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An expert warns advisors to be careful about what their clients invest in under this exemption, particularly as many companies seek to raise money through the exemption order before the pilot is set to expire in April next year.wutwhanfoto/iStockPhoto / Getty Images

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A pilot underway in Ontario to broaden the criteria of who qualifies as an accredited investor is being welcomed by advisors as the next step in the “modernization” of the private investment space – and an opportunity to broaden their client base.

Still, some industry experts caution advisors to tread carefully with the interim investment rules and ensure clients aren’t risking too much of their capital.

Last fall, the Ontario Securities Commission (OSC) unveiled an 18-month pilot, ending April 25, 2024, that expands the accredited investor exemption to include “self-certified” investors with certain types of education or professional experience.

Previously, there were only income and financial asset requirements to be considered an accredited investor, a financial status that provides access to investments not available to the public market such are venture capital, private real estate, or private equity.

The OSC’s updated exemption says investors with relevant professional or educational experience – such as a chartered professional accountant, someone with an MBA or who has passed the Canadian Securities Course – can access certain private investments, up to an annual maximum of $30,000 even if they don’t meet the financial threshold.

Self-certified investors need to prove to issuers that they meet the qualifying criteria, including acknowledging the risks of the investment.

“It’s the modernization of the accredited markets,” says Robert Janson, co-chief executive officer and chief investment officer at Westcourt Capital Corp. in Toronto. “It augments that market [by allowing] further participants – both issuers and investors – who are looking for different exposures.”

Mr. Janson, who has a handful of clients who could fall under the new self-certified investor category, says it’s a “more robust way to ensure that market participants are protected, and yet are potentially encouraged to invest in this space.

“That’s in the vein of the spirit of capital formation in the country,” he adds.

Exemptions in other provinces

The OSC pilot follows similar exemptions adopted recently in Alberta and Saskatchewan. It stems from the final report of the Capital Markets Modernization Taskforce, released in January 2021, which suggested expanding the accredited investor definition to those with a “high degree of understanding of investments and markets.”

The report noted similar changes made by the U.S. Securities and Exchange Commission in 2020, which updated the definition of accredited investors to include professional knowledge, experience or certifications.

The change means advisors “may consider a wider range of exempt-market products for their clients,” who meet the requirements to be a self-certified investor, the OSC said in an e-mail statement to the Globe.

“This is particularly relevant to clients who are not accredited investors or who do not meet the criteria for other prospectus exemptions, such as the employee prospectus exemption,” the statement said, adding that the order doesn’t provide a registration exemption.

“Registrants remain subject to their normal [know your product], [know your client], and suitability obligations under securities laws when considering trades under this prospectus exemption,” the OSC stated.

‘Advisors exercise some caution’

David Bardsley, partner and head of KPMG in Canada’s wealth and asset management advisory division, says advisors with clients who qualify under the interim exemption will need to ensure the investments make sense as part of their broader wealth management plans.

For instance, he says advisors will need to consider where the investment dollars will come from and the client’s investment time horizon.

“Is the money potentially going to be tied up in an investment for a number of years – and what impact does that have on the individual if their circumstances change?” Mr. Bardsley says.

He also advises diversifying any investments without spreading the capital too thin.

“Maybe there are two, potentially three opportunities that might warrant consideration for an investor who qualifies for this threshold,” he says.

Mr. Bardsley also warns advisors to be careful about what their clients invest in under this exemption, particularly as many companies seek to raise money through the exemption order before the pilot is set to expire in April next year.

“Most advisors will act in the best interests of their clients and their investment strategies,” he says. “But I would suggest that advisors exercise some caution.”

How Ontario’s order is different

It’s not yet clear if the OSC program will be extended, or amended, as it was in Alberta and Saskatchewan.

Alberta and Saskatchewan first announced their accredited investor changes on March 31, 2021 and amended them on July 28, 2022, according to the Canadian Securities Administrators.

Ontario’s order is slightly different than the two western provinces, according to a recent note from lawyers Shawn Blundell and Stuart Ruffolo at Stikeman Elliott LLP in Toronto.

In Alberta and Saskatchewan, the exemption applies to both distributions by an issuer and by an existing security holder, whereas the OSC order applies only to the distribution by an issuer of its own securities.

Also, the exemption in Alberta and Saskatchewan provides that qualifying special purpose vehicles (SPVs) are not subject to certain investment limits, while the OSC’s order “doesn’t have a similar carve-out for SPVs,” the lawyers noted.

In Alberta and Saskatchewan, the exemption also requires a concurrent distribution to accredited investors. The lawyers state that the OSC’s rules don’t have that requirement.

“Ultimately, any amendments or additions to further align the OSC order with the exemption in Alberta and Saskatchewan would bolster the likelihood of a unified approach among these (and potentially other) provinces through the adoption of a multi-lateral instrument or amendment to the national instrument,” they wrote.

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