On September 17, the Canadian Securities Administrators (CSA) published for comment proposed changes to the offering memorandum (OM) prospectus exemption (OM Exemption) in National Instrument 45-106 Prospectus Exemptions (NI 45-106) and related guidance in Companion Policy 45-106CP (Proposed Amendments). The principal changes introduce new disclosure requirements for issuers engaged in real estate activities and issuers that are collective investment vehicles.
A. New Requirements for Issuers with Real Estate Activities
“Real estate activities” are defined, subject to certain exceptions, as “an undertaking, the purpose of which is primarily to generate for security holders income or gain from the lease, sale or other disposition of real property.” Activities relating to mineral, oil and gas projects are excluded from the definition, as are distributions in Québec of certain products that provide a real right of ownership in an immovable or give the holder of a security a right of exclusive use of a residential unit and space in an immovable owned by the security’s issuer.
Independent Appraisal: Issuers that engage in real estate activities and wish to rely on the OM Exemption will have to provide to the purchaser and file with the relevant securities regulatory authorities an independent appraisal of any interest in real property if:
- The issuer has acquired or proposes to acquire an interest in real property from a related party (as that term is defined in NI 45-106);
- A value for an interest in real property is disclosed in the offering memorandum (OM); and/or
- 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, issuers engaging in real estate activities also will have to complete new Schedule 1 Additional Disclosure Requirements for an Issuer Engaged in Real Estate Activities to Form 45-106F2:
- Issuers that develop real property will have to provide detailed disclosure about the project, such as descriptions of milestones and required permissions/approvals.
- Issuers that own and operate real property will have to provide detailed disclosure about matters such as the property’s age, condition and occupancy level.
- All issuers engaged in real estate activities will have to disclose the purchase and sale history of any of the issuer’s real property involving a related party.
- All issuers engaged in real estate activities will have to disclose penalties, sanctions, criminal or quasi-criminal proceedings, and/or bankruptcy or insolvency proceedings for parties such as the developer.
De Minimis Exemption: The disclosure requirements in Schedule 1 will not apply to an interest in real property, or 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.
B. New Requirements for Collective Investment Vehicles
“Collective Investment Vehicle” is defined very broadly in the Proposed Amendments to mean an issuer whose primary purpose is to invest money provided by its security holders in a portfolio of securities. This definition will include issuers that hold portfolios of mortgages, other loans, or receivables. Also, the definition will include investment funds, to the extent they are permitted to use the OM Exemption.
New Disclosure Schedule: New Schedule 2 Additional Disclosure Requirements for an Issuer That is a Collective Investment Vehicle to Form 45-106F2 will require such issuers to disclose, among other things:
- The issuer’s investment objectives;
- Detailed information about the portfolio;
- Information about the portfolio’s performance; and
- Penalties, sanctions, criminal or quasi-criminal proceedings, and/or bankruptcy or insolvency proceedings for persons involved in the selection and management of the investments.
C. Other Amendments
The Proposed Amendments also include some general amendments, which are meant to clarify or streamline parts of NI 45-106 or improve disclosure for investors. For example, to make reading and reviewing OMs more efficient, the filed copy will have to be formatted so that words can be search electronically.
Form 45-106F2 Offering Memorandum for Non-Qualifying Issuers (Form 45-106F2) will be revised to include new cover page disclosure items, such as working capital deficiencies, payments to related parties, payments to finders and sellers, restrictions on redemption and retraction rights, and insufficiency of funds to accomplish the proposed objectives. Other changes to Form 45-106F2 include:
- Enhanced disclosure if a material amount of the offering proceeds will be transferred to another issuer that is not one of the issuer’s subsidiaries;
- Disclosure of purchase and/or sale histories of the issuer’s business or assets (other than real estate) involving a related party;
- The addition of related parties that receive compensation to the compensation disclosure and securities ownership table;
- Requirements to disclose criminal and quasi-criminal convictions;
- Additional disclosure regarding fees or limitations on redemption or retraction rights;
- More disclosure regarding redemption and retraction activities, including requests made to or fulfilled by the issuer, including the price paid, source of funds, and outstanding requests;
- Disclosure of the source of funds for dividends or distributions paid that exceed cash flow from operations; and
- Cautionary disclosure where expert reports, statements or opinions are included in an OM and the expert is not subject to statutory liability.
