Lexpert US Guides

www.lexpert.ca | LEXPERT • June 2014 | 31 FUND REGULATION » or pursuant to an exemption from the prospectus requirements. In addition, market participants must be appropriately registered in the provinces and territories where they carry on business, and where they market and issue securities. " is article focuses on marketing and sales activities pursuant to prospectus-exempt off erings, which are more common for non-Cana- dian investment funds and much less burdensome than a prospectus- qualifi ed off ering. " e specifi c application of the regulatory regime in a jurisdiction may diff er depending on the nature and characteristics of a particular fund and its activities, manager, sponsors and investors. " is article considers a few popular types of funds (e.g., private-equity funds and hedge funds). However, prior to undertaking any market- ing and sales of investment fund securities in Canada, the sponsor or manager should seek advice tailored to its particular circumstances. STRUCTURING THE OFFERING: INVESTORS AND PROSPECTUS EXEMPTIONS " e most heavily regulated investment funds in Canada are publicly off ered mutual funds, and to an increasingly lesser extent, publicly of- fered investment funds. Prospectus-qualifi ed mutual funds and other investment funds are subject to a myriad of specifi c prospectus disclo- sure requirements and restrictions and prohibitions on certain invest- ment activities. Generally, non-resident investment funds off er their securities to Canadians pursuant to an exemption from the require- ment to fi le a prospectus in the off ering jurisdiction(s), sometimes re- ferred to as a "private placement." A private placement of investment fund securities has many ben- efi ts and drawbacks as compared to a prospectus qualifi ed off ering : Benefi ts • Off ering documents are not subject to review by provincial securities regulators; • Financial statements do not have to conform to Canadian GAAP; • Funds and fund managers or sponsors ("managers") are not subject to Canadian continuous disclosure obligations; • " ere is no requirement to translate off ering documents into French; • Costs are lower, due to a simple off ering process; and • Managers are able to access the signifi cant institutional, high net worth and wealthier retail segments of the Canadian capital markets. Drawbacks • Securities are not freely tradable and are subject to resale restrictions; • No access is given to non-accredited retail investors; • Limited distribution channels are available in Canada; and • Legal and accounting expenses, while varied, can be signifi cant. Prospectus Exemptions to Effect a Private Placement Among the prospectus exemptions available, the most frequently re- lied upon by Canadian and non-Canadian investment funds are the accredited investor exemption and the minimum amount exemption (collectively, the "common exemptions"). " e underlying premise of both exemptions is that sophisticated investors do not require the same level of protection by securities laws as does the general public. Accredited Investor Exemption " e accredited investor exemption, similar in concept to the limited-of- fering rules in the United States, is available in all provinces and exempts purchases of securities by certain entities or individuals, including: • Institutional investors such as banks, credit unions, trust, loan and insurance companies, registered advisors and registered dealers, public boards or commissions and federal, provincial and municipal governments; • Pension funds regulated by a federal or provincial pension authority; • Investment funds: » " at distribute or have distributed securities either only to accredited investors or under a prospectus, or » Advised by a person registered as an advisor, or a person who is exempt from the requirement to register as an advisor; • Individuals or entities who meet the income or asset tests: » An entity (other than an investment fund) with net assets of at least C$5,000,000 as refl ected in its most recently prepared fi nancial statements, if not created to purchase or hold securities, or » An individual with fi nancial assets over C$1,000,000; net assets over C$5,000,000; or a stable net income of more than C$200,000 per year (or C$300,000 in total with a spouse) for the two most recent years; and • Individuals or entities who apply to the applicable regulator to be recognized as an accredited investor (in provinces other than Alberta and British Columbia) or an exempt purchaser (in Alberta or British Columbia). In certain provinces (including Ontario) proposed amendments to the accredited investor exemption are currently under review. Such amendments include a requirement that the seller of securities take all reasonable steps necessary to verify that a purchaser may rely on this exemption, imposing a greater due diligence requirement than is currently in eff ect, and that the seller obtain a written acknowledge- ment of risks involved in the purchase of securities from certain indi- vidual purchasers. Minimum Investment Exemption In each province, securities can be off ered without a prospectus to any purchaser who purchases, as principal, securities having an aggregate acquisition cost of not less than C$150,000, paid in cash at the time of the trade, provided that the purchaser was not created or used solely to purchase or hold such securities. In Alberta, there are certain ad- ditional requirements if an off ering memorandum is delivered in con- nection with an investment made pursuant to this exemption. " e proposed amendments referred to above would permit the use of the minimum investment exemption only for purchases of securities by non-individuals. IS REGISTRATION BY THE FUND MANAGER /SPONSOR REQUIRED TO RAISE CAPITAL? Unless an exemption is available, market participants (such as non- Canadian managers and their employees) engaging in certain activi- ties must register with the provincial regulator where those activities are being conducted. A manager may also be required to join a self- regulatory organization (such as the Investment Industry Regulatory Organization of Canada), which imposes obligations that are o en more stringent than those under applicable securities laws. Registration Requirements " ere are three categories of registration for fi rms: dealer, advisor and investment fund manager:

• A-1
• A-2
• B
• C
• D
• E