an investor. Accordingly, issuers (assuming they do not have to
be registered under applicable securities law) and dealers who
contact investors through a General AI Solicitation will generally be
held to a high standard, given the lack of information the issuer or
dealer has about the prospective investor and the risk of attracting
non-AIs – the public.
The terms of the offering could also affect whether the
verification methods used by the issuer are reasonable. For
example, an investor’s ability to meet a high minimum investment
amount could be relevant to the types of steps that would be
reasonable. If the terms of an offering require a high minimum
investment amount, then it may be reasonable for the issuer to
verify AI status simply by confirming that the investment is not
being financed by a third party or the issuer, provided that there is
no evidence suggesting that the investor is not an AI.
A Canadian perspective
On May 13, 2011, the OSC published OSC Staff Notice
33-735 – Sale of Exempt Securities to Non-Accredited Investors
(OSC Staff Notice 33-735). OSC Staff Notice 33-735 sets out,
among other things, the OSC’s expectations for issuers/dealers
selling securities to AIs. For more information, see the article in the
Winter 2012 edition of the EMDA magazine that discusses OSC
Staff Notice 33-735.
However, for ease of reference, the OSC’s non-exhaustive list
of steps that EMDs should take in order to meet their obligations
under securities laws when selling exempt securities to AIs is set
• Read and understand the definition of AI;
• Develop an accurate form for collecting KYC information;
• Explain the AI definition to clients and ensure that their KYC
forms are properly completed;
• Do not sell an exempt security if you do not have sufficient
information to determine whether the client qualifies as an AI;
• Ensure the exempt security is suitable for the client;
• Review the KYC form;
• Retain documentation;
• Establish policies and procedures to ensure the AI
requirements are satisfied; and
• Report the sale of exempt securities to the OSC.
Notwithstanding the OSC’s guidance discussed above,
issuers and EMDs are cautioned against engaging in certain
practices as discussed below.
A few cautions of what not to do
We caution that when verifying an investor’s status as an AI,
issuers and EMDs should avoid the following pitfalls:
• exclusively relying on an investor’s self-certification that they
are an AI by ticking and initialing a box regarding their AI
status and signing the AI certificate attached to a subscription
• ignoring red flags suggesting an investor is not an AI;
• failing to update information about the investor as at the date
of the trade;
• failing to keep detailed written records about the discussions
and documents relied upon in determining an investor’s status
as an AI;
• including investments in non-securities (e.g., precious metals,
investment properties) as financial assets; and
• using creative calculations and interpretations of the criteria to
determine an investor is an AI.
As a final caution, Canadian securities regulators, including
the OSC, are calling investors to verify their AI status when they
relied on the AI exemption to confirm the information in the KYC
and subscription documents were accurate at the time of the trade.
In terms of any further guidance of what reasonable steps
issuers and EMDs can take to verify an investors’ status as
an AI, some market participants are using a KYC/investment
questionnaire, as discussed below.
KYC/Investment Questionnaire for determining an investor’s
EMDs have three fundamental obligations under Canadian
securities law: KYC, ‘know-your product’ (KYP) and suitability
obligations. A KYC/Investment Questionnaire is a useful tool for
EMDs to verify the AI status of an investor. It would typically be
completed for new clients and should be regularly updated as
required, but more importantly at the time of any trade. Below
are sample questions that can be included in a KYC/Investment
Questionnaire that can be used to assist market participants in
determining the AI-status of an investor.
Issuers do not have KYC, KYP or suitability obligations under
applicable law unless they are also in the business of trading, in
which case, they are also required to be registered as a dealer
under applicable securities law, or exempt from such registration.
A questionnaire is a useful tool for issuers to verify the AI status
of an investor, particularly in the context of a non-brokered private
Financial asset test
• What is the value of cash you have in all your accounts with
any financial institution?
• What is the market value of all the securities you own?
• Do all of these securities trade on a stock exchange, automatic