If you have been looking for alternative investments rather than the latest and greatest mutual fund, then you have likely run into the question of whether you are an Accredited Investor or not. Below you will find a brief clarification on the subject.
Under securities legislation in Canada, a company that wishes to raise capital via the public market (ie, sell shares in the given company or any other type of security) must file a “prospectus” with the provincial/ territory securities regulator it plans to offer said securities. Unfortunately, this is a very costly and impractical way of raising capital for the smaller private company. Thus, the Private Market or Exempt Market was born.
Private companies that raise capital in the Exempt market do so through one or more prospectus exemptions. For this article, we won’t get into the various exemptions but suffice it to say that these exemptions present different variables that can affect investment risk to the public because of different reporting standards. To protect the investing public, The Canadian Securities Commission has established rules and investment limits on who is allowed to invest in a private company that has not registered a Prospectus.
These rules separate the public into two categories of investors: “Accredited” and “Non-Accredited.”
The definition of an accredited investor is detailed in great length in subsection 1.1 of National Instrument 45-106 – Prospectus Exemption (“NI 45-106”). The definition includes a list of investors such as large financial institutions and government agencies, but we will focus on the criteria that distinguish individuals as accredited investors.
You may qualify as an accredited investor in Canada if you meet at least ONE of the following criteria.
- Your net income before taxes exceeded $200,000 in both of the last two years, and you expect to maintain at least the same level of income this year. Or, your net income before taxes, combined with that of a spouse, exceeded $300,000 in both of the last two years, and you expect to maintain at least the same level of income this year.
- You, alone or together with a spouse, own financial assets worth more than $1 million before taxes but net related liabilities. Cash, or specific investments such as public equity or bonds, would be considered liquid/financial assets.
- You, alone or together with a spouse, have net assets of at least $5,000,000. This criterion requires that an individual have net assets that count for at least $5 million, with liabilities subtracted. For example, this means that an investor with $4.5 million in real estate and $500,000 in cash may be considered an accredited investor.
- You currently are, or once were, a registered advisor or dealer, other than a limited market dealer. For example, someone with a Mutual funds license or an IROC license could be considered an accredited investor.
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