other funds available to repay the non-AIs; and
- the investors relied on the issuer/EMD to explain and determine that they were qualified under the AI exemption; and therefore, the investors have "clean hands”, so to speak.
In this situation, it is conceivable that the real property would have to be urgently sold by the issuer, likely at a reduced price, and the proceeds used to refund the non-AI investors. It would not matter that these investors received a regular dividend for over two years or that management was successfully executing its business plan. In fact, the issuer could be faced with a situation where it had to refund non-AI investors their money even if it meant bankrupting the issuer. Whether market participants agree with this result or not, it is a situation that no issuer or EMD would want to happen.
- an investor was sold exempt securities under the AI exemption by an EMD;
- the issuer of the exempt securities is not performing well;
- the investor wants their money back and the issuer refuses to return their funds;
- the investor relied on the issuer/EMD to explain and determine that they were qualified under the AI exemption and therefore the investor has "clean hands”, so to speak;
- the investor was not an AI as a matter of law at the time of the trade; and
- the investor sues the issuer and the EMD.
In this example, the investor was sold securities under the AI exemption when they were not an AI. By doing so, the issuer/EMD may have effectively given this non-AI investor the option of unwinding the transaction at any time, subject to any limitation periods under applicable law etc. By selling securities to a non-AI under the AI exemption, the issuer/EMD may put the issuer’s business at risk as in Example #1, if the issuer does not have enough money to refund an investor, and exposes the issuer/EMD and their related management, boards and applicable registered individuals to possible regulatory action.
"We recommend that issuers and EMDs take every reasonable precaution to ensure they properly rely on the AI exemption in connection with a private placement. Better safe than sorry.”
Verification of AI status
A principles-based approach
So how do you verify an investor’s status as an AI? Unfortunately, there are no step-by-step rules from Canadian securities regulators on what exactly an issuer and/or EMD need to do to ensure compliance with the AI exemption. It is no different south of the border in the United States. Although the securities regulators in both Canada and the United States have considered such matters, they have both adopted a "principles-based” approach which does not set out any specific requirements.
Securities regulators have declined to provide a comprehensive list of adequate verification measures for various reasons, including the following (17):
- such a list may be ill-suited or unnecessary to a particular offering or investor, given the facts and circumstances; in essence, there is no ‘one-size fits all’ approach;
- a list would not provide market participants with the flexibility to adapt to:
» different approaches to verification depending on the circumstances;
» changing market practices; and
» implementing innovative approaches to meeting the verification requirement;
- reliance on a list would encourage a ‘check-the-box’ mentality which may cause the issuer to overlook or disregard information indicating that a purchaser is not in fact an AI or be viewed as mandatory verification methods to be applied in all circumstances, thereby eliminating the flexibility intended under a principles based approach;
- it is not possible to adequately capture the potentially wide range of verification issues and measures with a prescriptive rules-based approach. A method that is reasonable in one set of circumstances may not be reasonable under a different set of circumstances; and
- producing a set of rules or a more prescriptive approach could open the doors to abuse by sophisticated fraudsters, who could ferret out loopholes permitting superficial compliance with the requirements while allowing participation by non-AIs.
Regardless of the reasons, it is worth exploring what these principles are, on both sides of the border, to give issuers and EMDs a better understanding of the expectations of securities regulators, so they can revisit their own best practices. These principles are discussed below.
A U.S. perspectiveOn August 29, 2012, the U.S. Securities and Exchange Commission (SEC) issued for public comment a proposal to, among other things, eliminate the prohibition against general solicitation and general advertising contained in Regulation D under the U.S. Securities Act of 1933, as
amended, for offerings relying on Rule 506 (18) of Regulation D, provided that all purchasers of the securities are AIs (the SEC Release). In order to use general solicitation and general advertising for such Rule 506 offerings, an issuer would be required to take reasonable steps to verify that the
purchasers of the securities are AIs.(19)Although this article will not discuss the SEC Release in detail, it does set out some of the principles, comments and steps to verify the AI status of an investor, as discussed in the SEC Release, which provides Canadian issuers and EMDs helpful guidance when reviewing their own best practices.
The SEC Release identifies three main factors that issuers may consider to verify that an investor is an AI:
- the nature of the purchaser and the type of AI the investor claims to be;
- the amount and type of information that the issuer has about the investor; and
- the nature of the offering, such as the manner in which the investor was solicited to participate in the offering and the terms of the offering, such as the minimum investment amount.
(b) Nature of the investorAs in Canada, the definition of AI under Rule 501 (a) of Regulation D includes financial institutions, natural persons and other entities and, includes various monetary thresholds that must be satisfied for certain types of investors to be an AI.
