Current Practices and Recommendations
The lack of prescriptive guidance from Canadian securities
regulators may pose difficulties for EMDs and issuers who
are inevitably faced with an ‘informational asymmetry’ when
attempting to verify AI status. In the context of an exempt market
trade, the only involved party that can conclusively determine
whether a potential investor is an AI is the AI itself.
While an EMD or issuer can ask questions of and conduct
independent research regarding a potential investor, there is no
guarantee that the information collected will be accurate or that
such procedures will be sufficient to discharge an EMD’s or issuer’s
obligations under applicable securities law.
Survey respondents have indicated that they apply a variety
of procedures with respect to the verification of AI status, which
include the completion of KYC and other questionnaires, reviewing
the definition of an AI with a potential investor to allow the investor
to self-certify his or her AI status and collecting and reviewing
financial statements or other forms of declaration of net worth.
Some survey respondents rely upon third-party verification, by an
accountant, lawyer or another registered dealer (one who holds
that individual’s investment account). Additionally, one survey
respondent indicated they set minimum investment thresholds for
investments by AIs to attempt to preclude non-AI participation.
Given the ‘informational asymmetry’ mentioned above,
it is not surprising that over half of the survey respondents
agree that investors should be required to certify
accredited investor status under penalty of perjury.
In so doing, the ultimate liability for compliance would rest upon
the party that is best-positioned to conclusively determine AI
status; the investor. However, existing securities law places the
liability squarely on the registrant.
As noted in our previous article, how an investor is solicited
can play a role in what is held to be ‘reasonable’ verification of
AI status. The SEC guidance discussed in our previous article
specifically indicated that relying on an investors’ self-certification
that they are an AI (i.e., checking a box in a questionnaire or
signing a form) would not be considered ‘reasonable steps taken’
to have verified an investor’s AI status, without obtaining additional
information about that investor.
Even though over half of the survey respondents expressed
the opinion that self-certification should be determinative with
respect to the verification of an investor’s AI status, this is not
sufficient under Canadian securities law.
While the SEC’s guidance provides examples of information
a registrant or issuer can collect in order to verify an investor’s
AI status, survey respondents indicate that it may not always be
possible to reliably obtain such information.
For example, the SEC has suggested reviewing an individual’s
tax returns in order to determine compliance with financial
thresholds. Similar guidance was also referenced in a recent OSC
order involving MaRS VX (the Order), an on-line matching portal
bringing together Ontario AIs and Ontario social impact issuers. A
representation by MaRS VX in the Order states that investors will
be required to provide information to support their AI status, such
as: (a) two years of tax returns from the Canada Revenue Agency
(CRA); (b) financial statements or client account statements from
a financial institution or registrant; or (c) a reference letter from a
Canadian financial institution, registrant or chartered accountant
confirming the investor’s income, financial assets and/or net
assets. This information is helpful in understanding what the
OSC believes are acceptable AI verification standards for various
income and assets tests involving individuals.
Notwithstanding such guidance, over 60% of survey
respondents indicated that potential investors are less than
forthcoming in providing T4 slips, employment pay stubs and
other evidence of income. As a result, we suggest regulators
consider lobbying the CRA to release relevant information to duly
authorized market participants to support a proposed trade under
the AI exemption with an investor’s express written consent. We
believe this would materially increase compliance with the AI
exemption if it is easier to obtain and
Third Party AI Verification
The SEC has also
suggested that issuers
may be able to rely on the
verification of an investor’s
AI status by a third party
such as a broker-dealer,
accountant or lawyer,
provided that there exists a
reasonable basis to rely on
such third party verification.
While many survey
respondents appear to agree
with this general approach, almost
90% agree that an EMD or issuer
should be able to rely on third-party verification without making
any further investigation. In light of
this feedback, we suggest Canadian
securities regulators consider the
feasibility of third-party verification