Retail investors, meet private equity: The OSC’s consultation on retail access to long-term asset investments

On October 10, 2024, the Ontario Securities Commission (the “OSC”) published Consultation Paper 81-737 Opportunity to Improve Retail Investor Access to Long-Term Assets through Investment Fund Product Structures (the “Consultation Paper”). The Consultation Paper is aimed at improving retail investor access to illiquid investments through a framework proposal for a long-term asset investment fund product structure.

What are long-term asset investments?

Long-term assets are illiquid assets that cannot be readily disposed of, may be difficult to value, and generally have longer investment time horizons than other assets. These assets include venture capital, private debt and equity, and infrastructure and natural resource projects.

The genesis behind the Consultation Paper is a perception that the current fund regulatory regime in Ontario is not conducive to the development of fund structures that facilitate retail investor access to long-term assets. While there are currently investment vehicles that provide access to these assets, many are privately funded and not available to retail investors. The rise in private financing in Ontario and other developed economies, and the trend of issuers staying private for longer, may further limit retail investors’ access to long-term assets.

The Ontario Long-Term Asset Fund

To facilitate retail access to long-term assets, the Consultation Paper proposes the creation of a new investment fund category, the Ontario Long-Term Asset Fund (the “OLTF”).

An OLTF’s main purpose would be to invest funds without seeking to control or actively manage any issuer in which it invests. Based on the product's redemption terms, an OLTF could be categorized as a mutual fund or as a non-redeemable investment fund (a “NRIF”). However, many existing regulatory requirements applicable to these types of funds may not be suitable for OLTFs, highlighting the need for a distinct regulatory framework that balances flexibility and investor protection. For example, mutual funds and NRIFs are currently prohibited from purchasing illiquid assets in proportions exceeding 10 percent or 20 percent, respectively, of their net asset value (“NAV”).

The proposal in detail

Under the OSC’s proposal, OLTFs would be exempt from the illiquid asset restrictions that apply to other investment funds. However, OLTFs must nevertheless address the inherent risks of long-term asset ownership — such as liquidity, volatility, concentration, duration, and informational asymmetries — including by implementing robust governance and operational protocols.

OLTFs would become reporting issuers in Ontario through a prospectus-qualified offering. As investment funds exclusively for Ontario investors, OLTFs would not have securities listed or traded on any Canadian marketplace.

Additionally, the proposal would require OLTFs to invest indirectly in long-term assets by purchasing securities of underlying collective investment vehicles — issuers that invest in long-term assets — which must have a “Cornerstone Investor” like a pension fund.

Retail investors would gain exposure to long-term assets through the professional management of a registered investment fund manager and registered portfolio manager. This would allow investors to reap the benefits of illiquid long-term assets while also mitigating the inherent risks, such as liquidity issues for retail investors needing quick cash withdrawals. Additional benefits of OLTFs identified by the Consultation Paper include:

• a fund structure that reduces informational risks by requiring clear explanations of the fund’s investment objectives and strategies; and
• diversification by allowing funds to hold various long-term assets or different projects within a specific asset type to minimize concentration risk.

Conclusion

There are still a number of threshold issues that the OSC is seeking to address through the consultation process. These threshold issues relate to requirements around redemptions, valuation (NAV), investment restrictions, etc. For example, the OSC is seeking input on how to deal with the liquidity risk inherent in holding illiquid assets. According to the Consultation Paper, liquidity risk results from a mismatch between the funds’ obligations to manage portfolio liquidity against the liquidity needs of securityholders. While redemption restrictions will help funds manage their liquidity, more onerous redemption restrictions will make investments in OLTFs less attractive to retail investors. The OSC’s current proposal in the Consultation Paper is to specify a range of redemption restrictions and permit OLTFs to choose a frequency within that range. The OSC’s view is that redemptions should be no more frequent than monthly and no less frequent than annually.

The OSC has requested that all comments on the Consultation Paper be submitted by February 7, 2025. Following this initial comment period, the OSC anticipates the next step will be a publication for comment of proposed rule amendments and policy changes.

If you would ‎like to comment on or discuss the Consultation Paper, we encourage you to contact a member ‎of our Equity Capital Markets team.‎