The Private Markets are Opening Up in Ontario!
Having received numerous calls from individual investors in Ontario, wanting to purchase private exempt market products, many times I have had to let them know that unfortunately they do not qualify as an accredited investor. As of this coming January 13, 2016, the investment landscape in Ontario will undergo massive changes that will affect over 1/3 of all Canadians: the Offering Memorandum Exemption is coming!
Current Ontario Qualifications
Currently, to purchase private exempt market products in Ontario, an individual must qualify as an accredited investor. The most common qualification tests are:
Net Income Test: Individuals whose net income before taxes exceeded $200,000 (or $300,000 in combination with the net income of their spouse) in the past two years, and who reasonably expect to earn the same amount or more in the current year, can qualify as accredited investors.
Net Assets Test: Individuals whose net assets (assets minus liabilities, including your home), either alone or together with their spouse, exceed $5,000,000 can qualify as accredited investors.
Net Financial Assets Test: Individuals whose financial assets, either alone or together with their spouse, exceed $1,000,000 can also qualify as accredited investors. There are restrictions on what qualifies as a financial asset, but it basically includes cash and investments so long as the realizable value of those financial assets is worth an aggregate of $1,000,000 before taxes but after paying off any related liabilities.
New Ontario Exemptions as of January 13, 2016
Ontario will still retain the accredited investor qualification, and will adopt a new Offering Memorandum Exemption. The Offering Memorandum Exemption will contain three categories for individual investors:
- Accredited Investor– Same qualifications as described above, only now utilizing the OM exemption, which provides additional investor protections
- Eligible investor– The eligible investor category is the real game-changer in Ontario. The bar is set much lower than for accredited investors and includes individuals who meet one of the tests below:
Net Income Test: Individuals whose net income before taxes exceeded $75,000 (or $125,000 in combination with the net income of their spouse) in the past two years, and who reasonably expect to earn the same amount or more in the current year, can qualify as eligible investors.
Net Assets Test: Individuals whose net assets (assets minus liabilities, including your home), either alone or together with their spouse, exceed $400,000 can qualify as eligible investors.
- Non-Eligible Investor– Any Canadian individual investor who does not meet the above income or assets tests
As can be clearly seen, the OM exemption and categories will have an enormous impact on residents of Canada’s largest province, Ontario, as almost all investors will now qualify. All Ontarians will finally be able to access private investment opportunities previously available to only the top few percent of residents.
Investment Will be Capped
No, this is not a license to invest, carte blanche, 100% of your money into private opportunities. Regulators have initiated a hard cap on investment into the exempt markets as follows:
Accredited Investors- Will not be capped
Eligible Investors- Maximum $100,000 total over any 12-month rolling period when purchasing via a registered investment dealer; Maximum $30,000 when purchasing directly from an issuer
Non-Eligible Investors- Maximum $10,000 over any 12-month rolling period
As an example, prior to January 13, 2016, an Ontario resident earning 100K/ yr with a $500,000 in net assets (net of liabilities investment) portfolio would not qualify. Under the changes, that same investor would now qualify under the OM exemption under the “eligible” category. This investor would meet both the income and assets tests although only one or the other is required. This individual could now purchase up to $100,000 of private exempt market products over any rolling 12-month period.
Changes in Alberta, Saskatchewan, Quebec as Well
These provinces, who currently allow for the Offering Memorandum Exemption, will also institute similar hard caps on investing over any 12-month period.
The OM Exemption Can Benefit Accredited Investors Also
Many ON investors who currently qualify for, and utiilize, the accredited investor exemption will see no need to change, and may continue to invest using the accredited investor exemption. This may be a mistake as the new OM exemption provides additional protections not currently available to ON accredited investors. These include:
- 2-day right of rescission
- If an Offering Memorandum contains a material mis-representation, the directors of an issuer can be held personally liable under the OM exemption
Therefore it is recommended that all accredited investors start utilizing the OM exemption (where available) and simply choose the accredited investor category.
Exciting Times!-What Next?
2016 will see a brand-new era rushed into the investment landscape for approximately 1/3 of Canadian investors. If correctly utilized, private investments can be an excellent way to properly diversify a portfolio, help control overall risk, provide alternative sources of income and growth, and can even smooth out stock market volatility. However they must be understood extremely well in order to be used properly.
If you have any questions about the upcoming changes, how they apply to you as an investor, and how you can take advantage of new opportunities, I am happy to help. Feel free to email me at firstname.lastname@example.org or click on the contact tab above.
If you like the blog check out Investing Beyond’s Youtube Channel here