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From time to time, you’ll see (or even be offered by your advisor) an investment available only to “accredited” investors. This doesn’t necessarily mean some sort of real estate syndicate in the Caribbean. In fact, very often it will be an investment fund of some sort. Do you fit the bill?
For example, Venator Capital Management, a Toronto-based investment firm, made an initial public offering for its Venator Founders Alternative Fund, a Liquid Alternative fund with a North American equity long/short mandate. It is available to accredited investors by offering memorandum only.
In other words you are being offered an investment that isn’t available to the general public and one that is not offered by prospectus. If all this sounds a tad murky to you, my advice is to tread very carefully. Here’s why.
A prospectus is a legal document setting out details about the security being offered for sale, the financial condition of the company making the offering, and the risks involved, among other things. Exchange-listed securities, for example, are usually offered for sale by prospectus, which while not offering any type of guarantee at all, sets out the legal requirements of the offering.
Most mutual funds, which continually offer or redeem units, are sold by prospectus, which details the fund’s management and sponsorship, its performance targets, strategies to be used, risks involved, distribution policy if any, and fees and expenses paid to the fund. So are most new exchange-listed share offerings.
Prospectuses and other regulatory filing documents for new share issues and mutual funds can be found on the System for Electronic Document Analysis and Retrieval (SEDAR) site set up by the Canadian Securities Administrators, the umbrella organization of Canada’s provincial and territorial securities regulators. It’s well worth a look to see what documents might be available for an investment you’re interested in.
However, as I said, not all securities are offered by prospectus. These may be, for example, private investment funds or pools like the Venator offering, hedge funds, or companies seeking larger chunks of financing ahead of a public offering (most often used by junior mining or energy companies). As a result, offerings of investments in securities of these entities are made to “accredited investors” only. Basically, that means investors with very deep pockets (to absorb financial losses) and an implied depth of knowledge about investing, business, and finance (to understand the risks involved). And the key document is called an offering memorandum.
The offering memorandum, which must also be filed with securities regulators, is used to provide information to investors in a private placement deal. It defines the investments objectives, risks, financials, and terms of the deal. It’s essentially a business plan but is intended for use by sophisticated investors to do their due diligence on the investment.
Typically, accredited investors are large financial institutions such as governments, banks, and insurance companies, certain types of investment funds, and pension funds. But private individuals may also be classified as “accredited.”
The financial threshold for private individuals to be deemed an “accredited investor” is fairly high. Under National Instrument 45-106 (a National Instrument is a securities regulation that is in force in every province and territory in Canada), an individual must meet a number of financial tests. You’re considered “accredited” if:
If you meet these financial conditions to be considered “accredited,” you are assumed to have the knowledge to assess an investment without a prospectus and to be able to lose the entire investment with no worries. (It’s that second part you really have to pay attention to.)
If you are an individual deemed to meet accredited investor criteria, but you’re not really comfortable with financial analysis and do not understand risk, it’s crucial that you get objective third-party advice on any investment proposal made to you. Talk to your financial planner, or other legal or financial advisor who is not in any way associated or affiliated with the person, group, or business making the offering, for an opinion on the value of the investment and the risks involved.
Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.
Notes and Disclaimer
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The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.
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