Canada's capital-markets regulators are proposing two new restrictions on what is known as the "exempt market," where higher-risk securities are mostly sold to wealthier investors without the usual disclosure documents.
Critics say the changes, one of which would see investors forced to sign a "risk acknowledgment form," do not go far enough to protect investors from unsuitably risky or fraudulent investments. But a group representing exempt market dealers says it welcomes the changes.
The Canadian Securities Administrators, the umbrella group of Canada's provincial securities regulators, has been weighing the risks and benefits of the multibillion-dollar exempt market over the past two years, consulting on changes with the industry.
Separately, the Ontario Securities Commission is preparing to release its own proposals next month, which are expected to allow Internet-based "crowdfunding" as well as other new exemptions from mainstream market rules.
Under the current exempt market regime, investors who meet certain asset or income thresholds, or who can commit $150,000 to one investment, are allowed to buy securities without receiving a prospectus.
The idea is that these wealthy investors are more sophisticated than the average investor and can handle the increased risk. Many say the exempt market is important for small businesses and startups looking to raise capital without the expense of drafting a full prospectus.
But the exempt market also suffers from abuse, as regulators say rule-breaking is common and warn that fraudsters or unscrupulous dealers can twist the exemptions to draw in more modest retail investors.
The first of the CSA's proposed changes would require investors who qualify because of their high income or assets to sign "a risk acknowledgment form." This change would leave the wealth thresholds, which date back to the 1980s, untouched. To qualify as "accredited," investors need an income of $200,000 (or $300,000 with a spouse), or must own financial assets (excluding real estate) worth more than $1-million or net assets of at least $5-million.
The other proposed change would cancel the exemption for individual investors who commit at least $150,000, in an attempt to close a loophole that currently sees some clients pressured into betting their life savings into one risky investment. Some investors are even pressured by salespeople to borrow money to qualify, securities regulators say.
Neil Gross, the executive director of the Canadian Foundation for Advancement of Investor Rights (FAIR Canada), said the CSA's proposed reforms do not go far enough.
Mr. Gross said the elimination of the $150,000 minimum threshold for individuals will not prevent unsophisticated investors who control small companies or family trusts from getting in over their heads.
He said the exemptions for investors with high income or millions in assets, should scrapped entirely and replaced by a third-party test or independent evaluation of an investor's sophistication. Making them sign another form would do little, he argues.
"More boilerplate disclosure in our view just doesn't work," Mr. Gross said, arguing that salespeople can get investors to gloss over the paperwork.
Craig Skauge, president of the National Exempt Market Association, said both changes would be good for the industry, as the minimum amount exemption would no longer be open to abuse and other accredited investors would receive more warning about the risks they face.
"They are adding an additional ugly form that people have to sign really spelling out as plain as day that you could lose your money," he said. "I don't see any harm in that."
Brian Koscak, a lawyer at Cassels Brock & Blackwell LLP who chairs the Private Capital Markets Association of Canada (formerly the Exempt Market Dealers Association of Canada), said his group was still reviewing the proposals.
But he said he was pleased regulators decided not to index the income thresholds for accredited investors, as some had called for – a move that would have greatly reduced the pool of investors who qualify, already estimated to be just 1 per cent of Canadians.
"It would make the accredited investor exemption completely unavailable," he said. "So there's some comfort that they haven't gone in that direction."