Accordingly, the reasonableness of the steps may differ depending on the nature of the investor. For example, if an investor claims to be a registered broker-dealer (which is a type of AI in the U.S.), an issuer can verify this on FINRA’s BrokerCheck website. In Canada, existing and former registrant status can be similarly verified on the website of each Canadian securities regulatory authority.The SEC recognizes the practical difficulties in taking steps to verify the AI status of an individual compared to other categories of AIs, which would be exacerbated by an individual’s privacy concerns about the disclosure of personal financial information. Investors often do not want
to openly share their financial information.
The SEC recognizes that it may easier to obtain information about an individual’s annual income (e.g., through tax returns or other income documentation, like pay stubs) than verifying information about a person’s assets and liabilities. In fact, it may be more difficult to obtain proof of liabilities than proof of assets.Issuers and EMDs should keep detailed notes and records of information, documents and conversations they had with an investor in connection with determining their AI status. This
may prove helpful in demonstrating that an issuer/EMD took reasonable steps to verify an individual’s AI status. However, when in doubt, keep asking for more information and do not do the trade until you are satisfied; it is as simple as that.
(c) Information about the investor
The SEC sets out examples of the types of information about an investor that an issuer could review or rely upon, which may, depending on the circumstances, constitute reasonable steps to verify an investor’s AI status. For example, an issuer could rely on:• publicly available information in government filings – for example,
» if the investor is a named executive officer of a public company, one could review public filings in• third party information – for example, one could:
any proxy statement (i.e., information circular); and
» if the investor is a corporation, one could review the audited financial statements of a corporation to determine whether the corporation satisfies certain
financial thresholds; and
» review the individual’s income tax returns;
» review industry or trade publications that disclose average annual compensation for certain levels of employment in a field or industry; or
» review and/or rely on the verification by a third party such as a broker-dealer, accountant or lawyer, provided that the issuer has a reasonable basis to rely on such third party verification.
(d) Nature and terms of the offering
How investors are solicited may also be relevant in determining the reasonableness of the steps taken to verify an investor’s AI status. For example, an issuer that solicits new investors through a website, through a widely disseminated e-mail or social media solicitation or through a newspaper (each being a General AI Solicitation), would need to take greater measures to verify an investor’s AI status than an issuer that solicits AIs from a reasonably reliable third party, such as a broker dealer in a brokered private placement.The SEC states that relying on the self-certification by an investor that they are an AI (i.e., checking a box in a questionnaire or signing a form) would not be considered ‘reasonable steps taken’ to have verified an investor’s AI status in connection with a General AI Solicitation, without
additional information about an investor. Accordingly, issuers (assuming they do not have to be registered under applicable securities law) and dealers who contact investors through a General AI Solicitation will generally be held to a high standard, given the lack of information the issuer or
dealer has about the prospective investor and the risk of attracting non-AIs – the public.
The terms of the offering could also affect whether the verification methods used by the issuer are reasonable. For example, an investor’s ability to meet a high minimum investment amount could be relevant to the types of steps that would be reasonable. If the terms of an offering require a high minimum investment amount, then it may be reasonable for the issuer to verify AI status simply by confirming that the investment is not being financed by a third party or the issuer, provided that there is no evidence suggesting that the investor is not an AI. (20)
A Canadian perspectiveOn May 13, 2011, the OSC published OSC Staff Notice 33-735 – Sale of Exempt Securities to Non-Accredited Investors (OSC Staff Notice 33-735). OSC Staff Notice 33-735 sets out, among other things, the OSC’s expectations for issuers/dealers selling securities to AIs. For more information, see the article in the Winter 2012 edition of the EMDA magazine that discusses OSC Staff Notice 33-735. (21)
However, for ease of reference, the OSC’s non-exhaustive list of steps that EMDs should take in order to meet their obligations under securities laws when selling exempt securities to AIs is set out below.
- Read and understand the definition of AI;
- Develop an accurate form for collecting KYC information;
- Explain the AI definition to clients and ensure that their KYC forms are properly completed;
- Do not sell an exempt security if you do not have sufficient information to determine whether the client qualifies as an AI;
- Ensure the exempt security is suitable for the client;
- Review the KYC form;
- Retain documentation;
- Establish policies and procedures to ensure the AI requirements are satisfied; and
- Report the sale of exempt securities to the OSC.
Notwithstanding the OSC’s guidance discussed above, issuers and EMDs are cautioned against engaging in certain practices as discussed below.
A few cautions of what not to do
We caution that when verifying an investor’s status as an AI, issuers and EMDs should avoid the following pitfalls:
- exclusively relying on an investor’s self-certification that they are an AI by ticking and initialing a box regarding their AI status and signing the AI certificate attached to a subscription agreement;
- ignoring red flags suggesting an investor is not an AI;
- failing to update information about the investor as at the date of the trade;
- failing to keep detailed written records about the discussions and documents relied upon in determining an investor’s status as an AI;
- including investments in non-securities (e.g., precious metals, investment properties) as financial assets; and
- using creative calculations and interpretations of the criteria to determine an investor is an AI.
