On December 8, 2022, the Canadian Securities Administrators (CSA) published amendments (the Amendments) to National Instrument 45-106 Prospectus Exemptions relating to the offering memorandum (OM) prospectus exemption (the OM Exemption). The Amendments will impose significant new and additional disclosure requirements on issuers that are engaged in “real estate activities” (Real Estate Issuers) and issuers that are “collective investment vehicles” (CIVs). The Amendments are intended to clarify the disclosure framework for Real Estate Issuers and CIVs, with the objective of providing better information for investors. We wrote about the proposed amendments (the Proposals) when they were introduced in September 2020.
The Amendments are expected to take effect on March 8, 2023.
1. New Requirements for Real Estate Issuers
The Amendments define “real estate activities”, subject to certain exceptions, as activities, the primary purpose of which is to generate for security holders income or gain from the lease, sale or other disposition of real property. The definition includes property development and real estate activities conducted by subsidiaries of the issuer. Activities relating to mineral, oil and gas projects are excluded from the definition, as are in Québec activities relating to the forms of investments subject to the Regulation Respecting Real Estate Prospectus and Registration Exemptions (Québec).
Independent Appraisal: The Amendments require Real Estate Issuers relying on the OM Exemption to provide to the purchaser, and file with the relevant securities regulatory authorities, an independent appraisal of an interest in real property if one or both of the following apply:
- the issuer proposes to acquire an interest in real property from a related party and a reasonable person would believe that the likelihood of the issuer completing the acquisition is high;
- a value for an interest in real property is disclosed in the OM (other than in the financial statements).
Unlike the Proposals, the appraisal requirement no longer applies to a completed acquisition of an interest in real property from a related party. Similarly, the appraisal requirement will not apply only if the issuer intends to spend a material amount of the proceeds from the offering on an interest in real property.
New Disclosure Schedule: Subject to the de minimis exemption noted below, OMs for Real Estate Issuers relying on the OM exemption will have to include the disclosure required by new Schedule 1 to Form 45-106F2 – Additional Disclosure Requirements for an Issuer Engaged in Real Estate Activities. The schedule applies to each interest in real property held or proposed to be acquired by the issuer (provided a reasonable person would believe that the likelihood of the issuer completing the acquisition is high) and includes the following:
- a detailed description of each property including disclosure of material encumbrances, current and proposed use and occupancy levels;
- detailed disclosure about real estate development projects, such as costs, objectives, timelines and any required approvals;
- the purchase and sale history of real property involving a related party;
- penalties, sanctions, criminal or quasi-criminal proceedings, and/or bankruptcy or insolvency proceedings for parties such as the developer; and
- information about any future cash calls required by investors.
De Minimis Exemption: Most of the disclosure requirements in Schedule 1 will not apply to an interest in real property, or to more than one interest in real property taken together, that when considered in relation to all interests in real property held by the issuer, is not significant enough to influence a decision by a reasonable investor to buy, hold or sell a security of the issuer.
2. New Requirements for Collective Investment Vehicles
The amendments define “collective investment vehicle” as an issuer whose primary purpose is to invest money provided by its security holders in a portfolio of securities other than securities of subsidiaries of the issuer. Issuers that hold portfolios of mortgages, other loans, or receivables would be considered CIVs. The definition also includes investment funds, to the extent they are permitted to use the OM Exemption.
New Disclosure Schedule: New Schedule 2 to Form 45-106F2 – Additional Disclosure Requirements for an Issuer That is a Collective Investment Vehicle will require such issuers to disclose in the OM, among other things:
- the issuer’s investment objectives, strategy and investment criteria;
- detailed description of the portfolio;
- portfolio performance information;
- disclosure of penalty, sanction, criminal or quasi-criminal proceedings, and/or bankruptcy or insolvency proceedings for persons involved in the selection and management of the investments; and
- conflicts of interest.
January 31, 2023