On September 17, 2020, the Canadian Securities Administrators
(“CSA“) published proposed amendments
(“Proposed Amendments“) to National
Instrument 45-106 – Prospectus
Exemptions (“NI 45-106“),
which investors who wish to rely on the Offering Memorandum
(“OM“) exemption set out in section 2.9
of NI-45-106 (“OM Exemption“).
In particular, the Proposed Amendments set out new disclosure
requirements for issuers engaged in “real estate
activities”, and those operating “collective investment
vehicles”. A discussion of the amendments relating to
“collective investment vehicles” is the subject of a
separate paper.
According to the CSA, the OM Exemption was originally designed
to be used by small, less sophisticated businesses, to raise early
stage capital from a large pool of investors without having to
comply with the costlier prospectus regime.
In practice, however, the CSA has found that the OM Exemption is
being used by large sophisticated issuers in specific industries,
such as real property ownership or development. In 2017, for
example, roughly 40% of the issuers relying on the OM Exemption had
assets of $100 million or more, with 17% of issuers being engaged
in “real estate activities” (as such term is defined
below).
Issuers Engaged in Real Estate Activities
“Real Estate Activities” is defined
in the Proposed Amendments as an undertaking, the purpose of which
is primarily to generate income for shareholders, or other gains
from the lease, sale or other disposition of real property, but
does not include, mining activities, oil and gas
activities, and in Quebec, certain contracts and rights relating to
immovables.[1]
Under the Proposed Amendments, an issuer engaged in Real Estate
Activities would be subject to new disclosure requirements,
including:
- providing an independent appraisal in
circumstances where (i) the issuer has acquired or proposes to
acquire an interest in real property from a Related Party (as such
term is defined in NI-45-106); (ii) the OM discloses a value for an
interest in real property (other than in its financial statements);
or (iii) the issuer intends to spend a material amount of the
proceeds of the offering to acquire an interest in real
property; - providing a general description of
the real property, including the nature of the interest held,
whether there are any encumbrances on the property, any
environmental liabilities, hazards or contamination, any tax
arrears, how the property is serviced by utilities, the current and
proposed use of the property and a statement why the issuer
considers the real property to be suitable for its plans, and if
there are any buildings on real property, the type of construction,
age and condition, and a description of any units for sale or
rental, and occupancy rates therein; - if the issuer will be developing the
real property, it will be required to provide comprehensive
disclosure on such development, including the estimated costs to
complete the development, any significant assumptions that underlie
the cost estimates, when the costs will be incurred, and the
milestones and objectives of the project, including the expected
timeline, the costs for completing each objective, and the
consequences of failing to meet one or more objectives; - disclosure of penalties, sanctions,
bankruptcy, insolvency and criminal or quasi-criminal convictions
for parties other than the issuer, such as a developer or
manager; - disclosure of any historical
transactions involving the issuer and any Related Party, so
investors can better evaluate transactions involving Related
Parties; - disclosure of any future cash calls
required by the investors; and - disclosure of the terms and
conditions of any Rental Poll or Rental Management Agreement.
These disclosure obligations would not apply to real property
that when taken together would not be significant to a reasonable
investor. This exception is intended to ensure that issuers are not
subject to an undue disclosure burden.
Compliance reviews conducted by the CSA on issuers engaging in
Real Estate Activities indicate that these issuers are often unsure
of the disclosure required in an OM. The Proposed
Amendments appear to set out a clear disclosure framework for these
issuers, giving them greater certainty as to what they must
disclose. Given the complexity of these entities, the
proposals appear reasonable in the circumstances, and will
hopefully lead to investors making more informed investment
decisions.
Comment Period
The Comment Period for the Proposed Amendments will be open
until December 16, 2020. If you are interested in submitting
comments or for further information on navigating NI 45-106, please
contact: James
Leech at (416) 643-8819 or jleech@torkinmanes.com.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