As a final caution, Canadian securities regulators, including the OSC, are calling investors to verify their AI status when they relied on the AI exemption to confirm the information in the KYC and subscription documents were accurate at the time of the trade.
In terms of any further guidance of what reasonable steps issuers and EMDs can take to verify an investors’ status as an AI, some market participants are using a KYC/investment questionnaire, as discussed below. KYC/Investment Questionnaire for determining an investor’s AI status EMDs have three fundamental obligations under Canadian securities law: KYC, ‘know-your product’ (KYP) and suitability obligations. A KYC/Investment Questionnaire is a useful tool for EMDs to verify the AI status of an investor.
It would typically be completed for new clients and should be regularly updated as required, but more importantly at the time of any trade. Below are sample questions that can be included in a KYC/Investment Questionnaire that can be used to assist market participants in determining the AI-status of an investor.
Issuers do not have KYC, KYP or suitability obligations under applicable law unless they are also in the business of trading, in which case, they are also required to be registered as a dealer under applicable securities law, or exempt from such registration. A questionnaire is a useful tool for issuers to verify the AI status of an investor, particularly in the context of a non-brokered private placement. (22)
Financial asset test
- What is the value of cash you have in all your accounts with any financial institution?
- What is the market value of all the securities you own?
- Do all of these securities trade on a stock exchange, automatic trading system or other quotation system or are they securities of a mutual fund?
- Do you believe these securities are liquid (e.g., can be easily sold) or relatively easy to liquidate?
- What is the cash surrender value of any contract of insurance that you have the right to, immediately if required, for your own personal benefit?
- Do you own any certificates of deposit or have evidence of a deposit that is not a security under securities legislation? What is its value?
- Have you included the value of any real estate, whether your principal residence, cottage, farm or other property for the purpose of satisfying this test?
- Have you entered into or intend to enter into any monetization scheme that will in effect provide you with available cash for purpose of satisfying this test?
Net asset test
- Is the value of the assets you have included, the fair value of those assets?
- Is there any current outstanding income tax payable in connection with that asset?
- Have you included the value of any real estate, whether your principal residence, cottage, farm or other property for the purpose of satisfying this test?
- Have you deducted the value of any loan, debt obligation, mortgage, claim or encumbrance against any of the assets you have identified that you own?
- Have you provided rough calculations or verifiable calculations as of the date of the questionnaire?
- Has your net income before taxes exceeded $200,000 in the two most recent calendar years?
- Has your net income before taxes, combined with that of your spouse, exceeded $300,000 in the two most recent calendar years?
- Do you expect to exceed that net income level in the current calendar year?
- Do you understand the AI financial tests?
- Do you understand that it is illegal for you to make this investment if you do not satisfy one of the above AI financial tests?
- Has your EMD dealing representative explained what it means to be an accredited investor and provided you with the opportunity to ask any questions? If asked, were the questions answered to your satisfaction?
- Do you believe you have been pressured to make this investment by the issuer/EMD representative?
- Do you understand that you could potentially lose all the money you invested in any particular investment?
- Is the information you have provided in this questionnaire current as of the date you signed this document and will be as of the date of the trade?
- Do you understand you have a duty to update any answer, statement or information you have provided on or before the date of the trade?
The KYC/Investment Questionnaire should be completed based on a dialogue between the investor, and his or her EMD dealing representative and, if possible, signed by the investor and witnessed by an independent third party. A KYC/Investment Questionnaire can be in the form of a declaration and, if possible, a statutory declaration to give it greater legal effect. Although having a statutory declaration signed may be difficult or impractical in certain situations, such measures help protect issuers and EMDs if an investor’s status as an AI is ever questioned. (23)
Need for greater guidance
We believe that Canadian securities regulators should provide issuers and EMDs with additional guidance to assist them in determining an investor’s AI status. Although securities regulators on both sides of the border prefer a principles-based approach, evidence suggests issuers and EMDs need help.As a first step, Canadian securities regulators have been undertaking various field reviews of EMDs and reviewing what action they took to determine the AI status of an investor for a distribution in reliance on the AI exemption.
We recommend Canadian securities regulators sharing the results of these field reviews in terms of best practices and unacceptable practices to allow the industry to see what others are doing with the idea of adopting such measures so issuers and EMDs can get it right and improve compliance.
Getting your input – a short surveyTo assist the EMDA in better understanding the views of its readers, we have prepared a short survey in connection with the AI exemption that we ask you to complete on-line.
