the investors who did fit within the applicable exemption?
Unwinding transactions could inadvertently hurt every other
investor who invested with an issuer because the management
team may be forced to withdraw capital that may have already been
allocated or spent by an issuer. Issuers could conceptually pursue
civil remedies against such ‘rogue’ investors for misrepresenting
their compliance with the eligible investor cap, however, any legal
and other costs to pursue such remedies would be borne by the
issuer and its existing investors. Alternatively, Canadian securities
regulators could determine that an ineligible investment should not
be unwound and no action should be taken, however, this creates
an incentive for willing investors to mislead issuers and dealers,
and thereby subverts the purpose of the eligible investor cap.
It is submitted that these issues need to be clarified by the
Canadian securities regulators if a cap is explored or, on their face, are
important concerns against the imposition of the eligible investor cap.
6. An eligible investor cap misaligns the interests of investors
Alignment continues to become an important word in the
lexicon of investors and we believe that the eligible investor cap
could foster misalignment between the interests of investors and
the interests of issuers. If the investment capital of an eligible
investor is capped at $30,000 during a 12-month period, issuers
could be forced to compete with each other
for a reduced pool of available capital.
This scarcity of capital could
improperly incent issuers to undertake
high pressure sales tactics to persuade
eligible investors to invest as much as
they can in a proposed transaction,
regardless of whether the investment is
suitable for them, up to the $30,000 cap
as a single investment. Such practices
should be discouraged by Canadian
securities regulators since they create a
‘race for the wallet’ and put more capital
at risk than if a dealer was involved.
7. Lack of a nationalized and
There are currently two variations
of the OM Exemption. One model is
following by the provinces of British
Columbia, New Brunswick, Nova Scotia
and Newfoundland and Labrador (for ease
of reference, called the British Columbia
model) and another model is followed by
the provinces of Alberta, Saskatchewan,
Manitoba, Quebec and Prince Edward
Island and the Northwest Territories, the Yukon and Nunavut (for
ease of reference, called the Alberta model).
The major difference between the British Columbia model
and the Alberta model is the imposition of a maximum investment
threshold of $10,000 per investment unless the investor is an eligible
investor (in which case there is currently no investment limit).
The provinces of Alberta, Quebec and Saskatchewan seek
to impose the eligible investor cap plus make some additional
changes to the OM Exemption (for ease of reference, these
changes are referred to as the Modified Alberta model). Ontario
and New Brunswick propose a more substantive variation of the
OM Exemption from the Alberta model that also includes the
imposition of the eligible investor cap.
The graph 4 below illustrates that if all of the proposed
changes to the OM Exemption are adopted by various members
of the Canadian Securities Administrators (the CSA), Canada will
have four models or variations of the OM Exemption.
The CSA has set regulatory harmonization as a member initiative,
and we encourage these members to develop a nationalized and
harmonized OM Exemption. The imposition of the eligible investor
cap, among other proposed changes to the OM Exemption by certain
CSA members, defeats this important objective.