The Private Equity markets in Canada are very active, especially in the Real Estate market. Private Equity allows private companies to raise capital from the public, but ONLY if the potential investor qualifies to do so. This has been laid out in National Instrument 45-106 with additional restrictions determined by provincial securities regulators. The province you reside in can impact your eligibility substantially!
Some Background Information:
First off, it’s essential to understand that many companies are restricted in the way that they can raise capital. Most people are familiar with publicly traded companies and investment fund offerings that have a prospectus created that investors can use to determine if they want to invest or not. In the case of Real Estate projects, this is often not practical, so these projects look to utilize ‘exemptions’ to the prospectus requirement to raise capital efficiently. These exemptions also create restrictions on who money can be raised from. We will discuss some of these restrictions in this article. Remember that we aren’t lawyers, and we encourage you to get proper legal advice before investing in any private equity offering.
The most common terminology in private Equity investing is “Accredited Investor.” If you qualify as an Accredited Investor, you will generally have access to almost any personal investment opportunities, most of which are unavailable to non-accredited investors.
So, who is an Accredited Investor?
Becoming an Accredited Investor is typically based on any of these three main qualifying metrics:
- Net Income – Your individual Net Income must be more than $200,000 per year or $300,000 jointly with your spouse.
- Net Assets – Your Net Worth exceeds $5,000,000, alone or jointly with your spouse.
- Financial Assets – You have liquid Financial Assets of at least $1,000,000 (for example, cash, stocks, bonds, etc.) This excludes Real Estate and some other assets.
If you meet any of these criteria, you are usually considered an Accredited Investor and are eligible to participate at your sole discretion.
Is there another way to qualify if you don’t meet these criteria?
Good news – There are a couple of options!
- Close Friends and Business Associates – If you know the issuer well, either personally or through past business dealings, you may be able to invest. Securities regulators have guidelines surrounding this, so check their websites for details (website links are at the end of this article)
- $150,000 Exemption – If you own an active operating company with cash deposits (at least $150k) you are looking to invest, you may qualify under this exemption. As before, check your province’s securities website for more details.
So… what if you don’t fit into these boxes?
One of the main ways companies can accept non-Accredited capital is by using an Offering Memorandum. An Offering Memorandum (OM) is a legal document that states the objectives, risks, and terms of an investment involved in private equity investment.
The OM, however, brings its own set of limitations, most of which are established at a provincial level. BC has minor restrictions, allowing anyone over 19 to invest. Most other provinces have much more stringent qualifications and limitations.
Most other provinces have different securities regulations for non-accredited capital being invested via an OM. Generally, two new categories of investors are identified – eligible and non-eligible.
Eligible Investor – Must meet one of the following criteria:
- Earns over $75k individually or $125k jointly in the past two years and is expected to continue in the coming year.
- Over $400k in net assets (total assets fewer total liabilities)
Non-Eligible Investor – Those below the above thresholds.
Each of these designations provides limitations on investment:
- Non-Eligible Investor – Maximum of $10,000 in all OM investments in the past 12 months.
- Eligible Investor – Maximum of $30,000 in all OM investments in the past 12 months.
- Can be increased to $100,000 if the investor receives advice from a licensed investment representative (Exempt Market Dealer, or EMD, is typical)
An Offering Memorandum opens the door for many everyday investors to participate in private equity investments that otherwise wouldn’t be available. Alongside this, it can create an opportunity to build a relationship between non-accredited investors and company principals, which can sometimes evolve their relationship to ‘close business associates,’ opening the door to investing in non-OM deals in the future.