From the Regulators

Investors would have to first obtain advice on suitability from an investment dealer

By James Langton |

A new prospectus exemption is being proposed by three securities regulators, which would allow retail investors to participate in private placements, on the condition that they receive advice on the suitability of the proposed investment from an investment dealer.

The regulators in British Columbia, New Brunswick and Saskatchewan proposed a new exemption Thursday, which would allow issuers to raise capital from retail investors without a prospectus, or an offering document. The new exemption would only be available to reporting issuers that are listed on a recognized Canadian stock exchange. And, the investor would have to first obtain advice on the suitability of the proposed deal from an investment dealer.

The regulators indicate that, under the current rules, issuers seeking to raise capital from new retail investors in the exempt market are required to prepare an offering document; and, that Canadian issuers "rarely use these exemptions because of the time and cost involved in preparing the offering document."

As a result, ordinary retail investors are generally excluded from these sorts of distributions. "This means that retail investors do not have an opportunity to participate in the more favourable terms generally offered through private placements," the regulators note. Retail investors that want to invest in a company must do it in the secondary market, often through an investment dealer.

Under the proposed new exemption, retail investors would still rely on a firm's existing financial disclosure, and a dealer's suitability advice, as they do when they invest in the secondary market. However, they would now be able to take part in a private distribution, subject to certain conditions.

The regulators say that the requirement to obtain advice is "a key condition for investor protection", because investment dealers must meet know-your-client (KYC) and know-your-product (KYP) obligations when determining the suitability of the investment. The exemption would not apply to dealers that are restricted dealers, exempt market dealers, or dealers that don't have to provide suitability advice such as discount brokers.

The proposed new exemption would also impose certain other conditions, including that the issuers' continuous disclosure is up-to-date and in compliance with regulatory requirements; that the issuer announce the proposed distribution in a news release; and, that the investor has the right to sue over any misrepresentation in the issuer's continuous disclosure record.

The three regulators are inviting comments on the proposals until June 15.