Re: CSA Multilateral Notice and Request for Comment 45-327 – Proposed Prospectus Exemption for Self-Certified Investors

FAIR Canada is pleased to provide comments on the proposed local blanket order of the Alberta Securities Commission (ASC) and the Financial and Consumer Affairs Authority of Saskatchewan (FCAA) published on November 20, 2020.

FAIR Canada is a national, independent charitable organization dedicated to being a catalyst for the advancement of the rights or investors and financial consumers in Canada. As a voice of the Canadian investor and financial consumer, FAIR Canada advances its mission through outreach and education on public policy issues, policy submissions to government and regulators, and proactive identification of emerging issues and other initiatives.[1]

Fundamental Concerns

We have two fundamental concerns with the approached proposed in the draft blanket order.

First, to the extent there is no concurrent distribution under the Accredited Investor exemption, the issuer relying on the proposed blanket order does not appear to have to provide any information to an investor about the securities being distributed.

Second, the blanket order does not limit the use of the exemption to only reporting issuers.  In other words, the exemption could be used by companies that provide no public information about their business, operations, or financial condition.

Taken together, the net effect is that securities could be offered to the public based solely on the fact that an investor belongs to a certain class and is willing to sign the proposed declaration and self-certification forms.

In our view, these two concerns pose significant risks to investors and extend the scope of the exemption too far.  We believe the exemption should be limited to reporting issuers only, and investors should be provided with relevant information about the offering prior to making their decision, and at least similar to what would be provided to an accredited investor.

Other concerns

Class of investors – We generally agree with the approach of using financial and investment education and experience as a reasonable proxy for identifying an investor who, because of being more knowledgeable and sophisticated than the average investor, does not require the full protections typically afforded by the regulatory framework. We question, however, whether the class as proposed is appropriate.

In our view, apart from perhaps those individuals who are full certified financial planners, or those who are licensed to work in the industry as dealer or adviser representatives, the parameters of who would be entitled to rely on this exemption is too broad.  This is not to suggest that CPAs, lawyers, MBA, or graduates with a degree in finance are not sophisticated professionals in their respective areas – they are.  However, that experience does not always equate to being a sophisticated investor.  We believe the criteria should be more closely aligned to actual investment experience.

We also note that the criteria do not require the individual investor to be currently working in the area of their designation.  For example, one only needs to hold a CPA designation to qualify, as opposed to be working as a CPA or have a minimum years or level of experience as a CPA.  As a further example, someone may have obtained an MBA in finance but gained experience in a completely different and unrelated discipline, yet still be eligible to rely on the exemption.

Our concerns are heightened by the fact that behavioural research shows that individual investors tend to be over-confident about their level of investment knowledge and literacy. In fact, many Canadians believe their level of investment literacy is above average, while studies show the opposite. In short, the reliance on self-certification, even for this class of investors, poses risks.  Stated differently, while the proposal should facility access to capital, in our view it is does not adequately address the investor protection concerns for this community of investors.

Ability to withstand loss – We are surprised that part of the rational for justifying this type of

exemption is based on the ability of an investor to be able to withstand the loss of their entire investment.  Yet the proposal does not include any other factor to suggest why losing either $10,000 or $30,000 in any 12-month period would be bearable for this class of investor.  While we appreciate the monetary caps are intended to minimize potential losses, the amounts may still represent significant investments beyond an investor’s ability to withstand loss. This is particularly true given that over the proposed three-year pilot phase of the proposed blanket order, an investor could have invested a total of $90,000 based on very little information or actual related investment experience.

We thank you for the opportunity to provide our comments and views in this submission. We welcome its public posting. Please be advised that we intend to make our submission public by posting it to the FAIR Canada website. We would be pleased to discuss our submission with the ASC and FCAA should you have questions or require further explanation of our views on these matters. Please contact Jean-Paul Bureaud, Executive Director, at JP.Bureaud@FAIRCanada.ca

Sincerely,
Jean-Paul Bureaud,
Executive Director
FAIR Canada | Canadian Foundation for Advancement of Investor Rights

[1] Visit www.faircanada.ca for more information