The Canadian Securities Administrators (CSA) have published for comment proposed amendments to National Instrument 45-106 Prospectus Exemptions (NI 45-106) and National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103). The CSA is accepting comments on the proposed amendments until June 6, 2018.
The primary purpose of the proposed amendments is to harmonize NI 45-106 and NI 31-103 across Canada with respect to the sale of syndicated mortgages. Currently, section 2.36 NI 45-106 and section 8.12 of NI 31-103 provide prospectus and registration exemption for the distribution of syndicated mortgages in Nova Scotia, Prince Edward Island, Newfoundland and in the three Territories. Similar provisions in the Ontario Securities Act provide the same exemptions in Ontario. If the proposed amendments are adopted, NI 45-106, NI 31-103 and the Ontario Securities Act will be harmonized and the prospectus and registration exemptions for syndicated mortgage will no longer be available anywhere in Canada.
The proposed amendments will also impose additional requirements when an issuer seeks to use the offering memorandum exemption under section 2.9 of NI 45-106 to distribute syndicated mortgages.
Finally, the proposed amendments will make the private issuer exemption in section 2.4 of NI 45-106 unavailable for the distribution of syndicated mortgages.
Currently, all provinces and territories in Canada have prospectus and registration exemptions for securities that are mortgages, provided they are sold by a mortgage broker licensed in the province or territory where the property is located. These exemptions are set out in sections 2.36 of NI 45-106 and 8.12 of NI 31-103, and in Ontario in the Securities Act.
In British Columbia, Alberta, Saskatchewan, Manitoba, Quebec and New Brunswick, these exemptions are not available for syndicated mortgages. A syndicated mortgage is a mortgage in which 2 or more persons participate as a lender in a debt obligation secured by a mortgage.
The CSA is proposing these amendments in part because there has been a significant increase in the offering of syndicated mortgages in connection with real estate developments. The CSA is of the view that these offerings raise investor protection concerns when they are sold to retail investors. The CSA have highlighted several concerns with the syndicated mortgages:
- they may be used to raise seed financing for real estate developments, such as the costs of initial design proposals and start-up expenses;
- they may be sold based on projected values of a completed development;
- they may not be fully secured by a charge against real property, since the amount of the loan may significantly exceed the current fair value of the land;
- they may be subordinate to future financings, such as construction financing, which may be substantial and effectively render the investment more similar in risk to an equity investment rather than a fixed income investment;
- they may be offered by issuers with no source of income, rendering the payment of ongoing interest dependent on future financing or reserves from the principal advanced; and
- they may be subject to the risk of delay and increased costs inherent to real estate development.
Changes to the Mortgage Exemptions
The proposed changes to NI 45-106 and NI 31-103 would remove the prospectus and dealer registration mortgage exemptions for syndicated mortgages in Newfoundland, Prince Edward Island, Nova Scotia, Ontario and the three Territories.
The Prospectus Exemption
This would mean that companies or individuals seeking to sell syndicated mortgage investments would need to rely on other prospectus exemptions, such as the accredited investor exemption, the offering memorandum exemption or the family, friends and business associates exemption. An important consequence of using any of these exemptions is that the company selling the syndicated mortgages would need to file a report of the distribution with the applicable securities commission and pay the applicable fee within 10 days of each closing. Currently, there are no reporting or fee obligations in respect of the syndicated mortgages exemption.