We hope to share the survey results with you in the next issue of the EMDA magazine and on the EMDA website and perhaps use this as a basis to encourage Canadian securities regulators in providing greater guidance on reasonable steps issuers, EMDs and other market participants can take to properly rely on the AI exemption.Please access the survey through this link.
The contents of this article do not constitute legal advice and is provided for information purposes only. This article does not necessarily reflect the opinions of Cassels Brock & Blackwell LLP or any of its lawyers or clients. The content of this article is not intended to be used as a substitute for specific legal advice or opinions.
For more information contact:
Brian Koscak - firstname.lastname@example.org
Afzal Hasan - email@example.com
For more articles, please download the Exempt Market Update, Issue 3 - the leading national magazine for the exempt market professionalsNotes
1. See OSC Staff Notice 45-707 – OSC Broadening Scope of Review of Prospectus Exemptions.
2. See: (a) OSC Staff Notice 33-735 – Sale of Exempt Securities to Non-Accredited Investors.; (b) OSC Staff Notice 33-738 – 2012 OSC Annual Summary Report for Dealers, Advisers and Investment Fund Managers (p 52); and (c) OSC Staff Consultation Paper 45-710 Considerations for New Capital Raising Exemptions (p. 37).
3. See http://www.osc.gov.on.ca/en/SecuritiesLaw_ord_20120210_oth_morgan-dragon.htm
4. See http://www.osc.gov.on.ca/en/SecuritiesLaw_ord_20120112_blueport-hare.htm
5. These are decisions under Section 31 of the Securities Act (Ontario) involving opportunities to be heard by the Director.
6. See paragraph (j) of definition of AI under s. 1.1 of NI 45-106.
7. Where individuals own financial assets indirectly, through trusts or other investment vehicles, it is necessary to consider whether these financial assets can be included in meeting the applicable threshold. Various criteria are used to make this determination, including evidence of possession, entitlement to income from the asset, the risk of losing the financial value of the asset and the ability to dispose of or otherwise exercise direction over the asset.
8. See paragraph (l) of definition of AI under s. 1.1 of NI 45-106.
9. See paragraph (k) of definition of AI under s. 1.1 of NI 45-106.
10. See Section 1.9 of the Companion Policy of NI 45-106.
11. See Section 1.9 of 45-106CP.
12. Photo Violation Technologies Corp. (Re), 2012 BCSECCOM 284 at para. 20, referencing Solara Technologies Inc. (Re), 2010 BCSECCOM426.
13. KCP Innovative Services Inc., (Re), 2007 ABASC 584 at para. 97, referencing InstaDial Technologies Corp. (Re), 2005 ABASC 965 at para. 61; and Euston Capital at paras. 103, 115-117, 119.
14. Euston Capital Corp. v. Saskatchewan Financial Services Commission, 2008 SKCA 22 at para. 22.
15. R. v. Guettler et al, ONCJ February 5, 2001 (unreported).
16. R. v. Maitland Capital Limited et al., 2011 ONCJ 168.
17. See SEC Release.
18. Rule 506 is a safe harbor under an exemption from the registration requirements of the U.S. Securities Act of 1933 that permits an issuer to offer securities to an unlimited number of accredited investors and to no more than 35 non-accredited investors who meet certain sophistication requirements. The existing Rule 506 exemption prohibits the offering or sale of securities through any form of "general solicitation” or "general advertising” within the meaning of Regulation D.
19. The comment period for the SEC Release ended on October 5, 2012 and there has been no further publication by the SEC on this subject matter as of December 31, 2012.
20. Readers should note that other steps must also be considered when, for example, EMDs have investors that invest more than $150,000 in a single investment in circumstances where the investor may not qualify as an AI. Although such an investment would satisfy the minimum investment amount prospectus exemption, the EMD may not be compliant with their suitability obligations under National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations by having such a large investment in a single issuer.
21. See article in the Winter 2012 edition of the EMDA magazine titled, "Compliance With The Accredited Investor Exemption - A 9 Point Plan for EMDs Firms and Dealing Representatives”, by Brian Koscak and David Gilkes.
22. The authors caution readers that these questions are only samples of the types of questions that can be included in a KYC/investment questionnaire of this nature to assist market participants in verifying the AI status of an investor. Readers are urged to obtain their own legal advice if they prepare such a questionnaire and, if a reader is a registrant, such as an EMD, to ensure the questionnaire includes other relevant questions that are required in order to satisfy the registrant’s KYC obligations under applicable securities law.
23. We note that this approach is not without its detractors. Having an investor sign a statutory declaration under the penalty of perjury could have the effect of shifting the burden for compliance and associated liability from the issuer to the investor; but not necessarily. This may be an appropriate solution for sophisticated parties that are aware of the legal consequences for false representations but not for unsophisticated investors.