Interim Financial Reports for Ongoing Distributions: OMs will have to be amended to include an interim financial report for the most recently completed 6-month interim period when a distribution of securities under an OM is ongoing.
Form 45-106F4 Risk Acknowledgement (Form 45-106F4) will be amended, with the intention of making the form more understandable and useful to investors and to align the form with risk acknowledgment forms required with other prospectus exemptions.
Related Local Amendments Are Contemplated in Certain Jurisdictions. For example, the Alberta and British Columbia Securities Commissions expect to repeal local rules that require additional disclosure in OMs that relate to real estate projects. These local matters are disclosed, jurisdiction by jurisdiction, in Annex E of the version of the Notice of Proposed Amendments published in that jurisdiction. In Ontario, no local amendments are contemplated but the Ontario Securities Commission has included an Ontario-specific regulatory impact analysis in Annex E of the Notice published in Ontario.
D. Our Takeaways
The Proposed Amendments will make it more cumbersome for issuers with real estate activities or that are collective investment vehicles (including mortgage investment entities) to use the OM Exemption. The deadline for comments is December 16, 2020. If you have questions or would like to discuss how the Proposed Amendments might affect your business, please contact us.
September 30, 2020
As readers of our bulletin know, the Financial Services Regulatory Authority of Ontario (FSRA) is a relatively new regulatory agency that, in 2019, took over regulatory oversight of mortgage brokers and administrators from the Financial Services Commission of Ontario. Earlier this month, FSRA announced that it was imposing a $250,000 penalty on Fortress Real Developments Inc. (Fortress) to settle enforcement proceedings against the firm. FSRA found that Fortress and its predecessor had been involved in helping borrowers raise more than $900 million in syndicated mortgage loans without being licensed to engage in such activity. This is one of the first administrative penalties FSRA has imposed on an entity and the largest administrative penalty it has imposed to date.
September 30, 2020
On September 24, the Financial Services Regulatory Authority of Ontario (FSRA) published for comment 22 proposed service standards (Standards) for its operations. They include, among other things, performance targets for handling individual applications for mortgage broker licenses. For example, FSRA aims to issue individual licenses within 10 days of receipt of a complete application, where payment has been made and there are no suitability issues, at least 80% of the time.
The proposed Standards also outline timelines for handling complaints. Among other things, FSRA aims to assess and “action” at least 80% of complaints within 120 days and at least 95% of complaints within 270 days of receiving a complain containing all relevant information. In this context, “action” means a range of possible outcomes including escalation to other areas of FSRA, transfer of the complaint to a third-party dispute organization, the issuance of a warning or caution letter, or closure of the complaint with no action.
The deadline for comments on the proposed Standards is October 23, 2020.
September 30, 2020
On August 6, the Canadian Securities Administrators (CSA) published final amendments to national rules affecting the prospectus and registration exemptions for distributions of securities involving syndicated mortgages (National Amendments). In addition, some provinces including Ontario have proposed additional changes to their local prospectus and registration exemptions, and the Financial Services Regulatory Authority of Ontario (FSRA) is consulting on draft guidance (FSRA Guidance) for its supervision of mortgage brokers and administrators dealing in certain syndicated mortgages. The National Amendments, proposed FSRA Guidance, and proposed Ontario-specific amendments prospectus and registration exemptions (Ontario Rules) are expected to come into effect on March 1, 2021. Below, we highlight key features of the reforms.
