Limited partnership units in a direct-hold solution are distributed through two channels: a prospectus offering during the prospectus marketing period, which qualifies each LP as a reporting issuer under applicable Canadian securities legislation; and the accredited investor exemption under National Instrument 45-106 Prospectus Exemptions, available to institutional and high-net-worth investors. The accredited investor exemption permits the sale of LP units to qualifying investors outside the prospectus marketing period, without the public disclosure requirements of a prospectus filing.

Key takeaways

• The accredited investor exemption permits the distribution of LP units to qualifying investors without a prospectus; the exemption does not reduce the issuer's ongoing disclosure obligations as a reporting issuer under NI 51-102 once the LP reaches reporting issuer status.
• Eligibility is self-certified by the investor at the time of subscription using the form prescribed in NI 45-106; the issuer is responsible for taking reasonable steps to verify eligibility but is entitled to rely on accurate representations from the subscriber.
• Risk acknowledgement documents required for distributions to eligible investors who are individuals — not institutional buyers — must include specified statutory language under NI 45-106 s.2.3(5).

The accredited investor exemption

National Instrument 45-106, adopted by the Canadian Securities Administrators, sets out the exemptions from the prospectus requirement available in each Canadian province and territory. The accredited investor exemption at s.2.3 is the most widely used exemption for private placements to institutional and high-net-worth investors.

An accredited investor includes, among other categories:

Financial institution. A bank, trust company, insurance company, or other financial institution regulated under federal or provincial statute.

Pension fund. A pension fund subject to supervision by a regulatory authority or pension fund administrator whose primary purpose is investing pension assets.

Registered investment dealer. A registered dealer acting as principal or on behalf of a managed account for a discretionary managed account client.

High-net-worth individual. An individual who, either alone or with a spouse, holds financial assets (excluding real property) with an aggregate pre-tax value of at least $1,000,000; or an individual whose net income before taxes exceeded $200,000 in each of the two most recent calendar years and who reasonably expects to exceed $200,000 in the current calendar year; or an individual whose net income before taxes, combined with that of their spouse, exceeded $300,000 in each of the two most recent calendar years and who reasonably expects to exceed $300,000 in the current calendar year; or an individual who holds, alone or with a spouse, net assets of at least $5,000,000.

Incorporated entity with net assets exceeding $5,000,000. A corporation, limited partnership, trust, or unincorporated entity that was not formed specifically to acquire the securities being distributed and that has net assets of at least $5,000,000 on its most recently prepared financial statements.

Subscription and eligibility certification

At the time of subscription, each investor completes an accredited investor certificate — Form 45-106F9 (in British Columbia) or equivalent provincial form — in which the investor certifies which category of accredited investor they satisfy. For investors who are individuals, an additional risk acknowledgement in the form prescribed in NI 45-106 Schedule 1 must be signed acknowledging, among other things, that the securities are not freely tradable and that the investor has assessed the risk of the investment.

The issuer — represented by the general partner of the LP — retains the signed certificate and any supporting representations for the period prescribed by applicable securities legislation. The issuer does not independently verify the financial data underlying the investor's self-certification, but is entitled to rely on the certificate in the absence of red flags suggesting the certification is inaccurate.

Transfer restrictions and secondary market compliance

LP units acquired under the accredited investor exemption are subject to a hold period under applicable securities legislation before they may be resold to members of the public. In most Canadian provinces, the hold period is four months from the date of distribution; after the hold period, units may be transferred without a prospectus provided the transfer complies with applicable exemptions (including the further sale to another accredited investor, the exemption for securities of a reporting issuer distributed in the normal course through a recognized exchange or alternative trading system, or other applicable exemptions).

Transfers of LP units are recorded on the partnership's unit register by the general partner when a completed transfer form and any required documentation is received. The general partner does not approve or disapprove transfers, but the update of the register is the mechanism by which the acquiring investor becomes the registered holder of the transferred units and gains access to investor reporting for the relevant asset.

Interaction with continuous disclosure

An LP that has distributed units by way of a prospectus, or that crosses the statutory threshold of 50 or more non-exempt holders of its securities, becomes a reporting issuer subject to the full NI 51-102 disclosure regime. Reporting issuer status means the LP must file annual audited financial statements, interim financial statements and MD&A, and an annual information form on SEDAR+ regardless of whether it conducts further distributions. The accredited investor exemption does not provide any relief from these ongoing obligations once reporting issuer status attaches.

See also

• limited-partnership-structure — the LP structure through which direct-hold units are issued and governance rights exercised
• distribution-declaration-mechanics — how distributions are structured within the limited partnership framework