Canadian Lawyer

October 2020

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Page 20 of 59 19 COLUMN: BANKING ON CORPORATE UPFRONT What is a sophisticated investor? The scope of the private placement exemption, which describes investors that don't need protection, has been the focus of regulatory consideration SECURITIES LAWS are in many respects consumer protection laws; but in that aspect, they are somewhat unique. For one thing, they are disclosure-oriented. Think of Health Canada as if it focused only on label- ling, so food producers could put any poison in food or drink for public sale as long as the ingredients were clearly disclosed. Equally distinctively, securities laws create an elab- orate framework to demarcate categories of persons who don't require the consumer protection that it provides: It's as if Health Canada went further and identified classes of cast-iron-stomached people who can digest anything and don't need nutritional regula- tion at all or much reduced forms of it. Securities rules are replete with excep- tions, where the full machinery of the securi- ties regulatory system is considered unneces- sary. There are exceptions and exceptions to those exceptions and still further exceptions, which is probably why it has proved so dif- ficult to set securities laws to music. One of the most common is the set of exceptions (commonly called private placement exemp- tions) that permits issuers to distribute secu- rities without undergoing the typically costly and time-consuming process of preparing and clearing a prospectus. In some cases, private placement exemp- tions are driven by circumstance; for exam- ple, core investors in a private company entirely familiar with its business shouldn't need or want a prospectus. In other cases, these exemptions respond to market and social developments, like the newish, limited exemptions to raise capital via crowdfund- ing. And then there are exemptions that are based on the characteristics of the purchaser, most notably what is known as the accred- ited investor exemption, which is the exemp- tion used in the substantial majority of pri- vate placements. The scope of this exemption, which out- lines the characteristics of investors that don't need protection, is often the focus of academic and regulatory consideration. Late this summer, the parallel exemption in the U.S. was expanded to add new categories. Earlier in the summer, the Ontario Capital Markets Modernization Taskforce proposed expansions to the concept. The issue is pre- dictably complicated, raising questions as to whether broadly cast private placement exemptions encourage finance activity out- side of the traditional public offering system and deny investment access to other seg- ments of the market. But at its core is the idea that certain persons do not require the full protections of the normal rules. The concept of accredited investors in Canada includes categories that are unsur- prising, such as various levels of govern- ment, financial institutions, registered securities dealers and advisors and other regulated entities. It also predictably includes entities (such as companies or part- nerships) and individuals (alone or with a spouse) that meet certain asset thresh- olds and individuals who meet prescribed income or wealth levels. The basic premise, as I had understood it, was that the exemp- tion was intended to include those persons who do not require the protection of secu- rities laws because they are "wealthy, wise or well advised." A common criticism, how- ever, has been that there is undue emphasis on the wealth element, which may speak to the party's ability to withstand an invest- ment loss and its resources to get advice, but which is not a proxy for investment sophis- tication. The announced and proposed regulatory initiatives illustrate the challenges in defin- ing accredited investors. The Ontario task force proposed to expand the category to include individuals who have successfully achieved proficiency requirements in order to advise clients on investments, echoing the U.S. reform to include registered investment advisers and individuals with similar certifi- cations. Depending on the jurisdiction, per- sons who are blessed by securities regulators to provide professional investment advice have either very recently or not yet been con- sidered sufficiently sophisticated to invest for themselves on an exempt basis. The evo- lution can also lag behind social change; for example, the formal recognition in the U.S. that there are "spousal equivalent" relation- ships that should inform the assessment of familial income or wealth occurred just this summer. Oddly, pushes to expand emphasis on the wise and well-advised aspects haven't appeared to result in any impetus to include corporate lawyers as accredited investors. Maybe that is fortuitous, in my own case, because my investing track record (like my nutritional choices) illustrates noth- ing but that I can use all the regulatory assistance that can be provided. Given my impulsive and emotional investment approach, there may be need of a new category — not for exempt investors but for verklempt investors. Neill May is a partner at Goodmans LLP in Toronto, focusing on securities law. He can be reached at The opinions expressed in this article are his alone.

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