Sale of Exempt Market Securities

Sale of Exempt Market Securities

and Requirements to Qualify as Accredited Investor

exempt marketsOSC has found that many issuers as well as dealers sell exempt securities on the basis of AI (accredited investor) exemption to investors who do not meet the criterion for accredited investors. As such OSC has provided necessary guidelines on this serious issue which can have negative effect on protection available to investors in exempt markets. The main problem is that many times dealers do not acquire required KYC information for properly determining whether any particular investor is actually accredited investor or not.

Misunderstanding Regarding Net and Financial Assets

Most common misunderstanding with respect to definition of accredited investor is related to meaning of net and financial assets. 

Dealers and issuers need to understand that both terms are different and they should not get confused. Let us look at what is meant by financial and net assets.

  • Financial Assets: It includes securities, cash or contract of insurance, evidence of deposit or actual deposit which is not in the form of a security as per securities legislation. However, economic valuation of personal residence or any other type of real estate investor has cannot be included in financial asset calculation.
  • Net Assets: This includes all the assets investor has after meeting all the liabilities and includes personal residence as well as other type of real estate investor has.

Value of Real Estate

OSC has found that during assessment of details with respect to client's ability to qualify as accredited investor, many dealers are not clarifying the fact to their client that any type of real estate or personal residence client has cannot be part of financial assets. 

Thus, dealers and issuers could be selling securities to investors relying on AI exemption where such investors do not meet the requirements to be accredited investors.

Dealer Obligations

Let us now look at some of the things dealers should do to make sure investors meet the requirements to be considered accredited investors.

  1. Understanding Accredited Investor Definition: Registered firms operating in exempt markets need to offer required training to their dealing representatives and chief compliance officers (CCO). Such training can help them in understanding requirements investors have to meet for becoming accredited investors.
  2. KYC Information Collection: It is also necessary for dealers to create proper forms for collection of KYC information from investors. The KYC information collected must include details of financial situation client is in, risk tolerance level client has and investment objectives client wants to meet. The details available in KYC form should assist dealers in determining client's ability to meet requirements to be considered an accredited investor. Dealers also need to review as well as update KYC form for making sure that dollar limits used for financial and net assets are accurate.

A Final Note

Thus we will conclude here with a final note that dealers have an important role to play in protecting rights of investors. By properly checking whether an investor qualifies to be an accredited investor, they can make sure that investors are investing in appropriate securities suitable for them.

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