The National Amendments will amend National Instrument 45-106 Prospectus Exemptions (NI 45-106), National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), and the related companion policies. Among other things:
- The existing prospectus and registration exemptions in Ontario, Newfoundland and Labrador, the Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island and the Yukon for securities that are syndicated mortgages (Mortgage Exemptions) will be removed. This will align the regulatory frameworks in these jurisdictions with the rest of Canada.
- The private issuer prospectus exemption (Private Issuer Exemption) will be removed for distributions of syndicated mortgages.
- Because of these changes, exempt distributions of syndicated mortgages in Canada will have to be effected under another prospectus exemption, such as the accredited investor exemption (AI Exemption), offering memorandum exemption (OM Exemption), or family, friends and business associates exemption (FFBA Exemption).
- Consistent with the current approach in British Columbia for syndicated mortgages distributed under the OM Exemption, the National Amendments will require supplemental disclosure tailored to syndicated mortgages.
- In Ontario and other jurisdictions where the Mortgage Exemptions currently apply to syndicated mortgages, market participants that are in the business of trading syndicated mortgages will need to determine whether the registration requirement applies to them.
Changes since 2019: The National Amendments are substantially similar to the proposed amendments published by the CSA for comment in March 2019 (2019 Proposal). But there have been a few changes. For example, Form 45-106F18 Supplemental Disclosure for Syndicated Mortgages will require disclosure of the potential subordination of the syndicated mortgage, clarify the calculation of the loan-to-value ratio, and include additional examples of risk factors.
Some jurisdictions have proposed further changes to their exemptions:
- Qualified syndicated mortgages: Ontario and New Brunswick have published for comment prospectus and registration exemptions for “qualified syndicated mortgages” (QSMs), and we expect Nova Scotia to introduce a similar pair of exemptions. Alberta and Québec have proposed a prospectus-only exemption for trades in QSMs.
- Distributions of non-qualified syndicated mortgage investments (NQSMIs) to permitted investors: Ontario and New Brunswick also have proposed prospectus and registration exemptions for distributions of NQSMIs to permitted clients (i.e. institutional and high net worth investors). Alberta has proposed a prospectus-only exemption for trades in NQSMIs to permitted clients, while Québec is asking for feedback on whether such an exemption should be introduced.
- Reports of exempt distribution: Ontario and New Brunswick will not require a Form 45-106F1 Report of Exemption Distribution to be filed for distributions of QSMs under their new prospectus exemptions or for distributions of NQSMIs sold to permitted clients.
Who will regulate what in Ontario beginning in March 2021? FSRA currently regulates all syndicated mortgage investments in Ontario. When the new regime comes into effect, FSRA will continue to supervise transactions involving qualified, syndicated mortgage investments and the mortgage brokers and administrators involved in such transactions. Oversight of NQSMIs will be split between FSRA and the OSC, depending on the status of the investor/lender and the type of transaction. In particular, FSRA will supervise:
- NQSMI transactions with permitted clients;
- NQSMI transactions with permitted and non-permitted clients before March 1, 2021 (Legacy NQSMIs); and
- Administrators of NQSMIs.
Mortgage brokerages that deal in mortgages and syndicated mortgages only with permitted clients will not have to register with the OSC and the distributions of these products to permitted clients will be exempt from the prospectus requirement. There will be dual oversight however, in some circumstances. For example, FSRA will have oversight over mortgage brokers dealing in NQSMIs when they act on behalf of the borrower who is not a permitted client, with the OSC having oversight over the trades with respect to that investor/lender.
The proposed FSRA Guidance describes FSRA’s forward-looking, risk-based approach to supervision of the firms and transactions over which it will have authority and outlines the data it plans to collect from firms to inform its risk assessments.
Comment Deadline: Comments on the proposed Ontario Rules and FSRA’s Proposed Guidance are due on September 21, 2020. If you are interested in submitting comments or have questions about how these changes to the syndicated mortgages regime could affect your business, please contact us.
August 31, 2020