R.S.O. 1990, c. S. 5, AS AMENDED
IN THE MATTER OF
Motion Heard: October 16, 2000
John A. Geller, Q.C. - Vice-Chair
Robert W. Davis, F.C.A. - Commissioner
For the Staff of the Ontario Securities Commission
Hugh Corbett and Margo Paul
David McIntyre - In Person
DECISION AND REASONS
Osler Hoskin & Harcourt, of which firm Mr. McIntyre is a partner, applied to the Commission for:
a) recognition by the Commission of Mr. McIntyre as an exempt purchaser, under paragraph 35(1) 4 of the Securities Act (the "Act"); and
b) a ruling pursuant to section 74 of the Act exempting trades to Mr. McIntyre from the requirements of section 53 of the Act.
If the application was granted by the Commission, trades to Mr. McIntyre would be exempt from both the registration and the prospectus requirements of the Act.
Both the registration and the prospectus requirements of the Act are designed to protect investors by ensuring that, unless an appropriate exemption is available or the Commission grants a specific exemption, a prospective investor in securities will have available the benefit of the advice of a registrant with respect to a proposed investment, and the information available in a prospectus to enable the proposed investor to make an investment decision on the basis of all of the relevant facts.
The application for recognition of Mr. McIntyre as an exempt purchaser was based on the assertion that Mr. McIntyre had income in excess of $200,000 in each of the last two years, and a reasonable expectation of achieving the same in the current year; and the argument that the Commission should apply the same test as is applied in the United States of America in respect of accredited investors for the purpose of prospectus and registration exemptions in respect of individuals.
Mr. McIntyre advised us that he is a non-industry director of BayStreetDirect Inc., a registered investment dealer, and is seeking recognition of himself as an exempt purchaser as a test case, and that, if successful, he would rely on the order granting him recognition to seek recognition for individuals in a similar financial position for the purpose of permitting them to invest in "start-ups" and other companies through BayStreetDirect Inc. Mr. McIntyre stated that the rationale behind seeking exempt purchaser status for such individuals is that while those individuals may be willing to invest, for example, $25,000 in a young company as an exempt purchaser, they are not willing or able to invest $150,000 in the same company. If they were so prepared, a trade could be made to them in reliance on the registration and prospectus exemptions contained in paragraph 35(1)5 and clause 72(1)(d) of the Act, which Mr. McIntyre asserts is essentially the only option available to them absent the relief requested in this application.
In effect, Mr. McIntyre asked us to craft a new general exemption from the registration and prospectus requirements of the Act, based on exemptions available in the United States of America.
We do not think that it is appropriate for such a general exemption to be crafted in the course of dealing with a particular application for recognition as an exempt purchaser or for an exemption from the prospectus requirements of the Act. Rather, in our view, such an exemption, if appropriate, should be dealt with under the Commission's policy-making or rule-making authority.
In fact, the Commission has published for comment proposed revised Rule 45-501 Exempt Distributions which would, if and when the Rule is made, replace certain existing exemptions from the registration and prospectus requirements of the Act with new exemptions.
One of the proposed exemptions, the "accredited investor" exemption, would exempt from the registration and prospectus requirements of the Act a trade in a security if the purchaser is an accredited investor and is purchasing as principal. The definition of "accredited investor" in the proposed revised Rule includes an individual whose net income exceeded $200,000 in each of the two most recent years or whose joint net income with a spouse exceeded $300,000 in each of those years and who, in either case, has a reasonable expectation of exceeding the same net income level in the current year. What Mr. McIntyre would have us do is agree to apply the proposed revised Rule as though it had been made.
However, as should be obvious from what has happened with other rules proposed by the Commission and published for comment, after receiving comments and considering them, the Commission will often revise very substantially the proposed rule, and there can be no certainty that the specific provision in question will remain unaltered. Comments received might convince the Commission, for instance, that the net income levels proposed are too low. Accordingly, we are not in a position to say at this time that it is appropriate for us to generally adopt those income levels as being the appropriate ones to use generally or in considering an application such as the one that is before us.
We do not consider it appropriate for us to make such a major change in the exemption regime of the Act in the course of dealing with a specific application. Rather, in our view, we must deal with Mr. McIntyre's application on the facts before us, and determine whether it is appropriate and in the public interest for us to grant the relief requested by him. It is, of course, for him to satisfy us that it is appropriate and in the public interest.
The exemptions to which Mr. McIntyre referred from the registration and prospectus requirements of the Act, commonly known as the "exempt purchaser" exemptions, are in our view, founded on the assumption that someone who has $150,000 to invest in a specific security is capable of determining, or is able to obtain the necessary advice on the basis of which he, she or it can determine, that the investment is a suitable one for him, her or it, and does not need the protection of the advice of a registrant or the information contained in a prospectus. It represented an attempt to arrive at a black line test as a proxy for determining whether a prospective investor was a "sophisticated investor" requiring less protection. The assumption may have been correct when the dollar figure in the exemptions was raised to $150,000 some years ago, but it is questionable whether it is still an appropriate assumption, and the fact that the Commission is considering replacing it by other exemptions by its proposed revised Rule 45-501 indicates that the Commission does have considerable doubt that it is still an appropriate basis for determining that a prospective investor is a "sophisticated investor".
Whatever alternative blackline test is adapted will similarly represent an attempt to find a method of arriving at a proxy for "sophistication".
Similarly, what we are required to do in this case is decide whether Mr. McIntyre is, in fact such a "sophisticated investor".
Mr. McIntyre has not satisfied us that, because he had income of over $200,000 in each of the last two years and expects to have similar income this year, he is such a "sophisticated investor".
We would add, parenthetically, that, in our view, the fact that Mr. McIntyre is an experienced securities lawyer does not assist us in determining whether he is a "sophisticated investor". The two are not necessarily the same thing.
Accordingly, we decline to grant Mr. McIntyre recognition as an exempt purchaser or the section 74 relief which he has requested.
October 25 th , 2000.
"J. A. Geller" "Robert W. Davis"