What this module covers
A first private investment involves more steps than a first purchase of a listed security. This module describes them in the order they usually occur: how an investor's category under the prospectus exemptions is established and what documents are involved; setting objectives in writing; independent research; the questions investors put to a dealer or manager; reading the offering documents; what a first investment exposes an investor to; and the advisers commonly involved. The decision to invest, or not, rests with the investor throughout.
Investor category and the documents involved
Private investments in Canada are generally sold under exemptions from the prospectus requirement in National Instrument 45-106 (NI 45-106). Each exemption is available only to investors in particular categories, such as the accredited investor or eligible investor categories, or only on particular conditions, as with the offering memorandum exemption. The categories and their definitions are set out, quoted from the instrument, on the investor categories page; module 03 describes the accredited investor definition.
Category status is established in two parts.
- The investor's representation. The investor states which category applies, usually in the subscription agreement signed to make the investment.
- The supporting information. The person relying on the exemption, the issuer or a dealer, is responsible for confirming that the exemption is available. That is why issuers and dealers ask for information and documents that support the investor's statement, rather than accepting the statement alone.
What is asked for depends on the basis of the category. Where it rests on income, issuers and dealers commonly ask for recent tax returns or notices of assessment. Where it rests on financial assets or net assets, they commonly ask for brokerage and registered-account statements and for documentation of liabilities such as mortgages. Some issuers ask for a confirmation letter from the investor's accountant or lawyer.
For some individual accredited investors, NI 45-106 also requires the person distributing the security to obtain a signed risk acknowledgement in a prescribed form (Form 45-106F9) at or before the time the investor signs the agreement to buy. Investors under the offering memorandum exemption sign a different prescribed risk acknowledgement (Form 45-106F4).
Category status and a capacity to carry the investment are separate things. A private fund's term commonly runs seven to ten years or more, and the investment carries a real possibility of loss. Whether capital can be committed for that long, and whether a loss could be absorbed, are questions of the investor's own liquidity and risk tolerance, described in module 15. No category answers them.