CANADA Law and Practice Contributed by: Darin Renton, Jill Winton, Amy Chao and Irena Ninkovic, Stikeman Elliott LLP
• net assets, alone or with a spouse, worth more than CAD5 million. The “permitted client” category is similar to the “accredited investor” category and includes a similar list of institutional investors, but the financial thresh - olds for individuals and entities are much higher. Permitted clients include individuals who beneficially own net financial assets in excess of CAD5 million and entities (other than investment funds) that have net assets of at least CAD25 million (as shown on their most recently prepared financial statements). Except under certain limited circumstances, retail investors cannot invest in alternative funds unless the distribution is qualified by a prospectus (pub - lic funds). The “offering memorandum exemption” (OM exemption) permits an alternative private fund to solicit investments from a wider range of inves - tors than under other prospectus exemptions, but the fund must prepare a prescribed form of OM (including audited financial statements) and there are strict limits on how much individuals can invest. In some Jurisdic - tions (eg, Ontario), this exemption is not available to investment funds; see 4.5 High Net Worth or Retail Investors . 4.2 Side Letters Alternative private funds are permitted to enter into side letters with investors with respect to any aspect of the investment or contractual relationship between the fund and investor. There is no requirement to disclose the existence or contents of a side letter to other investors in the fund, but it is best practice to do so. There is also no requirement to offer side let - ters to investors, but certain types of investors usu - ally request them, such as large pension plans and institutional investors. Public funds do not enter into side letters but can deal with special investment conditions through separate classes of securities, mostly with respect to manage - ment fees. 4.3 Marketing of Alternative Funds to Investors Securities of Canadian resident and non-resident alternative funds are generally marketed and sold on
a private placement basis to accredited investors and permitted clients; see 4.1 Types of Investors in Alter- native Funds . Certain public funds, designated as “alternative mutu - al funds”, are marketed to retail investors as liquid AIFs or “liquid alts”. Prospectus offerings can be mar - keted and distributed only by investment dealers or
mutual fund dealers registered in Canada. 4.4 Rules Concerning Marketing of Alternative Funds Registration Requirements
The marketing of the securities of alternative funds is considered an act in furtherance of a trade and, as such, is subject to the prospectus and dealer registra - tion requirements. In Canada, “trading” in securities is broadly defined to include not only the sale or dis - position of a security for valuable consideration, but also any act, solicitation or conduct that is directly or indirectly in furtherance of the sale or disposition of a security. Please refer to 2.2 Regulatory Regime for Funds and 3.3 Regulatory Regime for Managers with respect to potential filing obligations. As a general rule, alternative funds that do not pre - pare and file a prospectus cannot market to retail investors, with the limited “OM exemption” being the exception. Prospectus qualified distributions of secu - rities can only be marketed by investment dealers or mutual fund dealers registered in Canada with CIRO. Firms registered as “exempt market dealers” under NI 31-103 can market alternative funds to accred - ited investors in reliance on the accredited investor exemption or another prospectus exemption available under NI 45-106. Foreign dealers can market secu - rities of non-resident alternative funds to permitted clients under the IDE. Managers and sponsors of alternative private funds may also engage a registered dealer in Canada and rely on an exemption from the dealer registration requirement for trades to or through a registered deal - er. This exemption is relied on by firms and individu - als (“wholesalers”) who solicit only registered dealers on behalf of one or more funds in order to have the issuer’s securities offered by the dealer to the dealer’s clients. The exemption is not available if a manager or
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