Proposed Changes in Companion Policy
and How They Will Effect Accredited Investor Status
In exempt markets accredited investor exemption is utilized quite frequently. As such it is important for investors to be aware of details about who is considered an accredited investor and various tests they need to go through for qualifying as accredited investors. Let us look into some of the amendments which have been proposed by CSA in this context.
Financial Tests to Qualify as Accredited Investor
Any individual will be considered accredited investor if such individual is able to satisfy any one of the four financial tests which are:
- $1,000,000 test of financial assets.
- $5,000,000 test of financial assets.
- Net income test.
- Net asset test.
AIs and Financial Assets
The accredited investor category has been constructed in such a way that spouses together can be treated as a single investing block. This means that either of the spouses will be able to qualify as AI in case their combined financial assets are:
- Over $1,000,000.
- Combined net income is more than $3,00,000.
- Combines net assets are more than $5,000,000.
The fourth test of $5,000,000 financial assets does not consider spouses to be single investing element. In case someone is able to meet this requirement then such person would be able to qualify as permitted client. The advantage of qualifying as permitted client is that they are able to waive the suitability as well as KYC requirement of registered dealers. In case an issuer distributes exempt market securities as per AI exemption to someone who meets $5,000,000 test then such issuer will not have to get a risk acknowledgment form from that person.
What are considered financial assets for the purpose of tests?
To meet the definition of financial assets and qualify as per any of the four financial tests, financial asset should be:
- Securities or cash.
- Any contract of insurance.
- Any deposit which is not considered a security.
Financial Asset Calculation and Personal Residence
It is worth mentioning here that personal residence is not considered for calculating financial assets. However, for net asset test purchaser's cumulative assets after deducting the amount of total liabilities is considered. Thus, to complete the net assets test the value of personal residence is taken into consideration as being part of total assets and liabilities like for instance, mortgage (taken for the personal residence) is included for calculating total liabilities.
Investors and Risk Acknowledgment Form
If someone is relying on AI exemption for distributing exempt market securities to accredited investors then it is necessary to obtain a risk acknowledgment form from such investors. However, this requirement is not applicable in case accredited investor is able to fulfill the $5,000,000 test for financial assets.
In addition to it, individual accredited investor refers to a person excluding unincorporated associations, partnerships, unincorporated trusts and syndicates. The definition of AI also excludes people acting as executors, trustees, legal representatives or administrators.
Thus as we can see there are various measures being implemented by CSA to protect investors and bring in transparency into activities performed in exempt markets.